Working Paper: NBER ID: w18522
Authors: David Card; Jörg Heining; Patrick Kline
Abstract: We study the role of establishment-specific wage premiums in generating recent increases in West German wage inequality. Models with additive fixed effects for workers and establishments are fit in four distinct time intervals spanning the period 1985-2009. Unlike standard wage models, specifications with both worker and plant-level heterogeneity components can explain the vast majority of the rise in wage inequality. Our estimates suggest that the increasing variability of West German wages results from a combination of rising heterogeneity between workers, rising variability in the wage premiums at different establishments, and increasing assortativeness in the matching of workers to plants. We use the models to decompose changes in wage gaps between different education levels, occupations, and industries, and in all three cases find a growing contribution of plant heterogeneity and rising assortativeness between workers and establishments.
Keywords: wage inequality; establishment-specific wage premiums; workplace heterogeneity
JEL Codes: J01; J3; J4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| establishment-specific wage premiums (J31) | overall wage inequality (J31) |
| variance of the person component of pay (J33) | wage variance (J31) |
| establishment component of pay (J33) | wage variance (J31) |
| rising covariance between person and establishment components (C21) | total increase in wage variance (J31) |
| educational attainment (I21) | quality of job matches (L15) |
| rising assortativeness between workers and establishments (J29) | growth in inequality across occupations and industries (L16) |