Working Paper: NBER ID: w22850
Authors: David Card; Ana Rute Cardoso; Jörg Heining; Patrick Kline
Abstract: We survey two growing bodies of research on firm-level drivers of labor market inequality. The first examines how wages are affected by differences in employer productivity. Studies that focus on firm-specific productivity shocks and control for the non-random sorting of workers to firms typically find that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. Given the wide variation in firm-specific productivity, elasticities of this size suggest that a significant fraction of wage inequality is tied to firm performance. A second literature estimates two-way fixed effects models that rely on the wage changes of people who move between firms to identify firm-specific wage premiums. This literature also concludes that firm pay setting is important for wage inequality, with many studies finding that firm wage effects contribute approximately 20% of the overall variance of wages. To interpret these findings, we develop a model of firm wage setting in which workers have idiosyncratic tastes for different workplaces. We show that simple versions of this model can rationalize the standard two-way fixed effects specification proposed by Abowd, Kramarz and Margolis (1999), and can also match the typical “rent-sharing” elasticities estimated in the literature. Extended versions of the model can potentially explain differences in the wage premiums paid by a given employer to different subgroups of workers.
Keywords: labor market inequality; firm productivity; wage dispersion; rent sharing
JEL Codes: D24; J31; J42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm productivity (D22) | wages (J31) |
| firm-specific productivity shocks (D22) | wages (J31) |
| firm wage effects (J31) | overall wage variance (J31) |
| higher-ability workers (J24) | more productive firms (D21) |
| sorting of workers to firms (J68) | wage inequality (J31) |