Working Paper: NBER ID: w28424
Authors: Federico Huneeus; Kory Kroft; Kevin Lim
Abstract: Why do firms differ in the wages paid to otherwise identical workers and in the share of revenue that they allocate to labor? This paper explores the role of production networks. Using linked employer-employee and firm-to-firm trade transactions data from Chile, we show that firms with better access to both buyers and suppliers of intermediate inputs tend to have higher earnings premia and lower labor shares. Motivated by these facts, we develop and estimate a model with labor market power, worker and firm heterogeneity, and heterogeneity in firm-to-firm linkages in the production network. Greater access to larger buyers and more efficient suppliers raises the marginal revenue product of labor and lowers the relative cost of intermediates to labor. This leads to higher wages in the presence of labor market power and lower labor shares when labor and materials are substitutes. Through counterfactual simulations of the estimated model we find a substantial role for production networks in explaining the variances of earnings premia and labor shares across firms.
Keywords: earnings inequality; production networks; labor market power; firm heterogeneity
JEL Codes: F0; F12; F16; J0; J31; J42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Production network access (D85) | Worker earnings (J31) |
| Exogenous network demand shocks (D85) | Worker earnings (J31) |
| Material cost shocks (E30) | Worker earnings (J31) |
| Access to larger buyers (L81) | Higher earnings premia (G19) |
| Access to more efficient suppliers (L81) | Lower labor shares (J39) |
| Higher effective demand (D12) | Higher wages (J39) |
| Lower material costs (L74) | Higher wages (J39) |
| Production network heterogeneity (D29) | Variation in earnings premia (J31) |
| Production network heterogeneity (D29) | Variation in labor shares (J49) |