Unpacking the Wage Sorting Trend

Rune Vejlin, Jonas Maibom, Malthe Elholm and Jesper Bagger

No 26095, RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin)

Abstract: Using Using Danish matched employer-employee data from 1980-2019, this paper shows that rising wage sorting - the correlation between worker and firm wage fixed effects - increased from 0.06 to 0.18 and is driven entirely by employment shifting toward firms that consistently form high‑sorting matches. Individual firms' sorting propensities remain stable. Decomposition reveals that 60% of the increase reflects reallocation among surviving firms, while 40% stems from firm entry and exit. Regression analysis highlights firm turnover and industry shifts as the primary drivers, with rising educational attainment contributing through the concentration of educated workers in high‑sorting firms. Job‑to‑job mobility is the main reallocation mechanism.

Keywords: Inequality; sorting; firm dynamics; firm entry; firm exit; matched employer-employee data (search for similar items in EconPapers)
JEL-codes: E24 J21 J31 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:crm:wpaper:26095

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