What Drives Wage Sorting? Evidence From West Germany

Andre Mouton

No 112, Working Papers from Wake Forest University, Economics Department

Abstract: An important source of income inequality is wage sorting: high-earning individuals tend to work for employers that pay higher wages, conditional on worker characteristics. This paper combines German survey and administrative data to explore the causal mechanisms behind this poorly-understood phenomenon. I show three main results. First, wage sorting is entirely across industries and occupations, with evidence rejecting an assortative matching mechanism. Second, wage sorting has strengthened over 1993-2017 due to rising skill premia in high-paying sectors, and rising employment in low-skill, low-paying industries - outcomes consistent with demand-side shifts. Third, wage sorting reflects a positive association between human capital and firm investment, which I rationalize through a simple rent-sharing model. Hypothesis tests support a technological mechanism, in which knowledge-intensive production processes engender higher upfront costs - and therefore rents - on either side of the labor market.

Keywords: Wage Inequality; Firm-Wage Differentials; Labor Sorting (search for similar items in EconPapers)
JEL-codes: E24 J21 J24 J31 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2024-08-07
New Economics Papers: this item is included in nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:ris:wfuewp:0112

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