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Firm Productivity, Wages, and Sorting

Benjamin Lochner and Bastian Schulz ()

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We study the link between firms’ productivity and the wages firms pay. Guided by labor market sorting theory, we infer firm productivity from estimating firm-level production functions, taking into account that worker ability and firm productivity may interact at the match level. Using German data, we find that high wages are not necessarily a reflection of high firm productivity. Observed worker transitions towards higher wages are sometimes directed downwards on the firm-productivity ladder. Worker sorting into high-productivity firms is thus less pronounced than sorting into high-wage firms. Consequently, an implication of increasing wage sorting could be decreasing allocative efficiency.

Keywords: Assortative Matching; Labor Market Sorting; Wage Inequality; Job Mobility; Unobserved Heterogeneity; Firm Productivity; Production Function Estimation (search for similar items in EconPapers)
JEL-codes: J24 J31 J40 J62 J64 L25 (search for similar items in EconPapers)
Pages: 60
Date: 2021-03-15
New Economics Papers: this item is included in nep-bec, nep-eff, nep-eur, nep-hrm, nep-lab and nep-ure
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Working Paper: Firm productivity, wages, and sorting (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2021-04

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