Earnings Inequality in Production Networks

Federico Huneeus, Kory Kroft and Kevin Lim

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: This paper investigates the importance of firm-to-firm production network linkages for earnings inequality. We develop a quantitative model in which heterogeneous firms hire workers of different abilities in an imperfectly competitive labor market and source intermediates from heterogeneous suppliers in a production network. The model delivers an earnings equation with a firm-specific wage premium that depends endogenously on both firm productivities and firm-to-firm linkages in the production network. We establish identification of the model parameters and estimate them using linked employer-employee and firm-to-firm transactions data from Chile. Counterfactual simulations using our estimated model show that heterogeneity in network linkages explains 21% of log earnings variance, while passthrough of productivity shocks via network linkages explains between 20-25% of earnings volatility. We also examine the effects of a minimum wage policy and find strong spillover effects to worker earnings above the wage floor, with substitution of materials for labor explaining around 40% of these effects.

Date: 2021-03
New Economics Papers: this item is included in nep-net
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Citations: View citations in EconPapers (4)

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Working Paper: Earnings Inequality in Production Networks (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:907

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