Wage Inequality Dynamics: Productivity versus Frictions

Martim Leitao, Jaime Montana and Joana Silva

No 21096, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: What determines the distribution of firm pay? How are these factors related to firm productivity? We develop a framework in which weakening pass-through from productivity to wages, arising from labor market distortions, drives inequality. We propose a new methodology to identify this pass-through, quantify its impact on wage inequality dynamics, and decompose it into labor market distortions. Applying our method to administrative data from Portugal, we find that increased labor market competition and rising minimum wages are the primary drivers of weakening pass-through. Our findings suggest that reducing labor market distortions can lower inequality, even if productivity dispersion remains unchanged.

Keywords: Inequality; Wages; Imperfect competition (search for similar items in EconPapers)
JEL-codes: J00 J31 J40 (search for similar items in EconPapers)
Date: 2026-01
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