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Earnings Dynamics, Inequality and Firm Heterogeneity

Paul Bingley and Lorenzo Cappellari

No 2022-07, LISER Working Paper Series from Luxembourg Institute of Socio-Economic Research (LISER)

Abstract: Studies of individual earnings dynamics typically ignore firm heterogeneity, whereas worker and firm decompositions of earnings inequality abstract from the life-cycle. We study firm effects in individual earnings dynamics for the Italian private sector population, leveraging the covariance structure of co-workers earnings for identification. Our model allows for dynamics of both worker and firm effects, worker-firm sorting, worker segregation and correlation of firm effects among connected firms. While firms explain most of the earnings inequality when workers are young, workers explain most over the life cycle. Sorting of workers across firms is substantial, especially for younger workers. Standard earnings dynamics models overstate the relevance of individual heterogeneity.

Keywords: earnings inequality; earnings dynamics; co-workers' covariance (search for similar items in EconPapers)
JEL-codes: J24 J31 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2022-10
New Economics Papers: this item is included in nep-bec, nep-eur and nep-hrm
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