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Workers, Firms and Life-Cycle Wage Dynamics

Paul Bingley () and Lorenzo Cappellari
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Paul Bingley: VIVE - The Danish Centre for Applied Social Science

No 11402, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Studies of individual wage dynamics typically ignore firm heterogeneity, whereas decompositions of earnings into worker and firm effects abstract from life-cycle considerations. We study firm effects in individual wage dynamics using administrative data on the population of Italian employers and employees. We propose a novel identification strategy for firm-related wage components exploiting the informative content of the wage covariance structure of coworkers. Wage inequality increases three-fold over the working life; firm effects are predominant while young, but sorting of workers into firms becomes increasingly important, explaining the largest share of lifetime inequality. Static models that do not allow for life-cycle dynamics underestimate the importance of sorting and overstate match and firm effects.

Keywords: wage inequality; wage dynamics; co-workers' covariance (search for similar items in EconPapers)
JEL-codes: J24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-lma
Date: 2018-03
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