Unpacking the Wage Sorting Trend

Jesper Bagger (), Malthe Elholm, Jonas Maibom () and Rune Vejlin ()
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Jesper Bagger: University of Edinburgh
Jonas Maibom: Aarhus University
Rune Vejlin: Aarhus University

No 18502, IZA Discussion Papers from IZA Network @ LISER

Abstract: Using 1980--2019 Danish matched employer-employee data, we unpack the rise in wage sorting - the correlation between worker and firm wage fixed effects (Abowd et al., 1999) - from 0.06 to 0.18. The rise is driven entirely by reallocation of employment from persistently low-sorting to persistently high-sorting firms, with the average sorting contribution of any given firm remaining stable over time. A decomposition shows that 60 % reflects reallocation among surviving firms and 40 % firm turnover through entry and exit. Regression analysis identifies firm entry and exit and industry reallocation as the dominant firm-side drivers, and rising educational attainment as the key worker-side factor - reflecting concentration of educated workers in high-sorting firms rather than a systematic tendency of educated workers to form high-sorting matches across all employers. Event studies establish direct job-to-job moves as the primary mechanism through which reallocation is implemented at the worker-level.

Keywords: wage inequality; wage sorting; firm dynamics; employment reallocation; job-to-job mobility; matched employer-employee data (search for similar items in EconPapers)
JEL-codes: E24 J21 J31 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-bec, nep-lab and nep-lma
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