Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality

Marco Leonardi

No 909, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper provides some empirical evidence and a theory of the relationship between residual wage inequality and the increasing dispersion of capital/labor ratios across firms. I document the increasing variance of capital/labor ratios across firms in the US labor market. I also show that the increase in the capital intensity variance across firms is associated with the increasing wage variance across workers. To explain this empirical fact, I adopt a search model where firms differ in their optimal capital investment. The decline in the relative price of equipment capital makes the firm distribution of capital/labor ratios more dispersed. In a frictional labor market, this force generates wage dispersion among identical workers. Simple calibration of the model indicates that the dispersion of capital/labor ratios can account for about one third of the total increase in residual wage inequality.

Keywords: capital intensity; wage inequality; search models (search for similar items in EconPapers)
JEL-codes: J21 J31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2003-10
New Economics Papers: this item is included in nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published - published in: Economic Journal, 2007, 117 (518), 375-398

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Related works:
Journal Article: Firm heterogeneity in capital-labour ratios and wage inequality (2007)
Working Paper: Firm Heterogeneity in Capital labor Ratios and Wage Inequality (2005)
Working Paper: Firms' Heterogeneity in Capital/Labor Ratios and Wage Inequality (2003)
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