Firms and Labor Market Inequality: Evidence and Some Theory

David Card, Ana Rute Cardoso, Jörg Heining and Patrick Kline

No 22850, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We survey two growing bodies of research on firm-level drivers of labor market inequality. The first examines how wages are affected by differences in employer productivity. Studies that focus on firm-specific productivity shocks and control for the non-random sorting of workers to firms typically find that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. Given the wide variation in firm-specific productivity, elasticities of this size suggest that a significant fraction of wage inequality is tied to firm performance. A second literature estimates two-way fixed effects models that rely on the wage changes of people who move between firms to identify firm-specific wage premiums. This literature also concludes that firm pay setting is important for wage inequality, with many studies finding that firm wage effects contribute approximately 20% of the overall variance of wages. To interpret these findings, we develop a model of firm wage setting in which workers have idiosyncratic tastes for different workplaces. We show that simple versions of this model can rationalize the standard two-way fixed effects specification proposed by Abowd, Kramarz and Margolis (1999), and can also match the typical “rent-sharing” elasticities estimated in the literature. Extended versions of the model can potentially explain differences in the wage premiums paid by a given employer to different subgroups of workers.

JEL-codes: D24 J31 J42 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-lma and nep-ltv
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Published as David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, vol 36(S1), pages S13-S70.
Published as Firms and Labor Market Inequality: Evidence and Some Theory , David Card, Ana Rute Cardoso, Jorg Heining, Patrick Kline. in Firms and the Distribution of Income: The Roles of Productivity and Luck , Lazear and Shaw. 2018

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Related works:
Journal Article: Firms and Labor Market Inequality: Evidence and Some Theory (2018)
Working Paper: Firms and Labor Market Inequality: Evidence and Some Theory (2017)
Working Paper: Firms and Labor Market Inequality: Evidence and Some Theory (2016)
Working Paper: Firms and labor market inequality: evidence and some theory (2016)
Working Paper: Firms and Labor Market Inequality: Evidence and Some Theory (2016)
Chapter: Firms and Labor Market Inequality: Evidence and Some Theory (2015)
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