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How Much Should we Trust Estimates of Firm Effects and Worker Sorting?

Stéphane Bonhomme, Kerstin Holzheu, Thibaut Lamadon, Elena Manresa, Magne Mogstad and Bradley Setzler

No 27368, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Many studies use matched employer-employee data to estimate a statistical model of earnings determination where log-earnings are expressed as the sum of worker effects, firm effects, covariates, and idiosyncratic error terms. Estimates based on this model have produced two influential yet controversial conclusions. First, firm effects typically explain around 20% of the variance of log-earnings, pointing to the importance of firm-specific wage-setting for earnings inequality. Second, the correlation between firm and worker effects is often small and sometimes negative, indicating little if any sorting of high-wage workers to high-paying firms. The objective of this paper is to assess the sensitivity of these conclusions to the biases that arise because of limited mobility of workers across firms. We use employer-employee data from the US and several European countries while taking advantage of both fixed-effects and random-effects methods for bias-correction. We find that limited mobility bias is severe and that bias-correction is important. Once one corrects for limited mobility bias, firm effects dispersion matters less for earnings inequality and worker sorting becomes always positive and typically strong.

JEL-codes: C23 J31 J62 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-bec and nep-lab
Note: LS TWP
References: Add references at CitEc
Citations: View citations in EconPapers (36)

Published as Stéphane Bonhomme & Kerstin Holzheu & Thibaut Lamadon & Elena Manresa & Magne Mogstad & Bradley Setzler, 2023. "How Much Should We Trust Estimates of Firm Effects and Worker Sorting?," Journal of Labor Economics, vol 41(2), pages 291-322.

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Journal Article: How Much Should We Trust Estimates of Firm Effects and Worker Sorting? (2023) Downloads
Working Paper: How Much Should we Trust Estimates of Firm Effects and Worker Sorting? (2023) Downloads
Working Paper: How Much Should we Trust Estimates of Firm Effects and Worker Sorting? (2023) Downloads
Working Paper: How much should we trust estimates of firm effcts and worker sorting? (2021) Downloads
Working Paper: How Much Should we Trust Estimates of Firm Effects and Worker Sorting? (2020) Downloads
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