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Worker and Firm Heterogeneity in Wage Growth: An AKM Approach

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  • Kenneth Lykke Sørensen
  • Rune Vejlin

Abstract

This paper estimates a wage growth equation containing human capital variables known from the traditional Mincerian wage equation with year, worker and firm fixed effects included as well. The paper thus contributes further to the large empirical literature on unobserved heterogeneity following the work of Abowd, Kramarz, and Margolis (1999). Our main contribution is to extend the analysis from wage levels to wage growth. The specification enables us to estimate the individual specific and firm specific fixed effects and their degree of explanation on wage growth. The analysis is conducted using Danish longitudinal matched employer-employee data from 1980 to 2006. We find that the worker fixed effect dominates both the firm fixed effect and the effect of the observed covariates. Worker effects are estimated to explain seven to twelve per cent of the variance in wage growth while firm effects are estimated to explain four to ten per cent. We furthermore find a negative correlation between the worker and firm effects, as do nearly all authors examining wage level equations.

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File URL: http://hdl.handle.net/10.1111/j.1467-9914.2011.00527.x
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Bibliographic Info

Article provided by CEIS in its journal LABOUR.

Volume (Year): 25 (2011)
Issue (Month): 4 (December)
Pages: 485-507

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Handle: RePEc:bla:labour:v:25:y:2011:i:4:p:485-507

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  1. Torben Sørensen & Rune Vejlin, 2009. "The Importance of Worker, Firm and Match Fixed Effects in the Formation of Wages," Economics Working Papers 2009-11, School of Economics and Management, University of Aarhus.
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Cited by:
  1. Pravin Krishna & Jennifer P. Poole & Mine Zeynep Senses, 2011. "Wage Effects of Trade Reform with Endogenous Worker Mobility," NBER Working Papers 17256, National Bureau of Economic Research, Inc.
  2. Gregory Veramendi, 2012. "Labor Market Dynamics: A Model of Search and Human Capital Accumulation," 2012 Meeting Papers 1059, Society for Economic Dynamics.
  3. Krishna, Pravin & Poole, Jennifer P. & Senses, Mine Zeynep, 2011. "Trade liberalization, firm heterogeneity, and wages : new evidence from matched employer-employee data," Policy Research Working Paper Series 5711, The World Bank.

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