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Firms' Heterogeneity in Capital/Labor Ratios and Wage Inequality

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  • Leonardi, Marco

    (London School of Economics and 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 using Compustat data. I also show that the increase in the variance of capital/labor ratios across firms is related to the increasing variance of wages. To explain these empirical regularities I adopt a search model where firms differ in their optimal composition of capital between equipment and structure. As the relative price of equipment falls over time the distribution of capital/labor ratios becomes more dispersed across firms. In a frictional labor market this force generates wage dispersion among identical workers. In the model the increase in wage inequality is due only to job changers as they are randomly matched to an increasingly wide variety of jobs (capital/labor ratio). This feature of the model is consistent with recent evidence that indicates that the bulk of the increase in wage inequality took place between plants rather than within plants. Simple estimation of the model indicates that the dispersion of capital/labor ratios can explain up to one half of the total increase in residual wage inequality.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 136.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:136

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Web page: http://www.res.org.uk/society/annualconf.asp
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Keywords: wage inequality; capital intensity; search models;

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Citations

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Cited by:
  1. Julian Emami Namini & Giovanni Facchini & Ricardo Lopez, 2011. "Export Growth and Factor Market Competition: Theory and Evidence," Working Papers 28, Brandeis University, Department of Economics and International Businesss School.
  2. ITO Keiko & Sebastien LECHEVALIER, 2008. "The evolution of the productivity dispersion of firms - A reevaluation of its determinants in the case of Japan," Discussion papers 08014, Research Institute of Economy, Trade and Industry (RIETI).
  3. Silvio Contessi & Francesca de Nicola & Li Li, 2012. "International trade, female labor, and entrepreneurship in MENA countries," Working Papers 2012-053, Federal Reserve Bank of St. Louis.
  4. Mauro Caselli, 2010. "Trade liberalisation, skill-biased technical change and wages in developing countries: a model with heterogeneous firms," Economics Series Working Papers CSAE WPS/2010-27, University of Oxford, Department of Economics.
  5. Silvio Contessi & Pierangelo De Pace, 2011. "The (non-)resiliency of foreign direct investment in the United States during the 2007-2009 financial crisis," Working Papers 2011-037, Federal Reserve Bank of St. Louis.
  6. Donatella Gatti & Ryo Kambayashi & Sebastien Lechevalier, 2010. "Wage and Productivity Differentials in Japan: The Role of Labor Market Mechanisms," Global COE Hi-Stat Discussion Paper Series gd09-127, Institute of Economic Research, Hitotsubashi University.
  7. Mauro Caselli, 2010. "Trade, skill-biased technical change and wages in Mexican manufacturing," Economics Series Working Papers CSAE WPS/2010-28, University of Oxford, Department of Economics.
  8. Silvio Contessi & Francesca de Nicola & Li Li, 2013. "International trade, female labor, and entrepreneurship in MENA countries," Review, Federal Reserve Bank of St. Louis, issue January, pages 89-114.

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