Firms' Heterogeneity in Capital/Labor Ratios and Wage Inequality
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.Download Info
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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 136.Length:
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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Related research
Keywords: wage inequality; capital intensity; search models;Other versions of this item:
- Leonardi, Marco, 2005. "Firm Heterogeneity in Capital labor Ratios and Wage Inequality," Institute for Research on Labor and Employment, Working Paper Series qt1g9514wh, Institute of Industrial Relations, UC Berkeley.
- Leonardi, Marco, 2003. "Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality," IZA Discussion Papers 909, Institute for the Study of Labor (IZA).
- J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-16 (All new papers)
- NEP-LAB-2003-06-16 (Labour Economics)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- 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.
- Julian Emami Namini & Giovanni Facchini & Ricardo A. Lopez, 2011. "Export Growth and Factor Market Competition: Theory and Evidence," Development Working Papers 309, Centro Studi Luca d\'Agliano, University of Milano, revised 09 May 2011.
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08014, Research Institute of Economy, Trade and Industry (RIETI).
- Keiko Ito & Sébastien Lechevalier, 2009. "The evolution of the productivity dispersion of firms: a reevaluation of its determinants in the case of Japan," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(3), pages 405-429, October.
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"Trade liberalisation, skill-biased technical change and wages in developing countries: a model with heterogeneous firms,"
Economics Series Working Papers
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"Trade, skill-biased technical change and wages in Mexican manufacturing,"
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