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Firms' Heterogeneity in Capital/Labor Ratios and Wage Inequality

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Author Info
Leonardi, Marco (London School of Economics and IZA)

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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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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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Related research
Keywords: wage inequality; capital intensity; search models;

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Find related papers by JEL classification:
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

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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). [Downloadable!]
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