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The Sources of Wage Variation: A Three-Way High-Dimensional Fixed Effects Regression Model

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Author Info

  • Torres, Sónia

    ()
    (Statistics Portugal)

  • Portugal, Pedro

    ()
    (Banco de Portugal)

  • Addison, John T.

    ()
    (University of South Carolina)

  • Guimaraes, Paulo

    ()
    (University of Porto)

Abstract

This paper estimates a wage equation with three high-dimensional fixed effects, using a longitudinal matched employer-employee dataset covering virtually all Portuguese wage earners over a little more than two decades. The variation in log real hourly wages is decomposed into different components related to worker, firm, and job title characteristics (both observed and unobserved) and a residual component. It is found that worker permanent heterogeneity is the most important source of wage variation (36.0 percent) and that the unobserved component plays a more important role (21.0 percent) than the observed component (15.0 percent) in explaining wage differentials. Firm permanent effects are less important overall (28.7 percent) and are due in almost equal parts to the unobserved component and the observed component. Job title effects emerge as the least important dimension but they still explain close to 10 percent of wage variation. We found definitive evidence of positive assortative matching.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7276.

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Length: 42 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7276

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Keywords: high dimensional fixed effects; wage decomposition; assortative matching;

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Citations

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Cited by:
  1. Gabriel Felbermayr & Giammario Impullitti & Julien Prat, 2014. "Firm Dynamics and Residual Inequality in Open Economies," Discussion Papers 2014-01, University of Nottingham, GEP.
  2. Fernando Rios-Avila, 2013. "Feasible Estimation of Linear Models with N-fixed Effects," Economics Working Paper Archive, Levy Economics Institute wp_782, Levy Economics Institute.
  3. Daniel Borowczyk-Martins & Jake Bradley & Linas Tarasonis, 2014. "Racial Discrimination in the U.S. Labor Market: Employment and Wage Differentials by Skill," Working Papers, HAL halshs-00989748, HAL.
  4. Ana Rute Cardoso & Paulo Guimarães & Pedro Portugal, 2013. "Everything you always wanted to know about sex discrimination," Working Papers, Banco de Portugal, Economics and Research Department w201302, Banco de Portugal, Economics and Research Department.
  5. González de San Román, Ainara & Rebollo-Sanz, Yolanda F., 2014. "An estimation of worker and firm effects with censored data," Economics Discussion Papers 2014-28, Kiel Institute for the World Economy.
  6. Addison, John T. & Portugal, Pedro & Varejão, José, 2014. "Labour Demand Research: Towards a Better Match between Better Theory and Better Data," IZA Discussion Papers 8125, Institute for the Study of Labor (IZA).
  7. Yolanda F. Rebollo-Sanz & Ainara González de San Román, 2013. "Estimation of worker and firm effects with censored data," Working Papers 13.05, Universidad Pablo de Olavide, Department of Economics, revised May 2014.
  8. Luca David Opromolla, 2013. "Trade and wage inequality," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.

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