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Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality

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  • Leonardi, Marco

    ()
    (University of Milan)

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. I also show that the increase in the capital intensity variance across firms is associated with the increasing wage variance across workers. To explain this empirical fact, I adopt a search model where firms differ in their optimal capital investment. The decline in the relative price of equipment capital makes the firm distribution of capital/labor ratios more dispersed. In a frictional labor market, this force generates wage dispersion among identical workers. Simple calibration of the model indicates that the dispersion of capital/labor ratios can account for about one third of the total increase in residual wage inequality.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 909.

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Length: 37 pages
Date of creation: Oct 2003
Date of revision:
Publication status: published in: Economic Journal, 2007, 117 (518), 375-398
Handle: RePEc:iza:izadps:dp909

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Keywords: capital intensity; wage inequality; search models;

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References

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Cited by:
  1. Mauro Caselli, 2014. "Trade, skill-biased technical change and wages in Mexican manufacturing," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 336-348, January.
  2. 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.
  3. 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).
  4. Kalantzis, Y. & Kambayashi, R. & Lechevalier, S., 2012. "Wage and Productivity differentials in Japan. The Role of Labor Market Mechanisms," Working papers 399, Banque de France.
  5. repec:dgr:uvatin:2011013 is not listed on IDEAS
  6. repec:dgr:uvatin:2009020 is not listed on IDEAS
  7. Emami Namini, Julian & Facchini, Giovanni & Lopez, Ricardo, 2011. "Export growth and factor market competition: theory and evidence," CEPR Discussion Papers 8256, C.E.P.R. Discussion Papers.
  8. Mauro Caselli, 2010. "Trade liberalisation, skill-biased technical change and wages in developing countries: a model with heterogeneous firms," CSAE Working Paper Series 2010-27, Centre for the Study of African Economies, University of Oxford.
  9. 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.
  10. Emami Namini, Julian, 2014. "The short and long-run impact of globalization if firms differ in factor input ratios," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 37-64.

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