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The Sources of Wage Variation: An Analysis Using Matched Employer-Employee Data

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Author Info

  • Sónia Torres
  • Pedro Portugal
  • John T. Addison
  • Paulo Guimarães

Abstract

This paper estimates a wage equation that includes worker- and firm fixed effects simultaneously, using a longitudinal matched employer-employee dataset covering virtually all Portuguese employees over a little more than two-decades. The exercise is performed under optimal conditions by using (a) data covering the whole population of employees and (b) adequate econometric methods and algorithms. The variation in log real hourly wages is then decomposed into six different components related to worker and firm characteristics (either observed or unobserved) and a residual component. It is found that worker heterogeneity is the most important source of wage variation (46.2 percent), due in roughly equal parts to the unobserved component (24.2 percent) and the observed component (22 percent). Firm effects are less important overall (29.6%), although firms’ observed characteristics do play an important role (14.8) in explaining wage differentials.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201025.

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Date of creation: 2010
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Handle: RePEc:ptu:wpaper:w201025

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  1. Nicole Guertzgen, 2009. "Rent-sharing and Collective Bargaining Coverage: Evidence from Linked Employer-Employee Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(2), pages 323-349, 06.
  2. Card, David & Devicienti, Francesco & Maida, Agata, 2011. "Rent-Sharing, Hold-up, and Wages: Evidence from Matched Panel Data," IZA Discussion Papers 6086, Institute for the Study of Labor (IZA).
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  6. Anabela Carneiro & Pedro Portugal, 2008. "Market power, dismissal threat, and rent sharing: The role of insider and outsider forces in wage bargaining," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 30-47, May.
  7. Paulo Guimarães & Pedro Portugal, 2009. "A Simple Feasible Alternative Procedure to Estimate Models with High-Dimensional Fixed Effects," Working Papers w200909, Banco de Portugal, Economics and Research Department.
  8. David G. Blanchflower & Andrew J. Oswald & Mario D. Garrett, 1990. "Insider Power in Wage Determination," NBER Working Papers 3179, National Bureau of Economic Research, Inc.
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  10. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche 9503, Universite de Montreal, Departement de sciences economiques.
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  12. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
  13. Arai, Mahmood, 1999. "Wages, Profits and Capital Intensity: Evidence from Matched Worker-Firm Data," Research Papers in Economics 1999:3, Stockholm University, Department of Economics.
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  15. Ana Rute Cardoso, 1999. "Firms' wage policies and the rise in labor market inequality: The case of Portugal," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 53(1), pages 87-102, October.
  16. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-74, November.
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  19. Goux, Dominique & Maurin, Eric, 1999. "Persistence of Interindustry Wage Differentials: A Reexamination Using Matched Worker-Firm Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 492-533, July.
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Cited by:
  1. Nilsen, Øivind Anti & Raknerud, Arvid & Skjerpen, Terje, 2011. "Using the Helmert-Transformation to Reduce Dimensionality in a Mixed Model: Application to a Wage Equation with Worker and Firm Heterogeneity," IZA Discussion Papers 5847, Institute for the Study of Labor (IZA).
  2. Øivind A. Nilsen & Arvid Raknerud & Terje Skjerpen, 2011. "Using the Helmert-transformation to reduce dimensionality in a mixed model: An application to a wage equation with worker and firm heterogeneity," Discussion Papers 667, Research Department of Statistics Norway.

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