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Wage and Productivity Dispersion: Labor Quality or Rent Sharing?


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  • Dale T. Mortensen

    (Northwestern University)

  • Bent Jesper Christensen

    (Aarhus University)

  • Jesper Bagger

    (Royal Holloway, University of London)


The method introduced in this paper contributes to the estimation of production functions by embedding them in a structural equation system involving worker, firm, time, and occupation effects from an individual wage decomposition and accounting for labor input components that are substitutes and complements, while accommodating stochastically varying factor productivity. The structural model allows for differences in input quality as well as rent sharing, both of which may potentially help explain the observations that wage and labor productivity are dispersed across firms, and that more productive firms tend to pay higher wages. From our empirical results, which focus on the manufacturing sector only, both input heterogeneity and intrinsic differences in total factor productivity across firms are important for dispersion. We find that 41% of the dispersion in log value added per worker within the manufacturing sector is attributable to cross-firm differences in the levels of capital per worker, while another 39% of the variation stems from intrinsic TFP differences across firms. Only a smaller portion observed dispersion in log value added per worker (5s%) is associated with quality differences in the labor input. These results suggest that that there are major gains to reallocation of labor from firms with low marginal labor productivity to firms with high marginal labor productivity. The same would not be the case if the dispersion in marginal labor productivity were due to differences in labor quality alone. Rent sharing provide a link between individual wages and firms' marginal labor productivity and thus ties the dispersion in labor productivity to the wage distribution. Hence, rent sharing is a potentially important vehicle for reallocation as wage dispersion motivates job search. We provide a decomposition of individual log wages in the manufacturing sector and find that 70% of the individual log wage variation is due to individual characteristics, whereas only 13% is attributable to firm differences (i.e. rent sharing). The relatively small contribution of firm heterogeneity to individual wage dispersion is thus consistent with the inefficient allocation of labor across firms.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 758.

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Date of creation: 2010
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Handle: RePEc:red:sed010:758

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  1. Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers, Centre de Recherche en Economie et Statistique 97-30, Centre de Recherche en Economie et Statistique.
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Cited by:
  1. Niehues, Judith & Peichl, Andreas, 2011. "Lower and Upper Bounds of Unfair Inequality: Theory and Evidence for Germany and the US," IZA Discussion Papers 5834, Institute for the Study of Labor (IZA).
  2. Coles, Melvyn G. & Mortensen, Dale T., 2012. "Equilibrium labour turnover, firm growth and unemployment," ISER Working Paper Series 2012-07, Institute for Social and Economic Research.
  3. Böckerman, Petri & Maliranta, Mika, 2013. "Outsourcing, Occupational Restructuring, and Employee Well-Being: Is There a Silver Lining?," IZA Discussion Papers 7399, Institute for the Study of Labor (IZA).
  4. John Kennes & Daniel le Maire, 2013. "Competing Auctions of Skills," CAM Working Papers 2014_01, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  5. Leland D. Crane, 2014. "Firm Dynamics and Assortative Matching," Working Papers 14-25, Center for Economic Studies, U.S. Census Bureau.
  6. Marcus Hagedorn & Tzuo Hann Law & Iourii Manovskii, 2012. "Identifying Equilibrium Models of Labor Market Sorting," NBER Working Papers 18661, National Bureau of Economic Research, Inc.
  7. Doan, Tinh & Nguyen, Ha, 2013. "Productivity dispersion and the roles of quality of labour input and competition: A case of Vietnamese manufacturing sector," MPRA Paper 48357, University Library of Munich, Germany.
  8. John Kennes & Daniel le Maire, 2013. "Job Heterogeneity and Coordination Frictions," Economics Working Papers, School of Economics and Management, University of Aarhus 2013-09, School of Economics and Management, University of Aarhus.
  9. Judith Niehues & Andreas Peichl, 2012. "Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," CESifo Working Paper Series 3815, CESifo Group Munich.
  10. Judith Niehues & Andreas Peichl, 2014. "Upper bounds of inequality of opportunity: theory and evidence for Germany and the US," Social Choice and Welfare, Springer, Springer, vol. 43(1), pages 73-99, June.
  11. Torben Sørensen & Rune Vejlin, 2013. "The importance of worker, firm and match effects in the formation of wages," Empirical Economics, Springer, Springer, vol. 45(1), pages 435-464, August.
  12. Niehues, J. (Judith) & Andreas Peichl, 2012. "GINI DP 34: Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," GINI Discussion Papers 34, AIAS, Amsterdam Institute for Advanced Labour Studies.


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