Skill-Biased Firms and the Distribution of Labor Market Returns

How much do firms contribute to variation in labor market returns? To address this question we begin by documenting a historical episode that saw the economy-wide return to cognitive skills in Sweden surge in the 1990s and decline after 2000. Both upswing and reversal can be accounted for by between-firm variation. Motivated by this observation we develop and estimate an equilibrium model of skills demand with multi-dimensional firm heterogeneity. The model delivers sorting due to firm-specific skill-biases, which we estimate using rich population data on worker abilities. We find that: (i) the return to cognitive skills varies considerably across firms; (ii) more able workers sort into firms with higher returns; (iii) firm-specific wage premia, independent of workers' skills, exist even after controlling for worker sorting. A numerical implementation of the model shows that firm-level heterogeneity accounts for more than 2/3 of aggregate wage variation, with most of the impact due to skill-independent wage premia. However, firm-level skill-biases and non-pecuniary returns play a critical role for workers' sorting and for the evolution of the economy-wide return to skills.