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Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution

Author

Listed:
  • Daniel Haanwinckel

Abstract

This paper examines how workforce composition, labor demand, and minimum wage jointly determine wages through their effects on worker-task assignments, firm wage premiums, and firm-worker sorting. Using an estimated model of monopsonistic local labor markets, it finds that minimum wage hikes and labor demand shocks drove the decline in Brazilian wage inequality from 1998 to 2012. While rising educational attainment compressed skill premiums within firms, it also reallocated skilled workers to high-wage firms, limiting that shock's effect on inequality. The analysis highlights interactions among exogenous factors, showing that concurrent supply and demand changes attenuated minimum wage impacts.

Suggested Citation

  • Daniel Haanwinckel, 2025. "Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution," American Economic Review, American Economic Association, vol. 115(12), pages 4137-4182, December.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:12:p:4137-82
    DOI: 10.1257/aer.20201293
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    Cited by:

    1. is not listed on IDEAS
    2. Sergio Pinheiro Firpo & Alysson Lorenzon Portella, 2024. "The labor market in Brazil, 2001–2022," IZA World of Labor, Institute of Labor Economics (IZA), pages 4412-4412, April.
    3. Kline, Patrick, 2024. "Firm wage effects," Handbook of Labor Economics,, Elsevier.
    4. Hou, Shihang & Heath Milsom, Luke, 2025. "The Role of Firms and Occupations in Wage Inequality," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325461, Verein für Socialpolitik / German Economic Association.
    5. Patrick M. Kline, 2024. "Firm Wage Effects," NBER Working Papers 33084, National Bureau of Economic Research, Inc.
    6. Arindrajit Dube & Attila Lindner, 2024. "Minimum Wages in the 21st Century," RFBerlin Discussion Paper Series 2425, ROCKWOOL Foundation Berlin (RFBerlin).
    7. Lagos, Lorenzo, 2024. "Union Bargaining Power and the Amenity-Wage Tradeoff," IZA Discussion Papers 17034, Institute of Labor Economics (IZA).
    8. Daniel Haanwinckel, 2023. "Does regional variation in wage levels identify the effects of a national minimum wage?," Papers 2307.01284, arXiv.org, revised Apr 2025.
    9. Patrick M. Kline, 2025. "Labor Market Monopsony: Fundamentals and Frontiers," NBER Working Papers 33467, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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