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Worker and Firm Heterogeneity in Wage Growth: An AKM Approach

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  • Kenneth Lykke Sørensen
  • Rune Vejlin

Abstract

This paper estimates a wage growth equation containing human capital variables known from the traditional Mincerian wage equation with year, worker and firm fixed effects included as well. The paper thus contributes further to the large empirical literature on unobserved heterogeneity following the work of Abowd, Kramarz, and Margolis (1999). Our main contribution is to extend the analysis from wage levels to wage growth. The specification enables us to estimate the individual specific and firm specific fixed effects and their degree of explanation on wage growth. The analysis is conducted using Danish longitudinal matched employer-employee data from 1980 to 2006. We find that the worker fixed effect dominates both the firm fixed effect and the effect of the observed covariates. Worker effects are estimated to explain seven to twelve per cent of the variance in wage growth while firm effects are estimated to explain four to ten per cent. We furthermore find a negative correlation between the worker and firm effects, as do nearly all authors examining wage level equations.
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Suggested Citation

  • Kenneth Lykke Sørensen & Rune Vejlin, 2011. "Worker and Firm Heterogeneity in Wage Growth: An AKM Approach," LABOUR, CEIS, vol. 25(4), pages 485-507, December.
  • Handle: RePEc:bla:labour:v:25:y:2011:i:4:p:485-507
    DOI: j.1467-9914.2011.00527.x
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    File URL: http://hdl.handle.net/10.1111/j.1467-9914.2011.00527.x
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    References listed on IDEAS

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    1. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
    2. Torben Sørensen & Rune Vejlin, 2009. "The Importance of Worker, Firm and Match Fixed Effects in the Formation of Wages," Economics Working Papers 2009-11, Department of Economics and Business Economics, Aarhus University.
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    Cited by:

    1. Krishna, Pravin & Poole, Jennifer P. & Senses, Mine Zeynep, 2014. "Wage Effects of Trade Reform with Endogenous Worker Mobility," Journal of International Economics, Elsevier, vol. 93(2), pages 239-252.
    2. Gregory Veramendi, 2012. "Labor Market Dynamics: A Model of Search and Human Capital Accumulation," 2012 Meeting Papers 1059, Society for Economic Dynamics.
    3. Jinkins, David & Morin, Annaig, 2017. "Job-to-Job Transitions, Sorting, and Wage Growth," IZA Discussion Papers 10601, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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