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The importance of worker, firm and match effects in the formation of wages

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  • Torben Sørensen

    ()

  • Rune Vejlin

    ()

Abstract

This paper estimates a Mincerian wage equation with worker, firm, and match specific effects and thereby complements the growing empirical literature started by the seminal paper of Abowd (Econometrica 67:251–333, 1999b ). The analysis takes advantage of the extensive Danish IDA data which provides wage information on the entire working population in a 27-year period. We find that the major part of wage dispersion in the Danish labor market can be explained by differences in worker characteristics. However, the relative contributions of the three components vary across subgroups of workers. The match effect constitutes a non-negligible part of the overall wage dispersion. An analysis of inter-industry wage differentials shows that firm characteristics are more important at the industry level than at the worker level. Similarly, we find evidence that high-wage workers tend to sort into high-wage industries to a larger extent than they sort into high-wage firms within industries. The mobility pattern of workers is related to the quality of the firm and the match. Finally, we find that firms’ wage policies differ across subgroups. Copyright Springer-Verlag 2013

Suggested Citation

  • Torben Sørensen & Rune Vejlin, 2013. "The importance of worker, firm and match effects in the formation of wages," Empirical Economics, Springer, vol. 45(1), pages 435-464, August.
  • Handle: RePEc:spr:empeco:v:45:y:2013:i:1:p:435-464
    DOI: 10.1007/s00181-012-0603-3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gaure, Simen, 2014. "Practical Correlation Bias Correction in Two-way Fixed Effects Linear Regression," Memorandum 21/2014, Oslo University, Department of Economics.
    2. Taber, Christopher & Vejlin, Rune Majlund, 2016. "Estimation of a Roy/Search/Compensating Differential Model of the Labor Market," IZA Discussion Papers 9975, Institute for the Study of Labor (IZA).
    3. Christopher Taber & Rune Vejlin, 2012. "Estimation of a Roy/Search/Compensating Differential Model of the Labor Market," 2012 Meeting Papers 566, Society for Economic Dynamics.
    4. Jinkins, David & Morin, Annaig, 2017. "Job-to-Job Transitions, Sorting, and Wage Growth," IZA Discussion Papers 10601, Institute for the Study of Labor (IZA).
    5. repec:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1179-0 is not listed on IDEAS
    6. Laurent Gobillon & François-Charles Wolff & Patrice Guillotreau, 2013. "The anatomy of prices on the French fish market," Working Papers halshs-00839147, HAL.

    More about this item

    Keywords

    Matched employer-employee data; Unobserved effects; Wage dispersion; J21; J31;

    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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