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How Much Should We Trust Estimates of Firm Effects and Worker Sorting?

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  • Stéphane Bonhomme
  • Kerstin Holzheu
  • Thibaut Lamadon
  • Elena Manresa
  • Magne Mogstad
  • Bradley Setzler

Abstract

Many studies use matched employer-employee data to estimate a statistical model of earnings determination with worker and firm fixed effects. Estimates based on this model have produced influential yet controversial conclusions. The objective of this paper is to assess the sensitivity of these conclusions to the biases that arise because of limited mobility of workers across firms. We use employer-employee data from the United States and several European countries while taking advantage of both fixed effects and random effects methods for bias correction. We find that limited mobility bias is severe and that bias correction is important.

Suggested Citation

  • Stéphane Bonhomme & Kerstin Holzheu & Thibaut Lamadon & Elena Manresa & Magne Mogstad & Bradley Setzler, 2023. "How Much Should We Trust Estimates of Firm Effects and Worker Sorting?," Journal of Labor Economics, University of Chicago Press, vol. 41(2), pages 291-322.
    • Handle: RePEc:ucp:jlabec:doi:10.1086/720009
    DOI: 10.1086/720009
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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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