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Firm Productivity, Wages, and Sorting

Author

Listed:
  • Benjamin Lochner
  • Bastian Schulz

Abstract

We study the link between firm productivity and the wages that firms pay. Guided by a search-matching model with large firms, worker and firm heterogeneity, and production complementarities, we infer firm productivity by estimating firm-level production functions. Using German data, we find that the most productive firms do not pay the highest wages. Worker transitions from high- to medium-productivity firms are on average associated with wage gains. Productivity sorting—that is, the sorting of high-ability workers into high-productivity firms—is less pronounced than the sorting into high-wage firms.

Suggested Citation

  • Benjamin Lochner & Bastian Schulz, 2024. "Firm Productivity, Wages, and Sorting," Journal of Labor Economics, University of Chicago Press, vol. 42(1), pages 85-119.
    • Handle: RePEc:ucp:jlabec:doi:10.1086/722564
    DOI: 10.1086/722564
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    Citations

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    Cited by:

    1. Hou, Meng & Jing, Puxuan & Ke, Di & Yang, Hangjun, 2025. "The impact of airport opening on urban financial development: Evidence from China," Transport Policy, Elsevier, vol. 172(C).
    2. Bauer, Anja & Lochner, Benjamin, 2020. "History dependence in wages and cyclical selection: Evidence from Germany," Labour Economics, Elsevier, vol. 67(C).
    3. Pardesi, Mantej, 2024. "Productivity convergence and firm’s training strategy," ROA Research Memorandum 003, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    4. Pardesi, Mantej, 2024. "Productivity Convergence and Firm’s Training Strategy," Research Memorandum 003, Maastricht University, Graduate School of Business and Economics (GSBE).
    5. Shujiang Cao & Shutao Cao, 2025. "Worker Quality, Matching and Productivity Slowdown," Papers 2509.00516, arXiv.org.
    6. Benjamin Lochner & Christian Merkl, 2026. "Gender-Specific Application Behaviour, Matching, and the Residual Gender Earnings Gap," The Economic Journal, Royal Economic Society, vol. 136(673), pages 97-124.
    7. Benjamin Lochner & Bastian Schulz, 2024. "Firm Productivity, Wages, and Sorting," Journal of Labor Economics, University of Chicago Press, vol. 42(1), pages 85-119.
    8. Antoine Bertheau & Rune Vejlin, 2025. "Job Ladders by Firm Wage and Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 58, October.
    9. Francesco Bloise & Irene Brunetti & Valeria Cirillo, 2022. "Firm strategies and distributional dynamics: labour share in Italian medium-large firms," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(2), pages 623-655, July.
    10. Gulyas, Andreas & Meier, Matthias & Ryzhenkov, Mykola, 2024. "Labor market effects of monetary policy across workers and firms," European Economic Review, Elsevier, vol. 166(C).
    11. Cole, Matthew A. & Jabbour, Liza & Ozgen, Ceren & Yumoto, Hiromi, 2024. "Refugees' Economic Integration and Firms," IZA Discussion Papers 16828, IZA Network @ LISER.

    More about this item

    JEL classification:

    • 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
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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