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Firm Wage Differentials and Labor Market Sorting: Reconciling Theory and Evidence

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  • Rafael Lopes de Melo

Abstract

Why do firms pay different wages? Empirical evidence suggests the presence of substantial differences in firm pay controlling for worker skill. Moreover, these differences are uncorrelated with skills, indicating the absence of sorting. I show that the face value interpretation is inconsistent with evidence on coworker segregation. I interpret the evidence by applying a sorting model and show that the correlation is biased. I identify nonmonotonicities in wages as the reason for this bias and show that a measure of worker-coworker sorting is more accurate. By calibrating the model to US data, I confirm that the model matches many job market characteristics.

Suggested Citation

  • Rafael Lopes de Melo, 2018. "Firm Wage Differentials and Labor Market Sorting: Reconciling Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 126(1), pages 313-346.
  • Handle: RePEc:ucp:jpolec:doi:10.1086/695505
    DOI: 10.1086/695505
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