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Firms and Labor Market Inequality: Evidence and Some Theory

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  • David Card
  • Ana Rute Cardoso
  • Jörg Heining
  • Patrick Kline

Abstract

We synthesize two related literatures on firm-level drivers of wage inequality. Studies of rent sharing that use matched worker-firm data find elasticities of wages with respect to value added per worker in the range of 0.05 to 0.15. Studies of wage determination with worker and firm fixed effects typically find that firm-specific premiums explain 20% of overall wage variation. To interpret these findings we develop a model of wage setting in which workers have idiosyncratic tastes for different workplaces. Simple versions of this model can rationalize standard fixed effects specifications and also match the typical rent-sharing elasticities in the literature.

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  • David Card & Ana Rute Cardoso & Jörg Heining & Patrick Kline, 2017. "Firms and Labor Market Inequality: Evidence and Some Theory," Working Papers 976, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:976
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    Keywords

    Rent sharing; two-way fixed effects; Monopsony;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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