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Earnings Inequality in Production Networks

Author

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  • Federico Huneeus
  • Kory Kroft
  • Kevin Lim

Abstract

This paper investigates the importance of firm-to-firm production network linkages for earnings inequality. We develop a quantitative model in which heterogeneous firms hire workers of different abilities in an imperfectly competitive labor market and source intermediates from heterogeneous suppliers in a production network. The model delivers an earnings equation with a firm-specific wage premium that depends endogenously on both firm productivities and firm-to-firm linkages in the production network. We establish identification of the model parameters and estimate them using linked employer-employee and firm-to-firm transactions data from Chile. Counterfactual simulations using our estimated model show that heterogeneity in network linkages explains 21% of log earnings variance, while passthrough of productivity shocks via network linkages explains between 20-25% of earnings volatility. We also examine the effects of a minimum wage policy and find strong spillover effects to worker earnings above the wage floor, with substitution of materials for labor explaining around 40% of these effects.

Suggested Citation

  • Federico Huneeus & Kory Kroft & Kevin Lim, 2021. "Earnings Inequality in Production Networks," Working Papers Central Bank of Chile 907, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:907
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    References listed on IDEAS

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    Cited by:

    1. David W. Berger & Kyle F. Herkenhoff & Simon Mongey, 2022. "Minimum Wages, Efficiency and Welfare," Opportunity and Inclusive Growth Institute Working Papers 058, Federal Reserve Bank of Minneapolis.
    2. Brian Hill, 2021. "Being up Front about Income Inequality," Working Papers hal-02896664, HAL.
    3. Dami'an Vergara, 2022. "Minimum Wages and Optimal Redistribution," Papers 2202.00839, arXiv.org, revised Dec 2022.

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    More about this item

    JEL classification:

    • F0 - International Economics - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J0 - Labor and Demographic Economics - - General
    • 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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