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Wage Inequality Dynamics: Productivity versus Frictions

Author

Listed:
  • Leitao, Martim
  • Montana, Jaime
  • Silva, Joana

Abstract

What determines the distribution of firm pay? How are these factors related to firm productivity? We develop a framework in which weakening pass-through from productivity to wages, arising from labor market distortions, drives inequality. We propose a new methodology to identify this pass-through, quantify its impact on wage inequality dynamics, and decompose it into labor market distortions. Applying our method to administrative data from Portugal, we find that increased labor market competition and rising minimum wages are the primary drivers of weakening pass-through. Our findings suggest that reducing labor market distortions can lower inequality, even if productivity dispersion remains unchanged.

Suggested Citation

  • Leitao, Martim & Montana, Jaime & Silva, Joana, 2026. "Wage Inequality Dynamics: Productivity versus Frictions," CEPR Discussion Papers 21096, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21096
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    File URL: https://cepr.org/publications/DP21096
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    Keywords

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    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - General
    • 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

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