Workers, Firms, and Spatial Wage Inequality: Evidence from Hungarian Local Labor Markets

This paper examines how workers and employers jointly shape spatial wage disparities across Hungarian local labor markets. We combine longitudinal linked employer–employee administrative data for 2012–2022 with functional local labor markets constructed from district-to-district commuting flows in the 2022 Hungarian Census. Our preferred delineation contains 29 commuting zones and raises the share of employed residents working within the same unit above 90 percent, compared with 72 percent for districts and 81 percent for counties. We estimate an additive worker–employer fixed-effect wage model and decompose wage variation at the individual level, between commuting zones, and within commuting zones. Differences in commuting-zone mean wages account for 2.8 percent of national log-wage variance and 1.1 percent when the Budapest commuting zone is excluded. Although the between-zone component is modest, its structure is systematic: zones with higher average worker effects also tend to have higher average employer wage premia, so the spatial alignment of worker and employer components accounts for an important part of spatial wage differences. Wage dispersion and the relative importance of worker heterogeneity, employer premia, and worker–employer sorting within local labor markets also vary substantially across the country. The results indicate that spatial wage disparities in Hungary reflect not only differences in workers’ earnings potential and the employer premia attached to their jobs, but also how these components are combined across local labor markets.