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Earnings Dynamics, Inequality and Firm Heterogeneity

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  • Paul Bingley
  • Lorenzo Cappellari

Abstract

Studies of individual earnings dynamics typically ignore firm heterogeneity, whereas worker and firm decompositions of earnings inequality abstract from the life-cycle. We study firm effects in individual earnings dynamics for the Italian private sector population, leveraging the covariance structure of co-workers earnings for identification. Our model allows for dynamics of both worker and firm effects, worker-firm sorting, worker segregation and correlation of firm effects among connected firms. While firms explain most of the earnings inequality when workers are young, workers explain most over the life cycle. Sorting of workers across firms is substantial, especially for younger workers. Standard earnings dynamics models overstate the relevance of individual heterogeneity.

Suggested Citation

  • Paul Bingley & Lorenzo Cappellari, 2022. "Earnings Dynamics, Inequality and Firm Heterogeneity," LISER Working Paper Series 2022-07, Luxembourg Institute of Socio-Economic Research (LISER).
    • Handle: RePEc:irs:cepswp:2022-07
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    Keywords

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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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