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Workforce Composition, Productivity and Pay: The Role of Firms in Wage Inequality

Author

Listed:
  • Criscuolo, Chiara

    (OECD)

  • Hijzen, Alexander

    (OECD)

  • Schwellnus, Cyrille

    (OECD)

  • Barth, Erling

    (Institute for Social Research, Oslo)

  • Chen, Wen-Hao

    (OECD)

  • Fabling, Richard

    (Independent Researcher)

  • Fialho, Priscilla

    (OECD)

  • Grabska, Katarzyna

    (Maastricht University)

  • Kambayashi, Ryo

    (Hitotsubashi University)

  • Leidecker, Timo

    (OECD)

  • Nordström Skans, Oskar

    (Uppsala University)

  • Riom, Capucine

    (London School of Economics)

  • Roth, Duncan

    (Institute for Employment Research (IAB), Nuremberg)

  • Stadler, Balazs

    (OECD)

  • Upward, Richard

    (University of Nottingham)

  • Zwysen, Wouter

    (ISER, University of Essex)

Abstract

In many OECD countries, low productivity growth has coincided with rising inequality. Widening wage and productivity gaps between firms may have contributed to both developments. This paper uses a new harmonised cross-country linked employer-employee dataset for 14 OECD countries to analyse the role of firms in wage inequality. The main finding is that, on average across countries, changes in the dispersion of average wages between firms explain about half of the changes in overall wage inequality. Two thirds of these changes in between-firm wage inequality are accounted for by changes in productivity-related premia that firms pay their workers above common market wages. The remaining third can be attributed to changes in workforce composition, including the sorting of high-skilled workers into high-paying firms. Over all, these results suggest that firms play an important role in explaining wage inequality as wages are driven to a significant extent by firm performance rather than being exclusively determined by workers' earnings characteristics.

Suggested Citation

  • Criscuolo, Chiara & Hijzen, Alexander & Schwellnus, Cyrille & Barth, Erling & Chen, Wen-Hao & Fabling, Richard & Fialho, Priscilla & Grabska, Katarzyna & Kambayashi, Ryo & Leidecker, Timo & Nordström , 2020. "Workforce Composition, Productivity and Pay: The Role of Firms in Wage Inequality," IZA Discussion Papers 13212, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp13212
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    References listed on IDEAS

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    Cited by:

    1. Forth, John & Theodoropoulos, Nikolaos, 2022. "Earnings Discrimination in the Workplace," GLO Discussion Paper Series 1110, Global Labor Organization (GLO).

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    More about this item

    Keywords

    wage inequality; firm wage premium; productivity;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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