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Unpacking the Wage Sorting Trend

Author

Listed:
  • Bagger, Jesper

    (University of Edinburgh)

  • Elholm, Malthe

    (Aarhus University)

  • Maibom, Jonas

    (Aarhus University)

  • Vejlin, Rune

    (Aarhus University)

Abstract

Using 1980--2019 Danish matched employer-employee data, we unpack the rise in wage sorting - the correlation between worker and firm wage fixed effects (Abowd et al., 1999) - from 0.06 to 0.18. The rise is driven entirely by reallocation of employment from persistently low-sorting to persistently high-sorting firms, with the average sorting contribution of any given firm remaining stable over time. A decomposition shows that 60 % reflects reallocation among surviving firms and 40 % firm turnover through entry and exit. Regression analysis identifies firm entry and exit and industry reallocation as the dominant firm-side drivers, and rising educational attainment as the key worker-side factor - reflecting concentration of educated workers in high-sorting firms rather than a systematic tendency of educated workers to form high-sorting matches across all employers. Event studies establish direct job-to-job moves as the primary mechanism through which reallocation is implemented at the worker-level.

Suggested Citation

  • Bagger, Jesper & Elholm, Malthe & Maibom, Jonas & Vejlin, Rune, 2026. "Unpacking the Wage Sorting Trend," IZA Discussion Papers 18502, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18502
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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