Unpacking the Wage Sorting Trend

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.