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Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality

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  • Leonardi, Marco

    (University of Milan)

Abstract

This paper provides some empirical evidence and a theory of the relationship between residual wage inequality and the increasing dispersion of capital/labor ratios across firms. I document the increasing variance of capital/labor ratios across firms in the US labor market. I also show that the increase in the capital intensity variance across firms is associated with the increasing wage variance across workers. To explain this empirical fact, I adopt a search model where firms differ in their optimal capital investment. The decline in the relative price of equipment capital makes the firm distribution of capital/labor ratios more dispersed. In a frictional labor market, this force generates wage dispersion among identical workers. Simple calibration of the model indicates that the dispersion of capital/labor ratios can account for about one third of the total increase in residual wage inequality.

Suggested Citation

  • Leonardi, Marco, 2003. "Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality," IZA Discussion Papers 909, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp909
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    6. Leonidov, A. & Vasilyeva, E., 2020. "Schumpeterian evolution of firms' capital-labor ratio distribution," Journal of the New Economic Association, New Economic Association, vol. 48(4), pages 12-40.
    7. Keiko Ito & Sébastien Lechevalier, 2009. "The evolution of the productivity dispersion of firms: a reevaluation of its determinants in the case of Japan," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(3), pages 405-429, October.
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    9. Yannick Kalantzis & Ryo Kambayashi & Sébastien Lechevalier, 2012. "Wage and Productivity Differentials in Japan: The Role of Labor Market Mechanisms," LABOUR, CEIS, vol. 26(4), pages 514-541, December.
    10. Golam Rabbani & S N Rajesh Raj, 2024. "The role of financial constraints in firm transition—Evidence from Indian manufacturing," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(4), pages 2193-2228, May.
    11. Marco Leonardi, 2017. "Job Mobility And Earnings Instability," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 260-280, January.
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    Keywords

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    JEL classification:

    • 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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