Decomposing the structure of wages into firm and worker effects: some insights from a high unemployment economy

This paper estimates an individual wage equation where firm and workers effects are considered and the estimation process controls for censored wages. This exercise is performed for the Spanish economy over the course of a whole business cycle (2000-2015). It is acknowledged that Spain is a country where firm wage setting policies are at least as important as they are in to other European countries with apparently less rigid labour market. Spanish firms explain around 27% of the individual wage heterogeneity but more importantly around 74% of inter-industry wage differentials and these numbers increased over the current Big Recession. It is found evidence of an important sorting process of individual and firms across industries. Finally, it is also demonstrated that, for some key topics in labour economics such as the effect job mobility on wages, it is important to explicitly consider firm fixed effects.