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The sources of wage variation: a three-way high-dimensional fixed effects regression model

  • Sónia Torres
  • Pedro Portugal
  • John T. Addison
  • Paulo Guimarães

This paper estimates a wage equation with three high-dimensional fixed effects, using a longitudinal matched employer-employee dataset covering virtually all Portuguese wage earners over a little more than two decades. The variation in log real hourly wages is decomposed into different components related to worker, firm, and job title characteristics (both observed and unobserved) and a residual component. It is found that worker permanent heterogeneity is the most important source of wage variation (36.0 percent) and that the unobserved component plays a more important role (21.0 percent) than the observed component (15.0 percent) in explaining wage differentials. Firm permanent effects are less important overall (28.7 percent) and are due in almost equal parts to the unobserved component and the observed component. Job title effects emerge as the least important dimension but they still explain close to 10 percent of wage variation. Equally important, we found definitive evidence of positive assortative matching.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201309.

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Date of creation: 2013
Date of revision:
Handle: RePEc:ptu:wpaper:w201309
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  1. Mendes, Rute & van den Berg, Gerard J. & Lindeboom, Maarten, 2010. "An empirical assessment of assortative matching in the labor market," Labour Economics, Elsevier, vol. 17(6), pages 919-929, December.
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  11. Gerard J. van den Berg & Aico van Vuuren, 2002. "The Effect of Search Frictions on Wages," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C1-2, International Conferences on Panel Data.
  12. Paulo Guimarães & Pedro Portugal, 2009. "A Simple Feasible Alternative Procedure to Estimate Models with High-Dimensional Fixed Effects," Working Papers w200909, Banco de Portugal, Economics and Research Department.
  13. Simon D. Woodcock, 2005. "Heterogeneity and Learning in Labor Markets," Labor and Demography 0511012, EconWPA.
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  17. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
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  19. Abowd, John M. & Kramarz, Francis, 1999. "Econometric analyses of linked employer-employee data," Labour Economics, Elsevier, vol. 6(1), pages 53-74, March.
  20. Gruetter, Max & Lalive, Rafael, 2004. "The Importance of Firms in Wage Determination," IZA Discussion Papers 1367, Institute for the Study of Labor (IZA).
  21. Anabela Carneiro & Paulo Guimar�es & Pedro Portugal, 2012. "Real Wages and the Business Cycle: Accounting for Worker, Firm, and Job Title Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 133-52, April.
  22. M. J. Andrews & L. Gill & T. Schank & R. Upward, 2008. "High wage workers and low wage firms: negative assortative matching or limited mobility bias?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 171(3), pages 673-697.
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  28. repec:tpr:qjecon:v:87:y:1973:i:3:p:355-74 is not listed on IDEAS
  29. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
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