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

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

Abstract

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.

Suggested Citation

  • Sónia Torres & Pedro Portugal & John T. Addison & Paulo Guimarães, 2013. "The sources of wage variation: a three-way high-dimensional fixed effects regression model," Working Papers w201309, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201309
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    References listed on IDEAS

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    Cited by:

    1. Francesca Sgobbi & Fátima Suleman, 2015. "The Value of Transferable Skills," Scottish Journal of Political Economy, Scottish Economic Society, vol. 62(4), pages 378-399, September.
    2. repec:eee:labeco:v:49:y:2017:i:c:p:106-127 is not listed on IDEAS
    3. Borowczyk-Martins, Daniel & Bradley, Jake & Tarasonis, Linas, 2017. "Racial discrimination in the U.S. labor market: Employment and wage differentials by skill," Labour Economics, Elsevier, vol. 49(C), pages 106-127.
    4. Araújo, Bruno César & Paz, Lourenço S., 2014. "The effects of exporting on wages: An evaluation using the 1999 Brazilian exchange rate devaluation," Journal of Development Economics, Elsevier, vol. 111(C), pages 1-16.
    5. Hospido, Laura, 2015. "Wage dynamics in the presence of unobserved individual and job heterogeneity," Labour Economics, Elsevier, vol. 33(C), pages 81-93.
    6. Gabriel Felbermayr & Giammario Impullitti & Julien Prat, 2014. "Firm Dynamics and Residual Inequality in Open Economies," CESifo Working Paper Series 4666, CESifo Group Munich.
    7. John T. Addison & Arnd Kölling & Paulino Teixeira, 2014. "Changes in Bargaining Status and Intra-Plant Wage Dispersion in Germany. A Case of (Almost) Plus Ça Change?," GEMF Working Papers 2014-15, GEMF, Faculty of Economics, University of Coimbra.
    8. González de San Román, Ainara & Rebollo-Sanz, Yolanda F., 2014. "An estimation of worker and firm effects with censored data," Economics Discussion Papers 2014-28, Kiel Institute for the World Economy (IfW).
    9. Devicienti, Francesco & Fanfani, Bernardo & Maida, Agata, 2016. "Collective Bargaining and the Evolution of Wage Inequality in Italy," IZA Discussion Papers 10293, Institute for the Study of Labor (IZA).
    10. Ana Rute Cardoso & Paulo Guimarães & Pedro Portugal & Pedro S. Raposo, 2016. "The sources of the gender wage gap," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    11. Addison, John T. & Portugal, Pedro & Varejão, José, 2014. "Labor demand research: Toward a better match between better theory and better data," Labour Economics, Elsevier, vol. 30(C), pages 4-11.
    12. Lamers, Martien, 2015. "Depositor discipline and bank failures in local markets during the financial crisis," Research Report 15007-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    13. Dupuy, Arnaud & Galichon, Alfred, 2017. "A Note on the Estimation of Job Amenities and Labor Productivity," IZA Discussion Papers 10900, Institute for the Study of Labor (IZA).
    14. Matilde Bombardini & Gianluca Orefice & Maria D. Tito, 2015. "Does Exporting Improve Matching? Evidence from French Employer-Employee Data," NBER Working Papers 21225, National Bureau of Economic Research, Inc.
    15. Pedro Portugal & Fernando Martins, 2014. "Wage adjustments during a severe economic downturn," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    16. Fernando Rios-Avila, 2013. "Feasible Estimation of Linear Models with N-fixed Effects," Economics Working Paper Archive wp_782, Levy Economics Institute.
    17. Cardoso, Ana Rute & Guimaraes, Paulo & Portugal, Pedro, 2012. "Everything You Always Wanted to Know about Sex Discrimination," IZA Discussion Papers 7109, Institute for the Study of Labor (IZA).
    18. Félix, Sónia & Portugal, Pedro, 2016. "Labor Market Imperfections and the Firm's Wage Setting Policy," IZA Discussion Papers 10241, Institute for the Study of Labor (IZA).
    19. Luca David Opromolla, 2013. "Trade and wage inequality," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    20. Guimaraes, Paulo & Martins, Fernando & Portugal, Pedro, 2017. "Upward Nominal Wage Rigidity," IZA Discussion Papers 10510, Institute for the Study of Labor (IZA).
    21. Evangelia Papapetrou & Pinelopi Tsalaporta, 2016. "Inter-industry wage differentials in Greece: rent-sharing and unobserved heterogeneity hypotheses," Working Papers 213, Bank of Greece.
    22. Yolanda F. Rebollo-Sanz & Ainara González de San Román, 2013. "Estimation of worker and firm effects with censored data," Working Papers 13.05, Universidad Pablo de Olavide, Department of Economics, revised May 2014.
    23. Yolanda F. Rebollo-Sanz, 2017. "Decomposing the structure of wages into firm and worker effects: some insights from a high unemployment economy," Working Papers 17.10, Universidad Pablo de Olavide, Department of Economics.

    More about this item

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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