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Wage and Productivity Dispersion: Labor Quality or Rent Sharing?


  • Dale T. Mortensen

    (Northwestern University)

  • Bent Jesper Christensen

    (Aarhus University)

  • Jesper Bagger

    (Royal Holloway, University of London)


The method introduced in this paper contributes to the estimation of production functions by embedding them in a structural equation system involving worker, firm, time, and occupation effects from an individual wage decomposition and accounting for labor input components that are substitutes and complements, while accommodating stochastically varying factor productivity. The structural model allows for differences in input quality as well as rent sharing, both of which may potentially help explain the observations that wage and labor productivity are dispersed across firms, and that more productive firms tend to pay higher wages. From our empirical results, which focus on the manufacturing sector only, both input heterogeneity and intrinsic differences in total factor productivity across firms are important for dispersion. We find that 41% of the dispersion in log value added per worker within the manufacturing sector is attributable to cross-firm differences in the levels of capital per worker, while another 39% of the variation stems from intrinsic TFP differences across firms. Only a smaller portion observed dispersion in log value added per worker (5s%) is associated with quality differences in the labor input. These results suggest that that there are major gains to reallocation of labor from firms with low marginal labor productivity to firms with high marginal labor productivity. The same would not be the case if the dispersion in marginal labor productivity were due to differences in labor quality alone. Rent sharing provide a link between individual wages and firms' marginal labor productivity and thus ties the dispersion in labor productivity to the wage distribution. Hence, rent sharing is a potentially important vehicle for reallocation as wage dispersion motivates job search. We provide a decomposition of individual log wages in the manufacturing sector and find that 70% of the individual log wage variation is due to individual characteristics, whereas only 13% is attributable to firm differences (i.e. rent sharing). The relatively small contribution of firm heterogeneity to individual wage dispersion is thus consistent with the inefficient allocation of labor across firms.

Suggested Citation

  • Dale T. Mortensen & Bent Jesper Christensen & Jesper Bagger, 2010. "Wage and Productivity Dispersion: Labor Quality or Rent Sharing?," 2010 Meeting Papers 758, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:758

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    References listed on IDEAS

    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Bernard, Andrew B. & Bradford Jensen, J., 1999. "Exceptional exporter performance: cause, effect, or both?," Journal of International Economics, Elsevier, vol. 47(1), pages 1-25, February.
    3. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, March.
    4. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    5. Dale T. Mortensen, 2009. "Wage Dispersion in the Search and Matching Model with Intra-Firm Bargaining," NBER Working Papers 15033, National Bureau of Economic Research, Inc.
    6. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
    7. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    8. Dale T. Mortensen, 2009. "Wage Dispersion and Inter-Firm Bargaining in a Search and Matching Model," 2009 Meeting Papers 791, Society for Economic Dynamics.
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    Cited by:

    1. Judith Niehues & Andreas Peichl, 2011. "Lower and Upper Bounds of Unfair Inequality: Theory and Evidence for Germany and the US," SOEPpapers on Multidisciplinary Panel Data Research 395, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Leland D. Crane, 2014. "Firm Dynamics and Assortative Matching," Working Papers 14-25, Center for Economic Studies, U.S. Census Bureau.
    3. Petri Böckerman & Mika Maliranta, 2013. "Outsourcing, Occupational Restructuring, and Employee Well-Being: Is There a Silver Lining?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 52(4), pages 878-914, October.
    4. John Kennes & Daniel le Maire, 2013. "Competing Auctions of Skills," CAM Working Papers 2014_01, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
    5. Judith Niehues & Andreas Peichl, 2012. "Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," CESifo Working Paper Series 3815, CESifo Group Munich.
    6. Torben Sørensen & Rune Vejlin, 2013. "The importance of worker, firm and match effects in the formation of wages," Empirical Economics, Springer, vol. 45(1), pages 435-464, August.
    7. Erling Barth & James Davis & Richard B. Freeman, 2015. "Augmenting the Human Capital Earnings Equation with Measures of Where People Work," NBER Chapters,in: Firms and the Distribution of Income: The Roles of Productivity and Luck National Bureau of Economic Research, Inc.
    8. Pavel Ryska & Jan Prùša, 2011. "Efficiency Wages in Heterogenous Labour Markets," Working Papers IES 2011/28, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2011.
    9. Doan, Tinh & Nguyen, Ha, 2013. "Productivity dispersion and the roles of quality of labour input and competition: A case of Vietnamese manufacturing sector," MPRA Paper 48357, University Library of Munich, Germany.
    10. Melvyn G. Coles & Dale T. Mortensen, 2016. "Equilibrium Labor Turnover, Firm Growth, and Unemployment," Econometrica, Econometric Society, vol. 84, pages 347-363, January.
    11. John Kennes & Daniel le Maire, 2013. "Job Heterogeneity and Coordination Frictions," Economics Working Papers 2013-09, Department of Economics and Business Economics, Aarhus University.
    12. Niehues, J. (Judith) & Andreas Peichl, 2012. "GINI DP 34: Bounds of Unfair Inequality of Opportunity: Theory and Evidence for Germany and the US," GINI Discussion Papers 34, AIAS, Amsterdam Institute for Advanced Labour Studies.

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