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Wage and Productivity Dispersion: Labor Quality or Rent Sharing?

Listed author(s):
  • 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.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 758.

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Date of creation: 2010
Handle: RePEc:red:sed010:758
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  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, 03.
  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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