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Wage and Productivity Dispersion: The Roles of Rent Sharing, Labor Quality and Capital Intensity

Author

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  • Bent Christensen

    (University of Aarhus)

  • Jesper Bagger

    (Royal Holloway, University of London)

Abstract

Firm labor productivity and average wages paid by firms vary considerably and are positively correlated. These observations can be rationalized either by exogenous TFP heterogeneity in firm productivity coupled with rent sharing or by differences in capital intensity and in the quality of labor inputs. This paper ascertains the extent to which these factors provide an explanation of the observations using Danish matched employer-employee data. Using the worker fixed effect in a wage equation as a measure of worker ability, and a combination of ability and occupational composition for labor force quality, we find that TFP heterogeneity explains more of the observed labor productivity dispersion than differences in capital intensity and labor force quality in each of the industries considered, and that variation in labor force composition explains more than ability differences. Both differences in labor force quality and rent sharing are important in explaining firm level wage dispersion, whereas rent sharing is most important for the positive correlation between average firm wage and labor productivity.

Suggested Citation

  • Bent Christensen & Jesper Bagger, 2014. "Wage and Productivity Dispersion: The Roles of Rent Sharing, Labor Quality and Capital Intensity," 2014 Meeting Papers 473, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:473
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    References listed on IDEAS

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    4. Alfonso Irarrazabal & Andreas Moxnes & Karen Helene Ulltveit-Moe, 2013. "Heterogeneous Firms or Heterogeneous Workers? Implications for Exporter Premiums and the Gains from Trade," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 839-849, July.
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    11. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, June.
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    Cited by:

    1. Giuseppe Berlingieri & Patrick Blanchenay & Chiara Criscuolo, 2017. "The Great Divergence(s)," CEP Discussion Papers dp1488, Centre for Economic Performance, LSE.
    2. Marcus Hagedorn & Tzuo Hann Law & Iourii Manovskii, 2017. "Identifying Equilibrium Models of Labor Market Sorting," Econometrica, Econometric Society, vol. 85, pages 29-65, January.

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