Firms and Labor Market Inequality: Evidence and Some Theory

TLDR

The authors synthesize literature on firm‑level drivers of wage inequality and build a wage‑setting model that incorporates workers’ idiosyncratic workplace preferences. They develop a simple wage‑setting model that explains fixed‑effects specifications and reproduces rent‑sharing elasticities of 0.05–0.15. Empirical studies show rent‑sharing elasticities of 0.05–0.15 and that firm‑specific premiums account for about 20% of wage variation, findings that the model can rationalize.

Abstract

We synthesize two related literatures on firm-level drivers of wage inequality. Studies of rent sharing that use matched worker-firm data find elasticities of wages with respect to value added per worker in the range of 0.05–0.15. Studies of wage determination with worker and firm fixed effects typically find that firm-specific premiums explain 20% of overall wage variation. To interpret these findings, we develop a model of wage setting in which workers have idiosyncratic tastes for different workplaces. Simple versions of this model can rationalize standard fixed effects specifications and also match the typical rent-sharing elasticities in the literature.