Firms and Labor Market Inequality: Evidence and Some Theory
We review the literature on rm-level drivers of labor market inequality. There is strong evidence from a variety of elds that standard measures of productivity like output per worker or total factor productivity vary substantially across rms, even within narrowly-dened industries. Several recent studies note that rising trends in the dispersion of productivity across rms mirror the trends in the wage inequality across workers. Two distinct literatures have searched for a more direct link
... these two phenomena. The rst examines how wages are aected by dierences in employer productivity. Studies that focus on rm-specic productivity shocks and control for the non-random sorting of workers to more and less productive rms typically nd that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. A second literature focuses on rm-specic wage premiums, using the wage outcomes of job changers. This literature also concludes that rm pay setting is important for wage inequality, with many studies nding that rm wage eects contribute approximately 20% of the overall variance of wages. To interpret these ndings, we develop a model where workplace environments are viewed as imperfect substitutes by workers, and rms set wages with some degree of market power. We show that simple versions of this model can readily match the stylized empirical ndings in the literature regarding rent-sharing elasticities and the structure of rm-specic pay premiums. * We are extremely grateful to Raaele Saggio for assistance in preparing this paper, and to David Green for helpful suggestions on an earlier draft. Cardoso acknowledges nancial support from the Spanish Ministry of Economy and Competitiveness (Severo Ochoa Programme forCentres of Excellence in R&D grant SEV-2015-0563) and the Research Council of Norway (Europe in Transition funding scheme project 227072/F10 at ESOP).