Firms and labor market inequality: Evidence and some theory

Authors: David Card, Ana Rute Cardoso, Jörg Heining and Patrick Kline

Journal of Labor Economics, Vol. 36, No 51, S13-S70, January, 2018

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.

This paper originally appeared as Barcelona GSE Working Paper 976