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Firm Productivity, Wages, and Sorting

Author

Listed:
  • Benjamin Lochner

    (University of Erlangen-Nuremberg and Institute for Employment Research (IAB))

  • Bastian Schulz

    (Department of Economics and Business Economics, the Dale T. Mortensen Centre, Aarhus University and CESifo)

Abstract

We study the link between firms’ productivity and the wages firms pay. Guided by labor market sorting theory, we infer firm productivity from estimating firm-level production functions, taking into account that worker ability and firm productivity may interact at the match level. Using German data, we find that high wages are not necessarily a reflection of high firm productivity. Observed worker transitions towards higher wages are sometimes directed downwards on the firm-productivity ladder. Worker sorting into high-productivity firms is thus less pronounced than sorting into high-wage firms. Consequently, an implication of increasing wage sorting could be decreasing allocative efficiency.

Suggested Citation

  • Benjamin Lochner & Bastian Schulz, 2021. "Firm Productivity, Wages, and Sorting," Economics Working Papers 2021-04, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2021-04
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    2. Bauer, Anja & Lochner, Benjamin, 2020. "History dependence in wages and cyclical selection: Evidence from Germany," Labour Economics, Elsevier, vol. 67(C).
    3. Benjamin Lochner & Bastian Schulz, 2024. "Firm Productivity, Wages, and Sorting," Journal of Labor Economics, University of Chicago Press, vol. 42(1), pages 85-119.
    4. Pardesi, Mantej, 2024. "Productivity convergence and firm’s training strategy," ROA Research Memorandum 003, Maastricht University, Research Centre for Education and the Labour Market (ROA).
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    7. Pardesi, Mantej, 2024. "Productivity Convergence and Firm’s Training Strategy," Research Memorandum 003, Maastricht University, Graduate School of Business and Economics (GSBE).

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    More about this item

    Keywords

    Assortative Matching; Labor Market Sorting; Wage Inequality; Job Mobility; Unobserved Heterogeneity; Firm Productivity; Production Function Estimation;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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