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Persistence of Firm and Individual Wage Components

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  • Leonard, Jonathan S.
  • Van Audenrode, Marc

Abstract

Using longitudinal matched employer-employee data, we show that a standard wage equation ignoring firm and individual effects yields a baseline explaining 36 percent of wage variation. Firm specific wage components, including common firm-wide omitted human capital, accounts for an additional 22 percent. Firm pay differentials are large and persistent. Most of these firm differentials reflect omitted general human capital. We also show the importance of asymmetric information and unobserved heterogeneity in wage setting mechanisms. Nous utilisons une banque de données regroupant de l'information à la fois sur les employeurs et les employés. Nous montrons qu'une équation de capital humain standard qui ignore les effets individuels et les effets de firme explique environ 36% de la variance observée des salaires. Les effets de firme permettent d'expliquer 22% additionnels de cette variance. Les différences de salaires entre firmes sont importants et persistants. Nous montrons que la plus grande partie de ces différences de salaires sont causées par l'omission de certaines variables de capital humain. Par contre, nous montrons que l'asymétrie d'information et l'hétérogénéité non observée jouent également un rôle important dans la détermination des salaires.

Suggested Citation

  • Leonard, Jonathan S. & Van Audenrode, Marc, 1996. "Persistence of Firm and Individual Wage Components," Cahiers de recherche 9607, Université Laval - Département d'économique.
  • Handle: RePEc:lvl:laeccr:9607
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    References listed on IDEAS

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    1. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    2. Freeman, Richard B, 1984. "Longitudinal Analyses of the Effects of Trade Unions," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 1-26, January.
    3. George J. Stigler, 1962. "Information in the Labor Market," NBER Chapters, in: Investment in Human Beings, pages 94-105, National Bureau of Economic Research, Inc.
    4. John T. Dunlop, 1957. "The Task of Contemporary Wage Theory," International Economic Association Series, in: John T. Dunlop (ed.), The Theory of Wage Determination, chapter 0, pages 3-27, Palgrave Macmillan.
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    Cited by:

    1. Hübler, Dominik & Hübler, Olaf, 2006. "Is There a Trade-off Between Job Security and Wages in Germany and the UK?," IZA Discussion Papers 2241, Institute of Labor Economics (IZA).
    2. Diana Lúcia Gonzaga da Silva & Carlos Roberto Azzoni, 2016. "Location and wages: the contribution of firm and worker effects in Brazil," Working Papers, Department of Economics 2016_41, University of São Paulo (FEA-USP).
    3. Josef Zweimuller & Rudolf Winter-Ebmer, 1999. "Firm-Size Wage Differentials in Switzerland: Evidence from Job-Changers," American Economic Review, American Economic Association, vol. 89(2), pages 89-93, May.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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