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What Drives Wage Sorting? Evidence From West Germany

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Abstract

An important source of income inequality is wage sorting: high-earning individuals tend to work for employers that pay higher wages, conditional on worker characteristics. This paper combines German survey and administrative data to explore the causal mechanisms behind this poorly-understood phenomenon. I show three main results. First, wage sorting is entirely across industries and occupations, with evidence rejecting an assortative matching mechanism. Second, wage sorting has strengthened over 1993-2017 due to rising skill premia in high-paying sectors, and rising employment in low-skill, low-paying industries - outcomes consistent with demand-side shifts. Third, wage sorting reflects a positive association between human capital and firm investment, which I rationalize through a simple rent-sharing model. Hypothesis tests support a technological mechanism, in which knowledge-intensive production processes engender higher upfront costs - and therefore rents - on either side of the labor market.

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  • Mouton, Andre, 2024. "What Drives Wage Sorting? Evidence From West Germany," Working Papers 112, Wake Forest University, Economics Department.
    • Handle: RePEc:ris:wfuewp:0112
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    More about this item

    Keywords

    Wage Inequality; Firm-Wage Differentials; Labor Sorting;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • 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

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