Workforce Composition, Productivity and Pay: The Role of Firms in Wage Inequality

43 Pages Posted: 14 May 2020

See all articles by Chiara Criscuolo

Chiara Criscuolo

Organization for Economic Co-Operation and Development (OECD)

Alexander Hijzen

Organization for Economic Co-Operation and Development (OECD)

Cyrille Schwellnus

Organization for Economic Co-Operation and Development (OECD)

Wen-Hao Chen

affiliation not provided to SSRN

Richard Fabling

Ministry of Economic Development - Medium Term Strategy Group

Priscilla Fialho

affiliation not provided to SSRN

Katarzyna Grabska

Maastricht University

Ryo Kambayashi

Hitotsubashi University

Timo Leidecker

affiliation not provided to SSRN

Oskar Nordstrom Skans

Uppsala University; IZA Institute of Labor Economics

Capucine Riom

London School of Economics & Political Science (LSE) - London School of Economics

Duncan Roth

Institute for Employment Research (IAB)

Balazs Stadler

affiliation not provided to SSRN

Richard Upward

University of Nottingham - School of Economics

Wouter Zwysen

University of Essex - Institute for Social and Economic Research (ISER)

Abstract

In many OECD countries, low productivity growth has coincided with rising inequality. Widening wage and productivity gaps between firms may have contributed to both developments. This paper uses a new harmonised cross-country linked employer-employee dataset for 14 OECD countries to analyse the role of firms in wage inequality. The main finding is that, on average across countries, changes in the dispersion of average wages between firms explain about half of the changes in overall wage inequality. Two thirds of these changes in between-firm wage inequality are accounted for by changes in productivity-related premia that firms pay their workers above common market wages. The remaining third can be attributed to changes in workforce composition, including the sorting of high-skilled workers into high-paying firms. Over all, these results suggest that firms play an important role in explaining wage inequality as wages are driven to a significant extent by firm performance rather than being exclusively determined by workers' earnings characteristics.

Keywords: firm wage premium, wage inequality, productivity

JEL Classification: D2, J31, J38

Suggested Citation

Criscuolo, Chiara and Hijzen, Alexander and Schwellnus, Cyrille and Chen, Wen-Hao and Fabling, Richard and Fialho, Priscilla and Grabska, Katarzyna and Kambayashi, Ryo and Leidecker, Timo and Nordström Skans, Oskar and Riom, Capucine and Roth, Duncan and Stadler, Balazs and Upward, Richard and Zwysen, Wouter, Workforce Composition, Productivity and Pay: The Role of Firms in Wage Inequality. IZA Discussion Paper No. 13212, Available at SSRN: https://ssrn.com/abstract=3596678 or http://dx.doi.org/10.2139/ssrn.3596678

Chiara Criscuolo (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Alexander Hijzen

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Cyrille Schwellnus

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Wen-Hao Chen

affiliation not provided to SSRN

No Address Available

Richard Fabling

Ministry of Economic Development - Medium Term Strategy Group ( email )

P.O. Box 1473
Wellington
New Zealand

Priscilla Fialho

affiliation not provided to SSRN

No Address Available

Katarzyna Grabska

Maastricht University

P.O. Box 616
Maastricht, 6200MD
Netherlands

Ryo Kambayashi

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

HOME PAGE: http://www.ier.hit-u.ac.jp/English/faculty/kambayashi.html

Timo Leidecker

affiliation not provided to SSRN

No Address Available

Oskar Nordström Skans

Uppsala University ( email )

Box 513
Uppsala, 751 20
Sweden

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Capucine Riom

London School of Economics & Political Science (LSE) - London School of Economics

Duncan Roth

Institute for Employment Research (IAB) ( email )

Regensburger Str. 100
Nuremberg, Bavaria 90478
Germany

Balazs Stadler

affiliation not provided to SSRN

No Address Available

Richard Upward

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 115 951 5151 (Phone)
+44 115 951 4159 (Fax)

Wouter Zwysen

University of Essex - Institute for Social and Economic Research (ISER) ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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