The Importance of Worker, Firm and Match Fixed Effects in the Formation of Wages

University of Aarhus Economics Working Paper 2009-11

40 Pages Posted: 4 Dec 2009

Date Written: December 1, 2009


This paper estimates a Mincerian wage equation with worker, firm, and match specific fixed effects and thereby complements the growing empirical literature started by the seminal paper of Abowd, Kramarz and Margolis (1999). The analysis takes advantage of the extensive Danish IDA data, which provides wage information on the whole working population for a 24-year period. We find that the major part of wage dispersion in the Danish labor market can be explained by differences in worker characteristics. However, the relative contribution of the three components varies across subgroups of workers. The match effect contributes a non-neglible part to the overall wage dispersion and, furthermore, corrects the estimated returns to experience. An analysis of inter-industry wage differentials shows that firm characteristics are more important at the industry level than at the worker level. Likewise, we find evidence of high wage workers sorting into high wage industries but not into high wage firms within industries. The mobility pattern of workers is related to the quality of the firm and the match, and we find that the wage gain from job mobility depends on worker characteristics.

Keywords: MEE data, fixed effects, wage dispersion

JEL Classification: J21, J31

Suggested Citation

Soerensen, Torben and Vejlin, Rune, The Importance of Worker, Firm and Match Fixed Effects in the Formation of Wages (December 1, 2009). University of Aarhus Economics Working Paper 2009-11, Available at SSRN: or

Torben Soerensen (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000

Rune Vejlin

University of Aarhus ( email )

Building 350
DK-8000 Aarhus C

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