The Sources of Wage Variation: A Three-Way High-Dimensional Fixed Effects Regression Model

42 Pages Posted: 23 Mar 2013

See all articles by Sónia Manuela Torres

Sónia Manuela Torres

Statistics Portugal

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

John T. Addison

University of South Carolina - Moore School of Business - Department of Economics; IZA Institute of Labor Economics

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business; IZA Institute of Labor Economics

Abstract

This paper estimates a wage equation with three high-dimensional fixed effects, using a longitudinal matched employer-employee dataset covering virtually all Portuguese wage earners over a little more than two decades. The variation in log real hourly wages is decomposed into different components related to worker, firm, and job title characteristics (both observed and unobserved) and a residual component.It is found that worker permanent heterogeneity is the most important source of wage variation (36.0 percent) and that the unobserved component plays a more important role (21.0 percent) than the observed component (15.0 percent) in explaining wage differentials. Firm permanent effects are less important overall (28.7 percent) and are due in almost equal parts to the unobserved component and the observed component. Job title effects emerge as the least important dimension but they still explain close to 10 percent of wage variation. We found definitive evidence of positive assortative matching.

Keywords: high dimensional fixed effects, wage decomposition, assortative matching

JEL Classification: J2, J41

Suggested Citation

Torres, Sónia Manuela and Portugal, Pedro and Addison, John T. and Guimaraes, Paulo, The Sources of Wage Variation: A Three-Way High-Dimensional Fixed Effects Regression Model. IZA Discussion Paper No. 7276. Available at SSRN: https://ssrn.com/abstract=2238309

Pedro Portugal

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

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

John T. Addison

University of South Carolina - Moore School of Business - Department of Economics ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States
803-777-7400 (Phone)
803-777-6876 (Fax)

HOME PAGE: http://mooreschool.sc.edu/moore/economics/profiles/addison.htm

IZA Institute of Labor Economics

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

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

IZA Institute of Labor Economics

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

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