Augmenting the Human Capital Earnings Equation with Measures of Where People Work

29 Pages Posted: 22 Aug 2016 Last revised: 4 Jan 2021

See all articles by Erling Barth

Erling Barth

Institute for Social Research, Norway; Department of Economics, University of Oslo; IZA Institute of Labor Economics

James C. Davis

US Census Bureau

Richard B. Freeman

National Bureau of Economic Research (NBER); University of Edinburgh - School of Social and Political Studies; Harvard University; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Date Written: August 2016

Abstract

We augment standard ln earnings equations with variables reflecting unmeasured attributes of workers and measured and unmeasured attributes of their employer. Using panel employee-establishment data for US manufacturing we find that the observable employer characteristics that most impact earnings are: number of workers, education of co-workers, capital equipment per worker, industry in which the establishment produces, and R&D intensity of the firm. Employer fixed effects also contribute to the variance of ln earnings, though substantially less than individual fixed effects. In addition to accounting for some of the variance in earnings, the observed and unobserved measures of employers mediate the estimated effects of individual characteristics on earnings and increasing earnings inequality through the sorting of workers among establishments.

Suggested Citation

Barth, Erling and Davis, James C. and Freeman, Richard B., Augmenting the Human Capital Earnings Equation with Measures of Where People Work (August 2016). NBER Working Paper No. w22512, Available at SSRN: https://ssrn.com/abstract=2827430

Erling Barth (Contact Author)

Institute for Social Research, Norway ( email )

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Department of Economics, University of Oslo ( email )

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James C. Davis

US Census Bureau ( email )

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Richard B. Freeman

National Bureau of Economic Research (NBER) ( email )

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