The Peer Effect on Future Wages in the Workplace

52 Pages Posted: 4 Apr 2022

See all articles by Long Hong

Long Hong

University of Wisconsin - Madison

Salvatore Lattanzio

Carlo F. Dondena Centre for Research on Social Dynamics

Date Written: March 6, 2022

Abstract

We study a critical driver of future wages: peers. Using linked employer-employee data for Italy, we explore peer effects in two directions. First, using a novel estimation method and accounting for the endogenous sorting of workers into peer groups and firms, we estimate the impact of the average peer quality on future wages. We find that a 10 percent rise in coworker quality increases one’s wage in the next year by 1.8 percent. The effect decreases gradually over time and becomes about 0.7 percent after five years. Second, we delve deeper into the channels that identify the peer effect. Using an event study specification around mobility episodes, we study how the entry and leave of high-quality and low-quality workers affect wages of movers and coworkers. We find that hiring a high-quality worker is an important driver of wage growth, as well as separating from a low-quality worker. Movers experience an immediate gain when moving into high-quality peer groups.

Keywords: Peer effects, wage growth, linked employer-employee data

JEL Classification: J24, J31, J41, L14, M52

Suggested Citation

Hong, Long and Lattanzio, Salvatore, The Peer Effect on Future Wages in the Workplace (March 6, 2022). Available at SSRN: https://ssrn.com/abstract=4052587 or http://dx.doi.org/10.2139/ssrn.4052587

Long Hong

University of Wisconsin - Madison

Salvatore Lattanzio (Contact Author)

Carlo F. Dondena Centre for Research on Social Dynamics ( email )

Via Roentgen 1
Milan, 20136
Italy

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