The Peer Effect on Future Wages in the Workplace

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