The Role of Firms in Wage Inequality Dynamics

54 Pages Posted: 27 May 2022

See all articles by Joana Silva

Joana Silva

Catholic University of Portugal (UCP); World Bank; Centre for Economic Policy Research (CEPR)

Martim Leitao

Catholic University of Portugal (UCP)

Jaime Montana

Catholic University of Portugal (UCP)

Date Written: May 1, 2022

Abstract

This paper examines the mechanisms through which firms impact earnings inequality dynamics. Using a rich combination of administrative matched employer-employee-job title data, and detailed technology adoption firm surveys for Portugal, we show that the decrease in wage inequality has arisen from a compression in the firm pay premium, the job title pay premium and their covariance. These effects were mainly driven by a decline in passthrough from firm characteristics to pay, rather than changes in the distribution of these characteristics. Results show that workforce composition and labor productivity are the main drivers of firm pay premiums compression, and that this effect comes from a decline in returns to these characteristics. An increasing share of workers earning the minimum wage and a reduction in labor market concentration also contributed to the fall in between-firm pay premium dispersion but had smaller roles. We also find that technological adoption increases within-firm labor income inequality. Our results shed new light on how firms impact labor income inequality dynamics and have profound policy implications for the design of policies to mitigate inequality.

Keywords: Concentration, firms, institutions, Labor market, tecnology, Wage inequality

JEL Classification: J00, J31, J40

Suggested Citation

Silva, Joana and Leitao, Martim and Montana, Jaime, The Role of Firms in Wage Inequality Dynamics (May 1, 2022). CEPR Discussion Paper No. DP17327, Available at SSRN: https://ssrn.com/abstract=4121520

Joana Silva

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martim Leitao (Contact Author)

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

Jaime Montana

Catholic University of Portugal (UCP) ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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