The importance of worker, firm and match effects in the formation of wages

Abstract

This paper estimates a Mincerian wage equation with worker, firm, and match specific effects and thereby complements the growing empirical literature started by the seminal paper of Abowd (Econometrica 67:251–333, 1999b). The analysis takes advantage of the extensive Danish IDA data which provides wage information on the entire working population in a 27-year period. We find that the major part of wage dispersion in the Danish labor market can be explained by differences in worker characteristics. However, the relative contributions of the three components vary across subgroups of workers. The match effect constitutes a non-negligible part of the overall wage dispersion. An analysis of inter-industry wage differentials shows that firm characteristics are more important at the industry level than at the worker level. Similarly, we find evidence that high-wage workers tend to sort into high-wage industries to a larger extent than they sort into high-wage firms within industries. The mobility pattern of workers is related to the quality of the firm and the match. Finally, we find that firms’ wage policies differ across subgroups.