Worker skills or firm wage-setting practices? Decomposing wage inequality across 20 OECD countries

Abstract

In many OECD countries, low productivity growth has coincided with rising wage inequality. Widening wage and productivity gaps between firms may have contributed to both developments. This chapter uses harmonised linked employer-employee data for 20 OECD countries to analyse the role of firms in wage inequality. The main finding is that, on average across countries, differences in average wages between firms explain about one-half of overall wage inequality. Two-thirds of between-firm wage inequality (i.e. about a third of overall wage inequality) reflect firms’ wage-setting practices or wage premia, i.e. the part of wages that is determined by the firm rather than the characteristics of its workers. The remaining third (i.e. a sixth of overall wage inequality) can be attributed to differences in workforce composition across firms. The contribution of differences in wage premia to wage inequality tends to be larger in countries with decentralised collective bargaining systems and lower levels of job mobility. Overall, these results suggest that firms play an important role in explaining wage inequality, as wages are to a notable extent determined by firm wage-setting practices rather than being exclusively by workers’ skills. This chapter has been written by an OECD team consisting of Chiara Criscuolo, Alexander Hijzen, and Cyrille Schwellnus with contributions of: Erling Barth (Institute for Social Research Oslo, NORWAY), Antoine Bertheau (University of Copenhagen, DENMARK), Wen-Hao Chen (Statcan, CANADA), Richard Fabling (independent, NEW ZEALAND), Priscilla Fialho (OECD, PORTUGAL), Katarzyna Grabska-Romagosa (Maastricht University, NETHERLANDS), Ryo Kambayashi (Hitotsubashi University, JAPAN), Valerie Lankester and Catalina Sandoval (Central Bank of Costa Rica, COSTA RICA), Michael Koelle (OECD), Timo Leidecker (OECD), Balazs Murakőzy (University of Liverpool, HUNGARY), Oskar Nordström Skans (Uppsala University, SWEDEN), Satu Nurmi (Statistics Finland/VATT, FINLAND), Vladimir Peciar (Ministry of Finance, SLOVAK REPUBLIC), Capucine Riom (LSE, FRANCE), Duncan Roth (IAB, GERMANY), Balazs Stadler (OECD), Richard Upward (University of Nottingham, UNITED KINGDOM) and Wouter Zwysen (ETUI, formerly OECD). For details on the data used in this chapter please see the standalone Data Annex and Disclaimer Annex.