The firm-level link between productivity dispersion and wage inequality
A symptom of low job mobility?
Differences in average wages across firms – which account for around one-half of overall
wage inequality – are mainly explained by differences in firm wage premia (the part
of wages that depends exclusively on characteristics of firms) rather than workforce
composition. Using a new cross-country dataset of linked employer-employee data, this
paper investigates the role of cross-firm dispersion in productivity in explaining
dispersion in firm wage premia, as well as the factors shaping the link between productivity
and wages at the firm level. The results suggest that around 15% of cross-firm differences
in productivity are passed on to differences in firm wage premia. The degree of pass-through
is systematically larger in countries and industries with more limited job mobility,
where low-productivity firms can afford to pay lower wage premia relative to high-productivity
ones without a substantial fraction of workers quitting their jobs. Stronger product
market competition raises pass-through while more centralised bargaining and higher
minimum wages constrain firm-level wage setting at any given level of productivity
dispersion. From a policy perspective, the results suggest that the key priority should
be to promote job mobility, which would reduce wage differences between firms while
easing the efficient reallocation of workers across them.
Published on March 04, 2021
In series:OECD Science, Technology and Industry Working Papersview more titles