Worker and Firm Heterogeneity in Wage Growth

Kenneth Lykke Sørensen, Rune Majlund Vejlin
Aarhus University, Denmark

This paper estimates a wage growth equation containing human capital variables known from the traditional Mincerian wage equation with year, worker and firm fixed effects included as well. The paper thus contributes further to the large empirical literature on unobserved heterogeneity following the work of Abowd, Kramarz and Margolis (1999). Our main contribution is to extend the analysis from wage levels to wage growth. The specification enables us to estimate the individual specific and firm specific effects and their degree of explanation on wage growth. The analysis is conducted using Danish longitudinal matched employer-employee data 1980-2006. We find that the worker fixed effect dominates both the firm fixed effect and the effect of the observed covariates. Worker effects are estimated to explain around seven to twelve per cent of the variance in wage growth while firm effects are estimated to explain four to ten per cent. We furthermore find a negative correlation between the worker and firm effects, as do nearly all authors examining wage level equations. We find a positive correlation between the estimated worker fixed effect from regressions of wage levels and wage growth. This is suggestive evidence that workers with high initial wage also have higher wage growth.

View full paper