Title: The role of jobs in explaining UK wage inequality
Abstract:Previous work that seeks to decompose wage variance into worker and firm components often ends in a puzzle: sorting between firms and workers explains a large fraction of the log wage variance but fir...Previous work that seeks to decompose wage variance into worker and firm components often ends in a puzzle: sorting between firms and workers explains a large fraction of the log wage variance but firm differences are only a small component. In models where sorting is driven by complementarities in production (Becker [1973]) the lack of associated strong complementarities in wages is puzzling. In this paper, we suggest a solution to the puzzle by noting that workers match to jobs and not firms, and by decomposing wages into worker and job effects. Our approach nests the more common AKM specification and allows firm fixed effects to vary across occupations. We find that 38% of the observed UK wage variance between 2002 and 2019 can be attributed to job heterogeneity, 29% to matching between workers and jobs, and 18% to worker variation. This novel decomposition reconciles theory and empirics and allows us to look at UK wage inequality from 2002 to 2019 through a new lens. We document novel stylised facts: (i) differences between occupations explain two-thirds of the contribution of job heterogeneity to overall wage inequality; (ii) higher wage occupations also have larger wage variance and increasingly the variation in wages is due to sorting; (iii) higher-paying jobs and higher-wage workers increasingly co-locate in larger labour markets; (iv) variation in wages is increasing in labour market size, and sorting, especially within occupation, explains an increasingly large proportion of this variation.Read More
Publication Year: 2021
Publication Date: 2021-01-01
Language: en
Type: preprint
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