Department of Economics and Business Economics

Worker and Firm Heterogeneity in Wage Growth: An AKM approach

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  • Wp10 13

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  • School of Economics and Management
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 fixed effects and their degree of
explanation on wage growth. The analysis is conducted using Danish longitudinal matched employer-employee
data from 1980 to 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 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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages27
Publication statusPublished - 2010

    Research areas

  • Keywords: MEE data, fixed effects, wage growth

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