Firm productivity, wages, and sorting

Abstract

"We study the link between firms’ productivity and the wages firms pay. Guided by labor market sorting theory, we infer firm productivity from estimating firm-level production functions, taking into account that worker ability and firm productivity may interact at the match level. Using German data, we find that high wages are not necessarily a reflection of high firm productivity. Observed worker transitions towards higher wages are sometimes directed downwards on the firm-productivity ladder. Worker sorting into high-productivity firms is thus less pronounced than sorting into high-wage firms. Consequently, an implication of increasing wage sorting could be decreasing allocative efficiency." (Author's abstract, IAB-Doku) ((en))

Cite article

Lochner, B. & Schulz, B. (2021): Firm productivity, wages, and sorting. (University Aarhus. Economics working paper 2021-04), Aarhus, 58 p.