TY - JOUR AU - Card, David AU - Cardoso, Ana Rute AU - Heining, Jörg AU - Kline, Patrick TI - Firms and Labor Market Inequality: Evidence and Some Theory JF - National Bureau of Economic Research Working Paper Series VL - No. 22850 PY - 2016 Y2 - November 2016 DO - 10.3386/w22850 UR - http://www.nber.org/papers/w22850 L1 - http://www.nber.org/papers/w22850.pdf N1 - Author contact info: David Card Department of Economics 549 Evans Hall, #3880 University of California, Berkeley Berkeley, CA 94720-3880 Tel: 510/642-5222 Fax: 510/643-7042 E-Mail: card@econ.berkeley.edu Ana Rute Cardoso IAE (CSIC) and Barcelona GSE 08193 Bellaterra Barcelona Spain Tel: 34(9)35806612 Fax: 34(9)35801452 E-Mail: anarute.cardoso@iae.csic.es Jörg Heining Institute for Employment Research (IAB) E-Mail: Joerg.Heining@iab.de Patrick M. Kline Department of Economics University of California, Berkeley 530 Evans Hall #3880 Berkeley, CA 94720 Tel: 510/642-4628 E-Mail: pkline@econ.berkeley.edu M1 - published as David Card, Ana Rute Cardoso, Jorg Heining, Patrick Kline. "Firms and Labor Market Inequality: Evidence and Some Theory," in Edward Lazear and Kathryn Shaw, organizers, "Firms and the Distribution of Income: The Roles of Productivity and Luck" Journal of Labor Economics, 36(S1) (2018) AB - We survey two growing bodies of research on firm-level drivers of labor market inequality. The first examines how wages are affected by differences in employer productivity. Studies that focus on firm-specific productivity shocks and control for the non-random sorting of workers to firms typically find that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. Given the wide variation in firm-specific productivity, elasticities of this size suggest that a significant fraction of wage inequality is tied to firm performance. A second literature estimates two-way fixed effects models that rely on the wage changes of people who move between firms to identify firm-specific wage premiums. This literature also concludes that firm pay setting is important for wage inequality, with many studies finding that firm wage effects contribute approximately 20% of the overall variance of wages. To interpret these findings, we develop a model of firm wage setting in which workers have idiosyncratic tastes for different workplaces. We show that simple versions of this model can rationalize the standard two-way fixed effects specification proposed by Abowd, Kramarz and Margolis (1999), and can also match the typical “rent-sharing” elasticities estimated in the literature. Extended versions of the model can potentially explain differences in the wage premiums paid by a given employer to different subgroups of workers. ER -