NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Stephane Bonhomme

University of Chicago
1126 East 59th Street
Chicago, IL 60637

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Institutional Affiliation: University of Chicago

NBER Working Papers and Publications

June 2020How Much Should we Trust Estimates of Firm Effects and Worker Sorting?
with Kerstin Holzheu, Thibaut Lamadon, Elena Manresa, Magne Mogstad, Bradley Setzler: w27368
Many studies use matched employer-employee data to estimate a statistical model of earnings determination where log-earnings are expressed as the sum of worker effects, firm effects, covariates, and idiosyncratic error terms. Estimates based on this model have produced two influential yet controversial conclusions. First, firm effects typically explain around 20% of the variance of log-earnings, pointing to the importance of firm-specific wage-setting for earnings inequality. Second, the correlation between firm and worker effects is often small and sometimes negative, indicating little if any sorting of high-wage workers to high-paying firms. The objective of this paper is to assess the sensitivity of these conclusions to the biases that arise because of limited mobility of workers across...
 
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