Workers, Firms and Life-Cycle Wage Dynamics

The paper presented in this ZEW Research Seminar deals with firm effects in individual wage dynamics using administrative data on the population of Italian employers and employees. It proposes a novel identification strategy for firm-related wage components exploiting the informative content of the wage covariance structure of co-workers. Wage inequality increases three-fold over the working life. Firm-related heterogeneity largely determines wage differences among young workers, while idiosyncratic individual ability drives the widening of the wage distribution over the life cycle. Sorting accounts for the largest share of firm-related lifetime inequality. Static models that do not allow for life-cycle dynamics underestimate the importance of sorting and overstate match and firm effects.