By Ken Burdett, Carlos Carrillo-Tudela and Melvyn Coles
The objective of this paper is to study why are some workers paid more than others. To do so we construct and quantitatively assess an equilibrium search model with on-the-job search, general human capital accumulation and two sided heterogeneity. In the model workers differ in abilities and firms differ in their productivities. The model generates a simple (log) wage variance decomposition that is used to measure the importance of firm and worker productivity differentials, frictional wage dispersion and workers’ sorting dynamics. We calibrate the model using a sample of young workers for the UK. We show that heterogeneity among firms generates a lot of wage inequality. Among low skilled workers job ladder effects are small, most of the impact of experience on wages is due to learning-by-doing. High skilled workers are much more mobile. Job ladder effects have sizeable impact.
To all enthusiasts of diff-in-diff or diff-in-diff-in-diff empirical studies: adding a little bit of theory goes a log way in identifying and understanding what you are trying to measure, let alone how to set up the empirical strategy. This paper is perfect example of that. In particular it allows to tie back the measurements directly to concepts we know from theory, instead of having a usually vague idea that they are consistent with some theory (“the signs are correct”). Finally, this paper is not only a nice empirical exercise, it also yields some pretty interesting results.