Firm Heterogeneity in Skill Returns

Are specific skills rewarded differently across firms? If so, is this reflected in worker sorting across employers? We use administrative data linking employers and employees in conjunction with measures of cognitive and non-cognitive skills to examine these questions. We find that returns are very heterogeneous across firms. Workers respond by selecting employers that better reward their bundle of skills. Worker-firm skill complementarities contribute to the thick right tail in the distribution of earnings, pushing up both average labor market returns and their dispersion.

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Abstract. This paper presents new evidence on worker–firm complementarities. We combine matched employer-employee data with direct measures of workers’ cognitive and noncognitive skills, and propose an empirical approach that separately identifies the firm-level return for each attribute. We find that similar skills command different returns across employers and that workers’ sorting into firms depends on returns to both attributes. We derive theoretical restrictions that characterize many-to-one matching in employer-employee data, linking within-firm skill dispersion to between-firm differences in average skills. Estimates support these restrictions. Firm heterogeneity in skill returns raises both the average level and dispersion of earnings.

Citation

@techreport{BEG2020,
  title={Firm Heterogeneity in Skill Returns},
  author={Boehm, Michael J. and Esmkhani, Khalil and Gallipoli, Giovanni},
  year={2020},
  institution={Discussion Paper}
}