Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2021:21: Firm pay dynamics

Niklas Engbom (), Christian Moser () and Jan Sauermann ()
Additional contact information
Niklas Engbom: New York University, Postal: New York University
Christian Moser: Columbia University, Postal: Columbia University
Jan Sauermann: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden

Abstract: We study the nature of firm pay dynamics. To this end, we propose a statistical model that extends the seminal framework by Abowd, Kramarz, and Margolis (1999a) to allow for idiosyncratically time-varying firm pay policies. We estimate the model using linked employer-employee data for Sweden from 1985 to 2015. By drawing on detailed firm financials data, we show that firms that become more productive and accumulate capital raise pay, whereas firms lower pay as they add workers. A secular increase in firm-year pay dispersion in Sweden since 1985 is accounted for by greater persistence of firm pay among incumbent firms as well as greater dispersion in firm pay among entrant firms, as opposed to more volatile firm pay.

Keywords: Earnings Inequality; Worker and Firm Heterogeneity; Linked Employer-Employee Data; AKM; Two-Way Fixed Effects Model; Firm Dynamics

JEL-codes: D22; D31; E24; J31; M13

Language: English

51 pages, December 17, 2021

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