Wage and productivity dispersion: Labor quality or rent sharing?, working paper

Wage and labor productivity differ across firms, and more productive firms tend to pay higher wages. We consider a model that allows for differences in capital, employment and labor quality as well as rent sharing, all of which should help explain these observations. We estimate the model using detailed matched employer-employee data from the manufacturing sector in Denmark. The production function estimation is embedded in a structural equation system involving worker, firm, time, and occupation effects from an individual wage decomposition and accounting for labor input components that are substitutes and complements, while accommo-dating stochastically varying factor productivity. We find that both input heterogeneity and intrinsic differences in total factor productivity across firms are important explanations. In the case of Manufacturing, about 41 % of the dispersion in log value added per worker is attributable to cross-firm differences in the levels of capital per worker, while another 39 % of the variation stems from intrinsic TFP differences. Only 5 % is associated with quality differences in the labor input. In the case of individual log wages, 70 % of the variation is due to individual character-istics, whereas only 13 % is attributable to firm differences. Our results suggest that there ar