Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality

Arbeitspapier

This paper provides some empirical evidence and a theory of the relationship between residual wage inequality and the increasing dispersion of capital/labor ratios across firms. I document the increasing variance of capital/labor ratios across firms in the US labor market. I also show that the increase in the capital intensity variance across firms is associated with the increasing wage variance across workers. To explain this empirical fact, I adopt a search model where firms differ in their optimal capital investment. The decline in the relative price of equipment capital makes the firm distribution of capital/labor ratios more dispersed. In a frictional labor market, this force generates wage dispersion among identical workers. Simple calibration of the model indicates that the dispersion of capital/labor ratios can account for about one third of the total increase in residual wage inequality.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 909

Classification and Topics

• Classification: Wirtschaft ; Wage Level and Structure; Wage Differentials ; Labor Force and Employment, Size, and Structure
• Subject: wage inequality ; capital intensity ; search models ; Lohnstruktur ; Branche ; Faktorintensität ; Arbeitsnachfrage ; Arbeitsuche ; Suchtheorie ; Investition ; Theorie ; Vereinigte Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Leonardi, Marco
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/20146
• Last update: 10.03.2025, 11:41 AM CET