Rune Majlund Vejlin, Aarhus University

"Unpacking the Wage Sorting Trend"

Abstract

Using matched employer-employee data from Denmark's business sector, we project log wages onto worker and firm fixed effects and identify a wage sorting trend: the correlation between matched worker and firm fixed effects increased by 12 points from 1980-2019. This trend is entirely driven by shifts in employment from low- to high-sorting firms, with the employment dynamics of entering and exiting firms accounting for 60\% of the trend. Job-to-job changes boosted wage sorting in the 1980s and 1990s, while job-to-unemployment-to-job changes had smaller or negative effects. The wage sorting trend explains half of the increase in between-firm variance in residual wages  and a third of the rise in the overall variance. Hence, our results link firm dynamics, firm entry and exit, and rising wage inequality.

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