Econometrica: Mar, 1999, Volume 67, Issue 2
High Wage Workers and High Wage Firms
John M. Abowd, Francis Kramarz, David N. Margolis
We study a longitudinal sample of over one million French workers from more than five hundred thousand employing firms. We decompose real total annual compensation per worker into components related to observable employee characteristics, personal heterogeneity, firm heterogeneity, and residual variation. Except for the residual, all components may be correlated in an arbitrary fashion. At the level of the individual, we find that person effects, especially those not related to observables like education, are a very important source of wage variation in France. Firm effects, while important, are not as important as person effects. At the level of firms, we find that enterprises that hire high‐wage workers are more productive but not more profitable. They are also more capital and high‐skilled employee intensive. Enterprises that pay higher wages, controlling for person effects, are more productive and more profitable. They are also more capital intensive but are not more high‐skilled labor intensive. We find that person effects explain about 90% of inter‐industry wage differentials and about 75% of the firm‐size wage effect while firm effects explain relatively little of either differential.