Skills vs. Productivity: How Important Are Firms for Understanding Trends in Wage Inequality?

A large literature has documented striking increases in wage inequality over the past three decades in many advanced economies, including the U.S., the U.K., and Germany (e.g., Autor and Katz, 1999; Dustmann et al, 2009; Autor and Acemoglu, 2010). Using standard neoclassical economic models, analysts have attempted to partition these observed trends in the wage structure into components due to changes in the supply and demand for different types of labor and changes in labor market institutions (e.g., Juhn, Murphy, and Pierce, 1991; Bound and Johnson, 1992; Katz and Murphy, 1992). A widespread consensus is that the main source of rising wage inequality in many countries is an increase in the relative demand for more highly-skilled workers, though several studies have suggested that the decline of unionization has also contributed to the rise, particularly in the U.S. (e.g., Dinardo, Fortin and Lemieux, 1996) and Germany (Dustmann et al., 2009). Some recent studies have also tried to identify multiple dimensions of skill and look for more subtle trends in employment and wages across different occupational groups driven by technology induced changes in the returns to these skills (e.g., Autor, Levy, and Murnane 2003; Autor and Acemoglu, 2011).