Innovation, Firms and Wage Inequality∗

This paper uses matched employee-employer data from the UK that we augment with information on R&D expenditures, to analyze the relationship between innovativeness and average wage income across firms. We first show that more R&D intensive firms pay higher wages on average. Our second finding is that the premium to working in more R&D intensive firms seems to be higher for low-skilled workers than for high-skilled workers. As technology advances, demand for high skilled workers increases and they do better overall, but low skilled workers in innovative firms do better than other low-skilled workers. To account for these findings, we develop a simple model of the firm where the complementarity between high-skill occupation and low-skill occupation employees within the firm increases with the firm’s degree of innovativeness. An additional prediction of the model, which is also confirmed by the empirical analysis, is that low-occupation workers stay longer in more innovative firms. ∗Addresses Aghion: College de France and LSE; Bergeaud: Banque de France and PSE; Blundell: UCL, IFS and CEPR; Griffith: University of Manchester, IFS and CEPR. We thank the Centre for the Microeconomic Analysis of Public Policy (CPP) under grant number RES-544-28-0001 and the UK Data Service Team for their support. All results, tables and figures have been reviewed to ensure that no confidential information is disclosed.