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Title:Firm Heterogeneity in Capital/Labor Ratios and Wage Inequality PDF Logo
Authors:Leonardi, Marco
Issue Date:2003
Series/Report no.:IZA Discussion paper series 909
Abstract: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.
Subjects:wage inequality
capital intensity
search models
JEL:J31
J21
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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