Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/20146 
Authors: 
Year of Publication: 
2003
Series/Report no.: 
IZA Discussion Papers No. 909
Publisher: 
Institute for the Study of Labor (IZA), Bonn
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

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