Earnings Heterogeneity and Job Matching : Evidence from Linked Employer-Employee Data

This paper uses data from Statistics New Zealand's linked employer employee database (LEED) over the six year period April 1999-March 2005 to derive and analyse estimates of two-way worker and firm fixed effects components of job earnings rates. The fixed effects estimates reflect the portable earnings premium that each worker receives in whichever firm they work for, and the time-invariant premium that each firm pays to all the workers it employs. We focus on three issues. First, how much of the variation in job earnings rates is attributable to observable worker demographic factors (age and gender), unobserved worker effects and unobserved firm effects? Second, how much compositional change occurred during this period of substantial employment growth? Third, what is the aggregate pattern of sorting of workers and firms across jobs?