Earnings Inequality in Production Networks

We develop a quantitative model in which heterogeneous firms hire heterogeneous workers in an imperfectly competitive labor market and source intermediates from suppliers in a production network. We use the model to investigate how the production network shapes three key labor market outcomes: the passthrough of firm-level productivity, demand, and cost shocks into worker earnings; the distribution of firm effects on worker earnings; and firm heterogeneity in labor shares of value-added. We establish identification of model parameters and estimate them using linked employer-employee and firm-to-firm transactions data from Chile. Reduced-form evidence based on export demand and import cost shocks support the predictions of our model regarding the passthrough of these shocks to earnings. Counterfactual simulations show that heterogeneity in network linkages explains 21% of earnings variance, while labor value-added shares are less dispersed and less negatively correlated with firm size under the observed production network than under a random network