Establishment Wage Differentials

Economists have long known that individual wages depend on a combination of employee and employer characteristics, as well as the interaction of the two. Although it is important to understand how employee and employer characteristics are related to wages, little is known about the magnitude and relation of these wage effects. This is primarily due to the lack of microdata which links individuals to the establishments where they work, but also due to technical difficulties associated with separating out employee and employer effects. This paper uses data from the Occupational Employment Statistics program at the Bureau of Labor Statistics that permit both of these issues to be addressed. Our results show that employer effects contribute substantially to earnings differences across individuals. We also find that establishments that pay well for one occupation also pay well for others. This paper contributes to the growing literature that analyzes firms’ compensation policies, and specifically the topic of employer effects on wages.