Augmenting the Human Capital Earnings Equation with Measures of Where People Work

Authors

Erling Barth, Institute for Social Research and National Bureau of Economic ResearchFollow
James C. Davis, US Bureau of the Census and Boston Federal Statistical Research Data CenterFollow
Richard B. Freeman, Harvard University and National Bureau of Economic ResearchFollow

Date of this Version

2018

Citation

Journal of Labor Economics, 2018, vol. 36, no. S1

Comments

© 2018 by The University of Chicago.

This document is a U.S. government work and is not subject to copyright in the United States.

Abstract

We augment standard log earnings equations for workers in US manufacturing with variables reflecting measured and unmeasured attributes of their employer. Using panel employee-establishment data, we find that establishment-level employment, education of coworkers, capital equipment per worker, and firm-level R&D intensity affects earnings substantially. Unobserved characteristics of employers captured by employer fixed effects also contribute to the variance of log earnings, although less than unobserved characteristics of individuals captured by individual fixed effects. The observed and unobserved measures of employers mediate the effects of individual characteristics on earnings and increase earnings inequality through sorting of workers among establishments.