Worker skills or firm wage-setting practices? Decomposing wage inequality across 20 OECD countries

In many OECD countries, low productivity growth has coincided with rising wage inequality. Widening wage and productivity gaps between firms may have contributed to both developments. This chapter uses harmonised linked employer-employee data for 20 OECD countries to analyse the role of firms in wage inequality. The main finding is that, on average across countries, differences in average wages between firms explain about one-half of overall wage inequality. Two-thirds of between-firm wage inequality (i.e. about a third of overall wage inequality) reflect firms’ wage-setting practices or wage premia, i.e. the part of wages that is determined by the firm rather than the characteristics of its workers. The remaining third (i.e. a sixth of overall wage inequality) can be attributed to differences in workforce composition across firms. The contribution of differences in wage premia to wage inequality tends to be larger in countries with decentralised collective bargaining systems and lower levels of job mobility. Overall, these results suggest that firms play an important role in explaining wage inequality, as wages are to a notable extent determined by firm wage-setting practices rather than being exclusively by workers’ skills. 