Earnings Dynamics and Firm-level Shocks

This paper analyzes the role of firms in workers’ wage dynamics. Using Swedish employer-employee data, we find substantial transmission of firm-specific productivity shocks to wages, primarily for permanent shocks and among high-skilled workers. Our approach accounts for endogenous participation and mobility decisions of workers in response to firm shocks. Differences in firms’ pay levels and pass-through of shocks drive a significant share of earnings variance, and this share increases over the workers’ life cycle. We find that firms account for about one-third of the cross-sectional wage variance by age 55 among high-skilled workers.