A Note on the Calculation of Firm-specific and Skill-specific Labor Costs from Firmlevel Data

Virtually all empirical firm-level studies on the demand for heterogeneous labor do not include labor cost in the econometric specification. This is due to the fact that business and innovation survey data usually lack differentiated information on labor cost. This paper shows how reliable skill-specific and firm-specific labor cost can be calculated from firm-level data on the basis of information on total labor cost and firms' skill mix only. The simple method proposed here is applied to German innovation survey data. Three consistency checks are performed: (i) the estimated skill-specific and firm-specific labor costs are compared to aggregated data taken from official statistics, (ii) it is tested if the methods leads to "too much" variation of skill-specific labor costs within firms across time and (iii) labor costs are estimated for two different data sets and compared to reality. The consistency checks indicate that the labor cost decomposition proposed in this paper leads to reliable results.