Firm characteristics, labor sorting, and wages

We analyze the implications of optimal price and quality choices by efficiency-heterogeneous firms, for the sorting of workers with different skills into firms with different characteristics. Under very reasonable assumptions, the model provides an integrated explanation within a competitive framework for the observed correlations between several establishment characteristics (size, employees’ average education, capital/labor ratio, and remoteness of selling markets) and average wages. We test the model’s implications using Spanish employer-employee matched data that allow to simultaneously control for establishment and worker characteristics. We find that average education in the establishment is increasing in the remoteness of its main market. Establishment size, remoteness of main market, and coworkers’ average education have significant, robust and quantitatively important positive joint effects on wages. The national-market orientation effect on labor composition and on wages (with respect to local-market orientation) is at least as important as the international-market effect (with respect to national-market orientation). All establishment wage premia are non-decreasing on worker education and most of them are strictly increasing.