The dynamics of wage dispersion between firms: The role of firm entry and exit

Although wage inequality is a prominent and widely studied issue, the literature is vastly silent on the relationship between firm entry and exit and the wage dispersion between firms. Using a 50% random administrative sample of West German establishments over the period 1976-2017, I study wage dispersion dynamics between and within the groups of entering, exiting and incumbent establishments by examining the distribution of average wages across establishments. The results show that entering establishments became increasingly unequal over time, thereby contributing to the rise in the wage dispersion between establishments. However, stronger exit dynamism of young and low-wage establishments has dampened this effect. These findings suggest taking the consequences for wage inequality into consideration when designing and assessing policy instruments for firm entry and exit.