Wage Adjustment and Productivity Shocks

We study how workers’ wages respond to TFP-driven innovations in firms’ labor productivity.Using unique data with highly reliable firm-level output prices and quantities in themanufacturing sector in Sweden, we are able to derive measures of physical (as opposed torevenue) TFP to instrument labor productivity in the wage equations. We find that thereaction of wages to sectoral labor productivity is almost three times larger than the responseto pure idiosyncratic (firm-level) shocks, a result which crucially hinges on the use of physicalTFP as an instrument. These results are all robust to a number of empirical specifications,including models accounting for selection on both the demand and supply side throughworker-firm (match) fixed effects. Further results suggest that technological progress at thefirm level has negligible effects on the firm-level composition of employees....