Mons Chan, Queen's University

"Heterogeneous Passthrough from TFP to Wages"

Abstract

We examine the transmission of firms’ idiosyncratic productivity shocks to workers’ wages. To this end, we develop a dynamic structural model of firms and wage setting in imperfect labor markets which we use to estimate firm-level productivity and wage markdowns while controlling for observed and unobserved differences in worker ability. Using a rich panel dataset of workers and firms from Denmark, we estimate a mean elasticity of wages with respect to idiosyncratic firm productivity of 0.28. We show that ignoring adjustment costs, differences in worker ability, or using endogenous measures of firm productivity (such as value added) may significantly bias estimates of passthrough. Passthrough to wages can be decomposed into the effect of productivity shocks on markdowns and the marginal revenue product of labor. We show how these effects move in opposite directions and drive overall passthrough patterns in the data. Larger firms, and thus most workers, face lower passthrough elasticities due to adjustment costs which mitigate the opposing effect of these firms' increased market power.

Contact person: Jakob Roland Munch