How Much Should We Trust Estimates of Firm Effects and Worker Sorting?

Using matched employer-employee data, this paper examines earnings determination with worker and firm fixed effects. The study assesses the sensitivity of influential yet controversial conclusions to biases caused by limited worker mobility across firms. Employer-employee data from the United States and European countries are utilized, along with fixed effects and random effects methods for bias correction. The findings highlight the severity of the limited mobility bias and emphasize the importance of bias correction in these estimates.

Image courtesy of interviewee. December 21, 2023

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