Firm Pay Dynamics

We study the nature of firm pay dynamics using matched employer-employee and firm financials data from Sweden. To this end, we propose and estimate a statistical model that extends the seminal framework by Abowd, Kramarz, and Margolis (1999b) to account for idiosyncratically time-varying firm pay policies. We validate the model by showing that firm-year pay estimates are systematically related to measures of firm performance. We then apply the model to assess the role of firm pay dynamics in accounting for the rise in earnings inequality in Sweden, to characterize within-firm pay differences over time, to measure firm pay mobility, and to quantify ex-ante versus ex-post heterogeneity in firm pay differences over the firm life cycle.