Heterogeneous Passthrough from TFP to Wages

We examine the passthrough of firms’ productivity shocks to hourly wages using rich matched employer-employee data, allowing us to control for endogenous worker mobility and unobserved worker heterogeneity. We find an average passthrough of 0.08 which is economically and statistically significant. Hourly wages are twice as responsive to negative shocks as to positive shocks–especially during recessions. Ignoring endogenous labor mobility underestimates passthrough, erroneously implying downward wage rigidity. Our findings are consistent with models of labor market power and suggest a larger role for firm shocks in determining workers’ wage variability relative to previous estimates.

Working Paper. R&R JOLE