Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution
American Economic Review · 2025 · Volume 115 · Issue 12
Abstract
This paper examines how workforce composition, labor demand, and minimum wage jointly determine wages through their effects on worker-task assignments, firm wage premiums, and firm-worker sorting. Using an estimated model of monopsonistic local labor markets, it finds that minimum wage hikes and labor demand shocks drove the decline in Brazilian wage inequality from 1998 to 2012. While rising educational attainment compressed skill premiums within firms, it also reallocated skilled workers to high-wage firms, limiting that shock's effect on inequality. The analysis highlights interactions among exogenous factors, showing that concurrent supply and demand changes attenuated minimum wage impacts.
Keywords
Time Allocation and Labor Supply, Labor Demand, Human Capital, Skills, Occupational Choice, Labor Productivity, Wage Level and Structure, Wage Differentials, Wages, Compensation, and Labor Costs: Public Policy, Monopsony, Segmented Labor Markets, Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration, Regional Labor Markets, Population, Neighborhood Characteristics
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