Tuesday 11 November 2025 13:30 - 15:00

SAL 2.04, 2nd Floor Conference Room, Sir Arthur Lewis Building, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH

About this event

Firms face significant constraints in their ability to differentiate pay by worker productivity. We show how these internal equity constraints generate a quantity-quality trade-off in hiring: firms which offer higher wages attract higher skilled workers, but cannot profitably employ lower skilled workers. In equilibrium, this mechanism leads to workplace segregation and pay dispersion even among ex-ante identical firms. Unlike in a conventional monopsony model, firms use higher pay to improve hiring quality, even at the cost of lower quantity. Our framework provides a novel interpretation of the (empirically successful) log additive AKM wage model, and shows how log additivity can be reconciled with sorting of high-skilled workers to high-paying firms. It can also rationalize a hump-shaped relationship between firm size and firm pay—and, by implication, the small wage return to firm size. Finally, our model provides new insights into aggregate-level and regional changes in worker-firm sorting and earnings inequality, and public-private sector wage differentials—which we explore empirically using Israeli administrative data.

Participants are expected to adhere to the CEP Events Code of Conduct.

Directions

This event will take place in SAL 2.04, 2nd Floor Conference Room, Sir Arthur Lewis Building, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH.

Labour Markets Workshops are part of the CEP's Labour Markets programme.