Labor-market Drivers of Intergenerational Earnings Persistence

Abstract

To what extent does the sorting of workers across firms contribute to intergenerational persistence, and why? We show that differences in firm pay premia account for 31% of the intergenerational elasticity of earnings in Sweden, rising to 38% when including dynamic returns to firm-specific experience. Firm pay gaps open already at career start, suggesting that children from more privileged backgrounds find more favorable entry points to the labor market. Their pay advantage widens further in early career as they climb the firm pay ladder faster, switch firms more frequently and secure higher pay gains conditional on switching. Skill sorting explains most of the widening in early career, but not the initial pay gaps at career start. These results are robust to accounting for compensating differentials and using alternative measures of firm quality. Joint paper with Erika Forsberg and Martin Nybom.