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ABSTRACT:
This paper documents the increasing dispersion of capital-labor ratios across firms in the US and provides some empirical evidence of a positive correlation at the two-digit industry level between the dispersion of capital-labor ratios across firms and residual wage inequality. To explain this empirical fact, the paper adopts a search model where firms differ in their optimal capital investment. The exogenous decline in the relative price of equipment capital makes the distributions of capital-labor ratios more dispersed. In a frictional labor market, this force generates wage dispersion among identical workers. OLS estimates of the relationship between capital dispersion and the relative price of equipment capital support the main hypothesis of the model.

SUGGESTED CITATION:
Marco Leonardi, "Firm Heterogeneity in Capital labor Ratios and Wage Inequality" (October 30, 2005). Institute for Research on Labor and Employment. Institute for Research on Labor and Employment Working Paper Series. Paper iirwps-129-05.
http://repositories.cdlib.org/iir/iirwps/iirwps-129-05