Firm profitability, regional unemployment and human capital in wage determination

This paper presents an analysis of wage formation in the Norwegian private sector using data for individual workers matched with firm level information and regional unemployment. A key issue is to test whether or not firm specific variables affect individual wages after controlling for individual specific factors and working conditions. The results imply positive effects of firm specific profitability and firm size. The elasticity of wages with respect to value added per worker and firm size is 5% and 3.3%, respectively. Empirical evidence of a downward sloping regional wage curve is also reported, while there is no support of the hypothesis of compensating wage differentials. Since data for three levels of aggregation are used, the OLS estimates of the standard errors are downward biased. Therefore, results using a random effects model are also reported, taking the multi-level structure of the data into account.