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 informatio n and regional unemployment. A key issue is to test whether or not firm spe cific variables affect individual wages after controlling for individual sp ecific factors and working conditions. The results imply positive effects o f firm specific profitability and firm size. The elasticity of wages with r espect 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 repo rted, while there is no support of the hypothesis of compensating wage diff erentials. Since data for three levels of aggregation are used, the OLS est imates 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.