Babet, Damien, Olivier Godechot and Marco Palladino, 2022, In the Land of AKM: Explaining the Dynamics of Wage Inequality in France, Insee, Document de travail, forthcoming.

We use a newly built and exhaustive matched employer-employee database to study the contribution of firms to the dynamics of wage inequalities in France, where the original Abowd, Kramarz and Margolis (1999) double fixed effects model of log-wages was originally estimated on sampled data. Contrary to other countries, overall wage inequalities decreased in the 2002-2016 period. But France is not entirely an exception: the same polarizing dynamics observed in other countries are operating through an increase in between-firm inequalities. By applying the AKM model of log-wages with workers and firms additive fixed effects, we document increased sorting of high-wage workers to high-wage firms. We correct for bias in estimates of variance and covariance by clustering firms, and by splitting the sample as a simplification of previous methods. The rise in sorting is robust to these correction strategies and linked entirely to firm demographics and worker composition changes over time across firms. Over the same period, bottom earnings percentiles increased more than the rest of the distribution, in line with the rise in the legal minimum wage. As a result, within-firm inequalities decreased, more than offsetting the rising between-firm inequalities.