The Contribution of Workers, Workplaces, and Sorting to Wage Inequality in Mexico

We use a matched worker-workplace dataset comprising the near universe of formal private-sector workers in Mexico to estimate the contribution of average workplace-specific wagepremia, worker-level characteristics, and assortative matching on Mexico’s wage inequalitybetween 2004 and 2018. To this end, we regress log earnings on sets of worker and work-place fixed effects and perform a decomposition of total wage variance. We find that assor-tative matching explains between 16% and 19% of total wage variance, while worker- andworkplace-specific factors contribute between 35% to 42% and 33% to 38%, correspondingly.The importance of workplace factors in determining wage inequality correlates negatively withregional economic development: it is lowest in the North, Mexico’s most-developed region,and largest in the South, the country’s least-prosperous region.