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Increased sorting and wage inequality in the Czech Republic

New evidence using linked employer–employee dataset


  • We would like to thank Pavel Mrazek and Vladimir Smolka from Trexima for valuable advice and helpful assistance with the data. Comments from numerous participants on earlier versions presented at conferences in WISE, LEED, SOLE, CAED, EALE, NASMES, Ostrava, Karvina and K.U. Leuven are gratefully acknowledged.


This paper makes use of a linked employer–employee dataset to examine the evolution of wage inequality in the Czech Republic during 1998–2006. We find evidence of slightly increasing returns to human capital and diminishing gender inequality and document sharp increases in both within-firm and between-firm inequality. We investigate several hypotheses to explain these patterns: increased domestic and international competition, decentralized wage bargaining, skill-biased technological change and a changing educational composition of the workforce. Domestic competition is found to lower within-firm inequality whereas we find no evidence that increased international trade at the industry level is associated with higher between- or within-firm wage inequality. The key factors driving the observed increase in wage inequality are increased educational sorting and the inflow of foreign firms to the Czech Republic.

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