Abstract
How important are firms for wage inequality in developing countries where structural unemployment is high? Research focused on contexts close to full employment has suggested a substantial role of firms in labor market inequality. Using matched employer–employee data from South Africa, I find that firms explain a larger share of wage variation than in richer countries. I consider drivers of this, documenting first a higher productivity dispersion as found for other developing countries. Secondly, I estimate the separations elasticity by instrumenting wages of matched workers with firm wages, and I find a low separations elasticity. This generates a high degree of monopsony, and the correspondingly high estimated rent-sharing elasticity helps explain the important role of firm wage policies in inequality. Monopsony may be driven by higher unemployment, and regional heterogeneity provides suggestive evidence for this. Such firm-level competitive dynamics may exacerbate inequality in developing countries more generally.
•The role of firms in wage inequality is under-researched in developing countries.•The variance in firm wage premia is higher in South Africa than in richer countries.•Drivers are higher productivity dispersion and lower firm labor supply elasticity.•High unemployment may contribute to a low firm labor supply elasticity.•Such drivers of firm-based inequality may generalize to the development process.