High Wage Workers and High Wage Peers

This paper investigates the effect of co-worker characteristics on wages, measured by the average person effect of coworkers in a wage regression. The effect of interest is identified from within-firm changes in workforce composition, controlling for person effects, firm effects, and sector-specific time trends. My estimates are based on a linked employer employee dataset for the population of workers and firms of the Italian region of Veneto for years 1982–2001. I find that a 10 percent increase in the average labour market value of co-workers' skills is associated with a 3.6 percent wage premium. I also find that around one fourth of the wage variation previously explained by unobserved firm heterogeneity is actually due to variation in co-worker skills, and that between 10 and 15 percent of the immigrant wage gap can be explained by differences in coworker characteristics.