A Users' Guide to Uncovering Worker and Firm Effects: The ABC of AKM

TL;DR

This paper explains the AKM model for analyzing worker and firm effects on wages, providing guidance on its use, best practices, and reviewing empirical findings in labor economics.

Contribution

It introduces the AKM model and estimator, discusses estimation best practices, and reviews empirical insights on wage heterogeneity.

Findings

AKM model effectively analyzes worker and firm heterogeneity

Empirical studies highlight the role of firm effects in wage dispersion

Methodological improvements are needed for AKM applications

Abstract

The AKM model introduced by Abowd, Kramarz and Margolis (1999) has become a workhorse to study worker and firm heterogeneity, and to understand the sources of wage dispersion in the labor market using linked employer-employee data. In this article, we introduce the model and estimator, discuss some best practices for estimation, and review some empirical findings on the role of worker and firm heterogeneity in wage dispersion. While the AKM methodology has proven useful to analyze a host of questions in a variety of settings within labor economics and beyond, we also point to the need for methodological developments.