Decomposing the exporter wage gap: Selection or differential returns?

Abstract

We show that the exporter wage gap is driven by workers sorting on comparative advantage rather than firm selection. We start out with an AKM-style wage equation with worker, firm, and residual “match” fixed effects. We show that allowing worker and firm effects to depend on the export status of the firm changes how the exporter wage gap is decomposed. Our results suggest that workers in exporting firms have unobserved traits that are particularly valuable in exporting, resulting in higher wages for workers in those firms. Further, we show that workers make job transitions based on their differential returns. Thus, the exporter wage gap results from workers self-selecting into exporting and non-exporting firms based on their comparative advantage. Finally, we show that the conclusion is robust to relaxing the linearity assumptions of the AKM-style framework.