Human capital at work

Firms vary in their production processes, leading to different occupational skill requirements, and they employ workers with varying skill levels. The sorting of workers with heterogeneous skills into firms differing in productivity, size and age matters for both economic efficiency and distributional outcomes. This paper applies a unified measurement approach to comprehensive administrative micro data from Portugal to establish five facts about the relationship between workforce skills, firm productivity and dynamics, and wage differentials: 1) firms at the productivity frontier not only rely more on high-skill occupations, they also tend to hire the most skilled workers within each occupation; 2) such differences in workforce composition statistically explain close to a fifth of firm-level productivity dispersion; 3) young firms with a high-quality workforce are more likely to experience rapid employment growth; 4) more than half of the large-firm wage premium can be attributed to large firms employing more skilled workers; 5) working alongside highly skilled colleagues raises wages, and the clustering of talented workers in the same firms contributes about as much to the variance of log wages as worker-firm sorting. Together, these results highlight the significant interaction between human capital factors and firm dynamics.