This paper studies the relationship between wage inequality and skill demand and its connection to worker and firm heterogeneity. Combining linked employer-employee data from Italy with aggregate-level information on detailed skill requirements extracted from online job vacancies, we first study the relationship between wages and the demand for cognitive and social skills across labor markets defined by province, sector, and occupation. We find a strong and positive correlation between wages and the demand for cognitive and social skills, which is pronounced when both skills are required jointly for the same job position highlighting their complementarity. We then estimate the worker- and firm-pay components of the wage process through an AKM model and investigate their relationship with skill demand at the labor market level. Our analysis suggests that in markets in which firms demand more frequently both cognitive and social skills, higher wages are driven by worker effects, reflecting the higher market value of a combined skill set, rather than by firm pay policies. In contrast, in markets where firms predominantly demand either cognitive or social skills, higher wages are associated with higher firm effects, indicating larger firm pay premiums for specialized workers, despite the lower market value of specialized skills. These results highlight the role of worker and firm heterogeneity as mechanisms through which variations in skill demand influence overall wage inequality.

This paper examines the impact of increasing the relative cost of fixed-term contracts on labor demand as well as the demand for standard measures of human capital and specific skill requirements. We evaluate a 2018 Italian labor law reform that raised the cost of fixed- term contracts while keeping permanent contract costs unchanged. We employ a difference-in-differences research design, leveraging the variation in firms' exposure to the reform resulting from their diverse reliance on fixed-term contracts due to differing reactions to earlier labor market reforms. Using rich data covering the near universe of online job vacancies in Italy, our findings indicate that the increase in hiring costs for temporary contracts led to a decrease in the relative demand for temporary workers and an increase in the demand for permanent workers. This shift in demand was accompanied by upskilling towards workers with higher levels of human capital and specific skill requirements. When offering jobs under permanent contracts, firms increased their demand for workers with a college degree and social skills. At the same time, they reduced their demand for workers with only a high school degree and no work experience. On the other hand, when offering jobs under fixed-term contracts, firms increased their demand for workers with some work experience and social skills. These findings suggest that while restricting fixed-term contracts encouraged the hiring of permanent workers, such reforms might have unintended consequences by raising the hiring standards for job entry, thereby reducing employment opportunities for less qualified workers.