Demand for skills and wage inequality

Abstract

This paper studies the relationship between wage inequality and skill demand and its connection to worker and firm heterogeneity. Using linked employer-employee data from Italy and skill demand data from online job vacancies, we find a strong positive relationship between wages and the demand for cognitive and social skills, particularly when both are required, emphasizing their complementarity. Decomposing wage effects, we find that when firms demand both skill types, higher wages result from worker effects, reflecting the higher market value of a hybrid skill set. In contrast, when firms favor only one skill type, higher wages are driven by firm effects, indicating higher rent-sharing with specialized workers.