Abstract

The economic literature provides evidence that standard demographic characteristics and human capital variables explain at most one third of wage inequality in Mincerian earnings equations. This work explores the unexplained inequality by using Italian linked employeremployee data from 1998 to 2016. I provide evidence that, from the end of the 1990s to 2016, the type of contract became increasingly important in explaining wage inequality, especially annual and weekly, but around 70% of annual earnings inequality, and 40% of weekly and hourly wages remain unexplained by observable characteristics. My results suggest that part of the unexplained variance is due to differences between the firms in which the workers are employed, but the largest contribution remains workers’ unobserved heterogeneity.