Background wage premia, beyond education: Firm sorting and unobserved abilities of graduates

In this paper, we exploit the properties of a two-way fixed effects wage decomposition ‘a la AKM to disentangle the influence of parental background, beyond education, between individual level components and sorting across firms with different pay policies. We match Italian employer–employee administrative data with university records from a large public institution. Our findings indicate that approximately two-thirds of the background-related wage premium operates through firm assignment, while the remaining third reflects variation in individual returns. The sorting channel becomes increasingly relevant as workers progress in their careers. Moreover, the background channel weakens worker–firm positive assortative matching and plays a compensatory role: it is stronger both on firm allocation among low-wage workers and on individual fixed effects within low-paying firms.