Firm Size, Foreign Exposure and Inequality in Wage: A Decomposition Analysis

Satis Devkota
Kul Kapri
Mukti Upadhyay


This study uses pooled cross-section data from two large surveys of firms in Nepal to determine wage inequality. Applying an inequality decomposition procedure, the estimated wage inequality is then attributed to various factors that affect the labor demand function in the country. We find that firm size and exposure of firms to international trade are among the factors showing statistical significance in affecting wage disparity in Nepal. To the extent wage inequality can be attributed to the factors considered in this study, firm size alone accounts for 55 to 84 percent of the inequality depending on the size indicators such as employment or sales. On the other hand, foreign exposure, unlike strongly suggested in the literature, has played much less of a role.