We quantify firm heterogeneity in skill returns and present direct evidence of worker-firm complementarities. Within a model of firms’ demand for cognitive and noncognitive attributes, we show that identification depends on the availability of skill measures. Linking administrative data to test scores, we document worker sorting and convex earnings-skill relationships. We find that (1) both skills’ returns vary substantially across employers and correlate weakly within firms; (2) workers with large endowments of a skill populate firms with higher returns to it, and sorting intensifies with the cross-sectional dispersion of returns; and (3) complementarities and sorting significantly influence the earnings distribution.

We characterize the joint evolution of cross-sectional inequality in earnings, other sources of income and consumption across generations in the U.S. To account for cross-sectional dispersion, we estimate a model of intergenerational persistence and separately identify the influences of parental factors and of idiosyncratic life-cycle components. We find evidence of family persistence in earnings, consumption and saving behaviours, and marital sorting patterns. However, the quantitative contribution of idiosyncratic heterogeneity to cross-sectional inequality is significantly larger than parental effects. Our estimates imply that intergenerational persistence is not high enough to induce further large increases in inequality over time and across generations.