This paper examines the role of establishment-specific wage premiums in explaining the recent rise in wage inequality in West Germany. Using data from 1985 to 2009, the authors estimate models with additive fixed effects for workers and establishments to analyze trends in wage inequality. They find that the increase in wage inequality is largely due to rising heterogeneity among workers, variability in wage premiums across establishments, and increasing assortativeness in the matching of workers to establishments. The study shows that the contribution of plant heterogeneity and assortativeness has grown significantly, with the variance of the person component of pay accounting for about 40% of the rise in wage variance, and the establishment component accounting for about 25%. The covariance between the person and establishment components accounts for about a third of the rise. The authors also find that the rise in wage inequality is partly explained by changes in the association between education and establishment quality, with better-educated workers increasingly concentrated at high-wage establishments. The study highlights the importance of workplace-specific factors in explaining wage inequality and suggests that both observed and unobserved dimensions of worker skill are increasingly associated with establishment-specific pay premiums. The findings have implications for understanding the determinants of wage inequality and the process of worker-employer matching.This paper examines the role of establishment-specific wage premiums in explaining the recent rise in wage inequality in West Germany. Using data from 1985 to 2009, the authors estimate models with additive fixed effects for workers and establishments to analyze trends in wage inequality. They find that the increase in wage inequality is largely due to rising heterogeneity among workers, variability in wage premiums across establishments, and increasing assortativeness in the matching of workers to establishments. The study shows that the contribution of plant heterogeneity and assortativeness has grown significantly, with the variance of the person component of pay accounting for about 40% of the rise in wage variance, and the establishment component accounting for about 25%. The covariance between the person and establishment components accounts for about a third of the rise. The authors also find that the rise in wage inequality is partly explained by changes in the association between education and establishment quality, with better-educated workers increasingly concentrated at high-wage establishments. The study highlights the importance of workplace-specific factors in explaining wage inequality and suggests that both observed and unobserved dimensions of worker skill are increasingly associated with establishment-specific pay premiums. The findings have implications for understanding the determinants of wage inequality and the process of worker-employer matching.