This paper examines the role of establishment-specific wage premiums in explaining the recent increase in wage inequality in West Germany. Using data from 1985 to 2009, the authors fit models with additive fixed effects for workers and establishments, finding that these models can explain a significant portion of the rise in wage inequality. The increasing variability in wages is attributed to rising heterogeneity among workers, variability in wage premiums across establishments, and improved assortativeness in the matching of workers to plants. The study decomposes changes in wage gaps between different education levels, occupations, and industries, showing that plant heterogeneity and assortativeness play a growing role. The findings suggest that a rising share of wage inequality is due to variation in job opportunities and the increasing association between worker skills and establishment-specific pay premiums.This paper examines the role of establishment-specific wage premiums in explaining the recent increase in wage inequality in West Germany. Using data from 1985 to 2009, the authors fit models with additive fixed effects for workers and establishments, finding that these models can explain a significant portion of the rise in wage inequality. The increasing variability in wages is attributed to rising heterogeneity among workers, variability in wage premiums across establishments, and improved assortativeness in the matching of workers to plants. The study decomposes changes in wage gaps between different education levels, occupations, and industries, showing that plant heterogeneity and assortativeness play a growing role. The findings suggest that a rising share of wage inequality is due to variation in job opportunities and the increasing association between worker skills and establishment-specific pay premiums.