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Turbulent firms, turbulent wages?

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  • Diego Comin
  • Erica L. Groshen
  • Bess Rubin

Abstract

Has greater turbulence among firms fueled rising wage instability in the United States? Earlier research by Gottschalk and Moffitt shows that rising earnings instability was responsible for one-third to one-half of the rise in wage inequality during the 1980s. These growing transitory fluctuations remain largely unexplained. To help fill this gap, this paper further documents the recent rise in transitory fluctuations in compensation and investigates its linkage to the concurrent rise in volatility of firm performance documented in research by Comin and Mulani and others. ; After examining models that explain the relationship between firm and wage volatility, we investigate this linkage in three complementary panel data sets, each with its own virtues and limitations: the Panel Study of Income Dynamics (detailed information on workers, but no information on employers), COMPUSTAT (detailed firm information, but only average wage and employment levels about workers), and the Federal Reserve Bank of Cleveland's Community Salary Survey (wages and employment for specific occupations for identified firms). We find support for the hypothesis in all three data sets. We can rule out straightforward compositional churning as an explanation for the link to firm performance in high-frequency (over spans of five years) wage volatility, although not in more persistent fluctuations (between successive five-year averages). We conclude that the rise in firm turbulence explains about 60 percent of the recent rise in high-frequency (five-year) wage volatility.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 238.

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Date of creation: 2006
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Handle: RePEc:fip:fednsr:238

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Keywords: Wages ; Corporate profits;

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References

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  1. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Working Papers 12354, National Bureau of Economic Research, Inc.
  2. Diego Comin & Sunil Mulani, 2007. "A theory of growth and volatility at the aggregate and firm level," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  3. Gueorgui Kambourov & Iourii Manovskii, 2000. "Occupational Mobility and Wage Inequality, Second Version," PIER Working Paper Archive 04-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 15 Jun 2004.
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  6. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228 National Bureau of Economic Research, Inc.
  7. Diego Comin & Sunil Mulani, 2006. "Diverging Trends in Aggregate and Firm Volatility," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 374-383, May.
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Cited by:
  1. Stephen Jenkins & Peter Lambert, 2011. "Robert Moffitt and Peter Gottschalk’s 1995 paper ‘Trends in the covariance structure of earnings in the US: 1969–1987’," Journal of Economic Inequality, Springer, vol. 9(3), pages 433-437, September.
  2. Kai Liu & Marcos Chamon & Eswar Prasad, 2010. "Income Uncertainty and Household Savings in China," IMF Working Papers 10/289, International Monetary Fund.
  3. Buch, Claudia M. & Döpke, Jörg & Stahn, Kerstin, 2008. "Great moderation at the firm level? Unconditional versus conditional output volatility," Discussion Paper Series 1: Economic Studies 2008,13, Deutsche Bundesbank, Research Centre.
  4. Shane T. Jensen & Stephen H. Shore, 2008. "Changes in the Distribution of Income Volatility," Papers 0808.1090, arXiv.org.
  5. Peter Gottschalk & Robert Moffitt, 2009. "The Rising Instability of U.S. Earnings," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 3-24, Fall.
  6. Claudia M. Buch & Christian Pierdzioch, 2009. "Low Skill but High Volatility?," CESifo Working Paper Series 2665, CESifo Group Munich.

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