Firm Pay and Consumption Inequality

An extensive body of research has documented that firms play an important role in wage inequality. However, much less is known about how firm pay differentials translate into household spending, and under what conditions those spending differences map into welfare differences. In this paper, we combine newly collected expenditure data with employer-employee records from Norway to examine how firm pay inequality is transmitted to household spending. We show that when workers move up the firm pay ladder, the resulting increase in spending is roughly half of the increase in disposable income: the implied marginal propensity to consume (MPC out of income) is approximately 0.5. These spending responses are highly persistent. The response is concentrated in discretionary and housing-related spending: hotel stays display the largest relative response, while housing-related expenditures account for the largest share of the aggregate MPC. Next, we decompose wages and spending into worker- and firm-level components, and find that firms account for roughly half the variance in consumption inequality relative to wages. Finally, a search model with consumption-savings decisions reproduces these results and shows that firm-level consumption differences closely track firms’ contribution to welfare inequality. Our findings thus indicate that firms play an important role not only in wage inequality but also in welfare inequality.