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Turbulent Firms, Turbulent Wages?

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  • Diego Comin
  • Erica L. Groshen
  • Bess Rabin

Abstract

Has greater turbulence among firms fueled rising wage instability in the U.S.? Gottschalk and Moffitt ([1994]) find 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 by Comin and Mulani [2005] among others. After examining models that explain the relationship between firm and wage volatility, we investigate the 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 complementary 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 5 years) wage volatility, although not in more persistent fluctuations (between successive 5-year averages). We conclude that the rise in firm turbulence explains about sixty percent of the recent the rise in the high frequency (5-year) volatility of wages.

Suggested Citation

  • Diego Comin & Erica L. Groshen & Bess Rabin, 2006. "Turbulent Firms, Turbulent Wages?," NBER Working Papers 12032, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12032
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    Cited by:

    1. Riphahn, Regina T. & Schnitzlein, Daniel D., 2016. "Wage mobility in East and West Germany," Labour Economics, Elsevier, vol. 39(C), pages 11-34.
    2. Daniel Sandoval & Mark Rank & Thomas Hirschl, 2009. "The increasing risk of poverty across the American life course," Demography, Springer;Population Association of America (PAA), vol. 46(4), pages 717-737, November.
    3. Devonald, L. & Higson, C. & Holly, S., 2017. "Aggregate and Firm level volatility: the role of acquisitions and disposals," Cambridge Working Papers in Economics 1748, Faculty of Economics, University of Cambridge.
    4. García-Vega, María & Guariglia, Alessandra & Spaliara, Marina-Eliza, 2012. "Volatility, financial constraints, and trade," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 57-76.
    5. Chamon, Marcos & Liu, Kai & Prasad, Eswar, 2013. "Income uncertainty and household savings in China," Journal of Development Economics, Elsevier, vol. 105(C), pages 164-177.
    6. repec:taf:applec:v:49:y:2017:i:43:p:4299-4309 is not listed on IDEAS
    7. Anna Batyra, 2007. "Are turbulences of Sargent and Ljungqvist consistent with lower aggregate volatility?," 2007 Meeting Papers 413, Society for Economic Dynamics.
    8. Ronald Leung & Marco Stampini & Desire Vencatachellum, 2014. "Does Human Capital Protect Workers against Exogenous Shocks? Evidence from Panel Data on South Africa during the 2008-2009 Crisis," South African Journal of Economics, Economic Society of South Africa, vol. 82(1), pages 99-116, March.
    9. HIGUCHI Yoshio & KIYOTA Kozo & MATSUURA Toshiyuki, 2016. "Multinationals, Intrafirm Trade, and Employment Volatility," Discussion papers 16087, Research Institute of Economy, Trade and Industry (RIETI).
    10. Erling Barth & Alex Bryson & James C. Davis & Richard Freeman, 2016. "It's Where You Work: Increases in the Dispersion of Earnings across Establishments and Individuals in the United States," Journal of Labor Economics, University of Chicago Press, vol. 34(S2), pages 67-97.
    11. 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.
    12. 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’," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(3), pages 433-437, September.
    13. Paula Garda & Volker Ziemann, 2014. "Economic Policies and Microeconomic Stability: A Literature Review and Some Empirics," OECD Economics Department Working Papers 1115, OECD Publishing.
    14. repec:ucp:jlabec:doi:10.1086/694167 is not listed on IDEAS
    15. 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.
    16. Claudia M. Buch, 2013. "Has Labor Income Become More Volatile? Evidence from International Industry-Level Data," German Economic Review, Verein für Socialpolitik, vol. 14(4), pages 399-431, November.
    17. Shane T. Jensen & Stephen H. Shore, 2008. "Changes in the Distribution of Income Volatility," Papers 0808.1090, arXiv.org.
    18. Stephen Shore, 2015. "The co-movement of couples’ incomes," Review of Economics of the Household, Springer, vol. 13(3), pages 569-588, September.
    19. Louis Chauvel & Anne Hartung & Flaviana Palmisano, 2017. "Dynamics of Income Rank Volatility: Evidence from Germany and the US," SOEPpapers on Multidisciplinary Panel Data Research 926, DIW Berlin, The German Socio-Economic Panel (SOEP).
    20. repec:bla:ecinqu:v:55:y:2017:i:1:p:260-280 is not listed on IDEAS
    21. Claudia M. Buch & Christian Pierdzioch, 2009. "Low Skill but High Volatility?," CESifo Working Paper Series 2665, CESifo Group Munich.
    22. repec:prg:jnlpol:v:2017:y:2017:i:4:id:1152:p:410-423 is not listed on IDEAS
    23. Boris Cournède & Paula Garda & Volker Ziemann, 2015. "Effects of Economic Policies on Microeconomic Stability," OECD Economics Department Working Papers 1201, OECD Publishing.

    More about this item

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

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