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Firming Up Inequality

Author

Listed:
  • Jae Song

    (Social Security Administration)

  • David J. Price

    (Princeton University)

  • Faith Guvenen

    (University of Minnesota, FRB of Minneapolis, and NBER)

  • Nicholas Bloom

    (Stanford University, NBER, and SIEPR)

  • Till von Wachter

    (UCLA and NBER)

Abstract

We use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We find that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred between firms. However, this rising between-firm variance is not accounted for by the firms themselves: the firm-related rise in the variance can be decomposed into two roughly equally important forces -- a rise in the sorting of high-wage workers to high-wage firms and a rise in the segregation of similar workers between firms. In contrast, we do not find a rise in the variance of firm-specific pay once we control for worker composition. Instead, we see a substantial rise in dispersion of person-specific pay, accounting for 68% of rising inequality, potentially due to rising returns to skill. The rise in between-firm variance, mostly due to worker sorting and segregation, accounted for a particularly large share of the total increase in inequality in smaller and medium firms (explaining 84% for firms with fewer than 10,000 employees). In contrast, in the very largest firms with 10,000+ employees, 42% of the increase in the variance of earnings took place within firms, driven by both declines in earnings for employees below the median and a substantial rise in earnings for the 10% best-paid employees. However, because of their small number, the contribution of the very top 50 or so earners at large firms to the overall increase in within-firm earnings inequality is small.

Suggested Citation

  • Jae Song & David J. Price & Faith Guvenen & Nicholas Bloom & Till von Wachter, 2018. "Firming Up Inequality," Working Papers 618, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:618
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    More about this item

    Keywords

    Income inequality; pay inequality; between firm inequality;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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