Title

Firming Up Inequality

Author(s)

Jae Song Jae Song (Social Security Administration)

David J. Price David Price (Princeton University)

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

Nicholas Bloom Nicholas Bloom (Stanford University, NBER, and SIEPR)

Till von Wachter 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.

Creation Date

2018-04

Section URL ID

Paper Number

618

URL

https://dataspace.princeton.edu/bitstream/88435/dsp01p2676z23z/3/618.pdf

File Function

Jel

E23, J21, J31

Keyword(s)

Income inequality; pay inequality; between firm inequality

Suppress

false

Series

1