Income Inequality Within and Across Firms

Paper Session

Friday, Jan. 6, 2017 8:00 AM – 10:00 AM

Hyatt Regency Chicago, Regency C
Hosted By: American Economic Association
  • Chair: Christian Moser, Columbia University

Inequality Inside United States Mega Firms

Nicholas Bloom
,
Stanford University
Fatih Guvenen
,
University of Minnesota
David J. Price
,
Stanford University
Jae Song
,
U.S. Social Security Administration
Till M. von Wachter
,
University of California-Los Angeles

Abstract

We study the evolution of wage inequality and wage dynamics inside very large US firms--those with more than 10,000 employees--which we refer to as Mega firms. These firms make up a small minority--less than 0.2%--of all US firms but employ more than 20% of the labor force and make up the substantial part of US stock market value. We show that within-firm wage inequality and dynamics have displayed distinct patterns for these mega firms, sharply contrasting with those observed inside medium and small firms. The substantial rise in inequality inside these large firms has been driven by rising wages at the very top (CEOs and top 50 or so executives) and steeply falling wages at the bottom half of the within-firm wage distribution. Furthermore, the well-documented pay-size relationship, whereby larger firms pay higher wages, have become significantly muted since the 1980s, erasing the wage premium paid by mega firms.

Can Employer Heterogeneity Explain Gender and Racial Pay Gaps in the U.S.?

Niklas Engbom
,
Princeton University
Christian Moser
,
Columbia University

Abstract

We assess the extent to which a rise in the minimum wage can account for three facts characterizing a large decline in earnings inequality in Brazil from 1996-2012: (i) the decline is more pronounced towards the bottom of the distribution; (ii) one quarter of the decline stems from an increase in relative pay at less productive firms; and (iii) another quarter is attributable to falling pay differences due to worker heterogeneity. To this end, we build an equilibrium search model with heterogeneity in worker ability and firm productivity. The central feature of the model is the presence of spillover effects of the minimum wage on higher earnings ranks due to monopsonistic competition among firms for workers. We estimate the model using indirect inference and find that the rise in the minimum wage explains 70 percent of the decline in the variance of log earnings. Spillover effects of the minimum wage account for more than half of this decline and quantitatively match the three empirical facts. Our results suggest that labor market dynamics can lead to large effects of policy on earnings inequality.

Within-Firm Pay Inequality

Holger M. Mueller
,
New York University
Paige P. Ouimet
,
University of North Carolina-Chapel Hill
Elena Simintzi
,
University of British Columbia

Abstract

Financial regulators and investors alike have expressed concerns about high pay
inequality within firms. Using a proprietary data set of public and private firms,
this paper shows that firms with higher pay inequality–relative wage differentials
between top- and bottom-level jobs–are larger and have higher valuations, better
operating performance, and higher equity returns. High-inequality firms also exhibit
larger earnings surprises, consistent with the argument that pay inequality is not
fully priced by the market. Overall, our results support the notion that high pay
disparities within firms are a reflection of better managerial talent.

Ranking Firms Using Revealed Preference

Isaac Sorkin
,
Stanford University

Abstract

This paper estimates workers’ preferences for firms by studying the structure of employer-to- employer transitions in U.S. administrative data. The paper uses a tool from numerical linear algebra to measure the central tendency of worker flows, which is closely related to the ranking of firms revealed by workers’ choices. There is evidence for compensating differential when workers systematically move to lower-paying firms in a way that cannot be accounted for by layoffs or differences in recruiting intensity. Compensating differentials account for about 15% of the variance of earnings.
Discussant(s)
Patrick M. Kline
,
University of California-Berkeley
Costas Meghir
,
Yale University
Nicholas Bloom
,
Stanford University
David Dorn
,
University of Zurich
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • J3 - Wages, Compensation, and Labor Costs