Monday, November 9, 2015

Wage Inequality Growth Caused By Some Firms Paying Higher Salaries To All Workers And Not Selective Pay Growth Within Firms or CEO Salaries

From The Wall Street Journal, Real Time Economics, "What’s Driving Inequality: CEO Pay or Company Success?" by Greg Ip:
A National Bureau of Economic Research paper caused a stir earlier this year by claiming all of the rise in inequality since 1980 was between firms, not within firms, implying executive pay played no role.

The paper [Firming Up Inequality], by Jae Song of the Social Security Administration, David J. Price and Nicholas Bloom of Stanford University, Fatih Guvenen of the University of Minnesota and Till von Wachter of the University of California, Los Angeles, looked at a large sample of more than 100 million employees and linked their pay to the average pay within their own firm.

They found that while incomes of the highest-paid workers (e.g., those earning more than 90% or 99% of all others) had indeed grown faster than the median, they had not grown faster than those of their co-workers. For example, the employee at the 90th percentile earned 1.69 times as much as his firm’s average wage in 1980, and 1.73 times as much in 2013. An employee at the 99th percentile earned 3.57 times his firm’s average in 1980, and 3.48 times in 2013.

From this they concluded that "virtually all of the rising dispersion between workers" was caused by the dispersion between firms, contradicting Thomas Piketty, author of "Capital in the Twenty-First Century," and others who say it’s due to the top 1% pulling away.
From The Wall Street Journal, "Behind Rising Inequality: More Unequal Companies: More competition would help narrow the gap between the highest- and lowest-paid employees" by Greg Ip:
Mounting evidence suggests the prime driver of wage inequality is the growing gap between the most- and least-profitable companies, not the gap between the highest- and lowest-paid workers within each company. That suggests policies that have focused on individuals, from minimum wages to education, may not be enough to close the pay gap; promoting competition between companies such as through antitrust oversight may also be important.
Separate research suggests that pay has closely followed these companies’ fortunes. Jae Song of the Social Security Administration and four co-authors [Firming Up Inequality] looked at pay records of more than 100 million workers between 1980 and 2013, and compared their pay to that of other workers at the same firm. Workers at the 90th and 99th percentile did see their pay rise much more than median and lower-paid workers over the period. But no such disparity appeared among co-workers at the same firm: the ratio of their pay to their firm’s average remained flat. In other words, everyone at the top companies, from the lowest to highest paid, pulled away from the pack, and everyone at the bottom companies languished.

Workers Income Gap Across And Between Firms
Source: The Wall Street Journal

Prior to this research, it was known that larger forms tend to pay more for the same job than smaller firms and that some industries pay more for a job function than others. For example, hospitals pay janitors a higher salary than other companies; technology firms pay more for computer programmers than industrial companies, etc. What the study mentioned above shows is that the growth in wage inequality is due to the differences in growth in pay across firms and industries and not due to selective pay growth within firms.

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