WORKING PAPER #618 Princeton University Industrial Relations Section - April 2018 - Firming Up Inequality

Sep 19, 2026

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WORKING PAPER #618 studies how firms contribute to the rise in U.S. earnings inequality from 1978 to 2013 using a massive, matched employer-employee dataset. About one-third of the increase in the variance of log earnings comes within firms, while two-thirds arises between firms. The between-firm component reflects sorting of high-wage workers into high-wage firms and segregation among similar workers; after controlling for worker composition, firm-specific pay variance does not rise, but person-specific pay dispersion increases strongly.

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Abstract

Introduction

WORKING PAPER \#618 PRINCETON UNIVERSITY INDUSTRIAL RELATIONS SECTION APRIL 2018 [http://arks.princeton.edu/ark:/88435/dsp01p2676z23z](http://arks.princeton.edu/ark:/88435/dsp01p2676z23z) Firming Up Inequality 􀀃 Jae Songy David J. Pricez Fatih Guvenenx Nicholas Bloom{ Till von Wachter k Abstract We use a massive, matched employer-employee database for the United States to analyze the contribution of 􀀌rms to the rise in earnings inequality from 1978 to 2013 . We 􀀌nd that one-third of the rise in the variance of (log) earnings occurred within 􀀌rms, whereas two-thirds of the rise occurred between 􀀌rms. However, this rising between-􀀌rm variance is not accounted for by the 􀀌rms themselves: the 􀀌rm-related rise in the variance can bedecomposed into two roughly equally important forces|a rise in the sorting of high-wage workers to high-wage 􀀌rms and a rise in the segregation of similar workers between 􀀌rms. In contrast, we do not 􀀌nd a rise in the variance of 􀀌rm-speci􀀌c pay once we control for worker composition. Instead, we see a substantial rise in dispersion of person-speci􀀌c pay, accounting for 68% of rising inequality, potentially due to rising returns to skill. The rise in between-􀀌rm variance, mostly due to worker sorting and segregation, accounted for a particularly large share of the total increase in inequality in smaller and medium 􀀌rms (explaining 84% for 􀀌rms with fewer than 10,000 employees) . In contrast, in the very largest 􀀌rms with 10,000+ employees, 42% of the increase in the variance of earnings took place within 􀀌rms, 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 􀀌rms to the overall increase in within-􀀌rm earnings inequality is small. Keywords: Income inequality, pay inequality, between-􀀌rm inequality. JEL Codes: E23, J21, J31 􀀃 Version: April, 2018 . Special thanks to Gerald Ray and Pat Jonas at the Social Security Administration for their help and support. We thank our formal discussants Pat Kline, Lin Peng, Ben Pugsley, Johannes Schmieder, Andre Shleifer, Larry Katz and 􀀌ve anonymous referees and seminar participants at the AEA, ASU, Berkeley, the White House CEA, Columbia, Chicago, Dartmouth, Drexel, FRBs of Atlanta, New York, and Philadelphia, Harvard, Michigan, MIT, NBER, Northwestern, Princeton, Rand, Stanford, TNIT, UCLA, and Yale for helpful comments. Benjamin Smith and Brian Lucking provided superb research assistance. We are grateful to the National Science Foundation for generous funding. To combat alphabetical inequality, author names have been randomly ordered. y Social Security Administration, [jae.song@ssa.gov](jae.song@ssa.gov)[ ](jae.song@ssa.gov)zPrinceton University; [djprice@princeton.edu](djprice@princeton.edu) x University of Minnesota, FRB of Minneapolis, and NBER; [guvenen@umn.edu](guvenen@umn.edu)[ ](guvenen@umn.edu){ Stanford University, NBER, and SIEPR; [nbloom@stanford.edu](nbloom@stanford.edu) k UCLA and NBER; [tvwachter@econ.ucla.edu](tvwachter@econ.ucla.edu) 1 Introduction The dramatic rise in U.S. earnings inequality from the 1970s to today has been well documented (see Katz and Autor (1999) and Acemoglu and Autor (2011) for detailed reviews) . It is well known that the change in inequality at the bottom (or below the median of the distribution) has been \episodic"|expanding in the 1980s and subsequently contracting and plateauing|whereas the rise in inequality above the median (all the way up to the very top earners) has been persistent throughout this period (e.g. , Piketty and Saez (2003) and Autor et al. (2008)) . An enormous body of theoretical and empirical research has been conducted over the past two decades in an attempt to understand the causes of these trends. Until recently, the analysis of the role of employers has been absent from this literature,

FAQs

What data source and period does the paper use?

It uses a massive, matched employer-employee database for the United States and analyzes changes from 1978 to 2013.

How much of the earnings inequality increase comes from within firms versus between firms?

One-third of the rise in the variance of (log) earnings occurs within firms, while two-thirds occurs between firms.

What explains the between-firm component of inequality?

The rise between firms is linked to sorting of high-wage workers into high-wage firms and to segregation of similar workers across firms.

Sep 19, 2026

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