Rising inequality in the amount of money Americans earn turns out to be mostly explained by where they work. And that may help solve another puzzle about the economy: why fewer and fewer workers are moving from one company to another.
For decades, economists have observed a growing disparity in earnings in the U.S. and questioned whether it stemmed from increasingly unequal pay within companies or from more unequal earnings from company to company.
Many people have assumed that most of the change has been happening within companies, as certain employees get disproportionately bigger paychecks. But a new study of U.S. incomes since the 1970s shows that most of the rise in inequality has been due to a greater spread in average earnings across companies. The researchers — Erling Barth of the Institute for Social Research, Alex Bryson of the National Institute of Economic and Social Research, James Davis of the Boston Census Research Data Center, and Richard Freeman of the National Bureau of Economic Research — attribute two-thirds to nine-tenths of the change to increasing inequality from workplace to workplace.
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This growing gap may also help explain a decline in labor market fluidity in recent years. The share of Americans who move across state boundaries for employment has been falling since even before the recession, leading to a drop-off in geographical mobility for people of working age.
In an important paper presented at the Federal Reserve conference last month in Jackson Hole, Wyoming, Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland showed that taken together, U.S. job creation and job destruction rates are just two-thirds as high as their 1991 peak. Other labor-market indicators also suggest that there is substantially less fluidity today than there has been historically and that the decline started well before the recent recession.
Davis and Haltiwanger note that the decrease "holds across major industry sectors, across all states, and across age and education groups for both men and women." They also warn that the drop in labor-market dynamism could threaten future productivity growth.
Here's how the two papers may be related: If most of the rise in earnings inequality is due to bigger pay differences across companies, one might expect that few people would leave the higher-paying employers once they're in the door. And while workers at the lower-paying companies may want to jump, the opportunities to do so would be limited.
Regardless of how tightly the new data are connected, they highlight two questions that should now be of central importance to policy makers: Why are earnings at different companies growing more unequal? And why are job turnover rates plummeting? Both problems appear to be playing large and unexpected roles in our economy.
To contact the writer of this article: Peter Orszag at [email protected].
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