“Firming Up Inequality”
We use a massive, new, 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 two thirds of the rise in the variance of earnings is associated with workers’ employers, whereas one third occurs within firms. The employer-related rise in the variance can be decomposed into two roughly equally important forces – a rise in the assortative matching of high-wage workers to high-wage firms and a rise in 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. The rise in the employer-related inequality was particularly strong in smaller and medium-sized firms (explaining 84% for firms with fewer than 10,000 employees), driven by worker sorting and segregation. In contrast, in the very largest firms with 10,000+ employees, almost half 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. We also find that for the very top earners, who experienced particularly large earnings gains over the last decades, a larger share of earnings growth occurred within firms. However, the contribution of these top earners to the overall increase in earnings inequality is small.