U.S. earnings inequality has increased greatly in the last three decades, but the trend is due primarily to rising differences in pay between firms, not growing gaps within them, according to a new working paper published by the National Bureau of Economic Research.
In other words, the pay gap is rising not because the top earners within a firm are being paid so much more than their lower-paid colleagues. It’s climbing because some firms pay much better than others, and employees at those firms get paid a lot more than workers at lower-paying firms.
So while CEO pay has rapidly outpaced workers’ median wages in recent decades, “virtually all of the rise in earnings dispersion between workers is accounted for by” the widening gap in average wages paid by different employers from 1978 to 2012, says the paper, titled “Firming Up Inequality.”
In contrast, the authors say, “pay differences within employers have remained virtually unchanged,” and this is true across industries, geographical regions and firms of different sizes. For example, the gap between the highest paid employees within a firm, such as the top executives, and the average employee “has increased only a small amount,” they find.
“We find strong evidence that within-firm pay inequality has remained mostly flat over the past three decades,” said the authors, Jae Song of the Social Security Administration, Fatih Guvenen, a professor at the University of Minnesota, and David J. Price and Nicholas Bloom, both at Stanford University.
Why is this happening? The economists aren’t quite sure but offer a few suggestions, including the possibility that more productive firms are better able to pay bigger salaries.
It’s also plausible, they say, that modern-day firms may have become so specialized that some employ mostly high-paid workers and others mostly low-paid ones. In this case, they say “some firms pay much higher average wages than before because their average worker quality has increased. And vice versa for firms that are now paying lower than before.”