Firms and Labor Market Inequality: Evidence and Some Theory

From David Card, Ana Rute Cardoso, Joerg Heining, and Patrick Kline:

We review the literature on firm-level drivers of labor market inequality. There is strong evidence from a variety of fields that standard measures of productivity – like output per worker or total factor productivity – vary substantially across firms, even within narrowly-defined industries. Several recent studies note that rising trends in the dispersion of productivity across firms mirror the trends in the wage inequality across workers. Two distinct literatures have searched for a more direct link between these two phenomena. The first examines how wages are affected by differences in employer productivity. Studies that focus on firm-specific productivity shocks and control for the non-random sorting of workers to more and less productive firms typically find that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. A second literature focuses on firm-specific wage premiums, using the wage outcomes of job changers. This literature also concludes that firm pay setting is important for wage inequality, with many studies finding that firm wage effects contribute approximately 20% of the overall variance of wages. To interpret these findings, we develop a model where workplace environments are viewed as imperfect substitutes by workers, and firms set wages with some degree of market power. We show that simple versions of this model can readily match the stylized empirical findings in the literature regarding rent-sharing elasticities and the structure of firm-specific pay premiums.

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Senator Sanders’s Proposed Policies and Economic Growth by Christina Romer and David Romer

Christy Romer and David Romer analyze Senator Sanders’s proposed policies and their impacts on economic growth


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Interesting Figures from the CEA

This gallery contains 20 photos.

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Murphy and Summers on US Growth

Video of Kevin Murphy and Lawrence Summers discussed their outlooks of the US economy at the Scholes Forum on February 18.

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Human Capital Investment, Inequality and Economic Growth

From Murphy and Topel:

We treat rising inequality is an equilibrium outcome in which human capital investment fails to keep pace with rising demand for skills. Investment affects skill supply and prices on three margins: the type of human capital in which to invest; how much to acquire; and the intensity of use. The latter two represent the intensive margins of human capital acquisition and utilization. These choices are substitutes for the creation of new skilled workers, yet they are complementary with each other, magnifying inequality. When skill-biased technical change drives economic growth, greater inequality reduces growth.

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Shift in Payouts of Corporate Profits Has Major Revenue and Tax-Reform Consequences

Here is a NBER discussion of some my recent work on tax policy and the economy

In 1980, about 80 percent of business income went to traditional corporations, but research presented at the NBER’s annual Tax Policy and the Economy Conference this year shows that now roughly half of business income is passed through to entities outside of the traditional corporate sector. Researchers find that this change has had a significant effect on the amount of tax revenue government has been able to collect, and has implications for tax reform as well. Work on these subjects and others is featured on the newest NBER research theme page.

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State Taxes and Spatial Misallocation

Pablo Fajgelbaum, Eduardo Morales, Juan Carlos Suarez Serrato, and I have a new paper on the impact of state taxes on the US economy. Here is the abstract:

We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general-equilibrium model in which the distribution of workers, firms, and trade flows across states responds to state taxes and public-service provision. We estimate firm and worker mobility elasticities and preferences for public services using data on the distribution of economic activity and state taxes from 1980 to 2010. A revenue-neutral tax harmonization leads to aggregate real-GDP and welfare gains of 0.7%. Tax cuts by individual states lower own-state tax revenues and economic activity, and generate cross-state spillovers depending on trade linkages.

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