The Roles of Productivity and Luck "pubs_nav.html" -->

November 13-14, 2015
David Card of University of California, Berkeley and Kathryn Shaw of Stanford University, Organizers

Richard B. Freeman, Harvard University and NBER; Erling Barth, Institute for Social Research and NBER; and James Davis, Bureau of the Census

Augmenting the Human Capital Earnings Equation with Measures of Where People Work

Barth, Davis, and Freeman augment standard human capital earnings equations with variables reflecting attributes of the establishment and firm that employs a worker and find that the education of co-workers, capital equipment per worker, the industry in which the establishment operates, and the R&D intensity of firms impact worker earnings, among others. In longitudinal data, the researchers find that workplace fixed effects contributes substantially to the overall dispersion of ln earnings, though by less than individual fixed effects. The estimated relations between observed and unobserved measures of the workplace account for much of the dispersion of ln earnings, which suggests that research on earnings should go beyond standard human capital determinants of pay to “bring the workplace back in” to the earnings equation.

John Haltiwanger, University of Maryland and NBER, and Henry R. Hyatt and Erika McEntarfer, Bureau of the Census

Do Workers Move Up the Firm Productivity Job Ladder?

In this paper, Haltiwanger, Hyatt, and McEntarfer use linked employer-employee data to provide direct evidence on the role of job-to-job flows in reallocating workers from less productive to more productive firms in the U.S. economy. The researchers present evidence that workers move up the firm productivity ladder, and that job-to-job moves of workers explain almost all of the differential employment growth rates of high and low productivity firms. Movements up the firm productivity ladder are procyclical but there has also been a downward trend in movements up the ladder. The latter suggests that job-to-job flows are contributing less to productivity growth and potentially reflects a decline in economic mobility in the U.S. Integrating these new findings with evidence on job ladders by firm size and wage, the authors observe that job-to-job moves reallocate workers up the firm productivity and the firm pay distribution, but not up the size distribution. This suggests that the tight relationship between firm productivity, wages, and size that is central to many macro-labor models does not hold in real world data. To resolve this discrepancy, the authors investigate the nature of the joint distribution of firm wages, firm size and firm productivity. They find evidence that firm productivity and firm wages are much more closely related than firm productivity and firm size, and that the firm productivity/size relationship varies systematically across industries. They hypothesize and present evidence that the weak relationship observed between size and productivity in many industries is due to market segmentation in those industries.

Chinhui Juhn, University of Houston and NBER; Kristin McCue, Bureau of the Census; Holly Monti, University of Texas, and Brooks Pierce, Bureau of Labor Statistics

Firm Performance and the Volatility of Worker Earnings

The notion that firms provide wage insurance to risk-averse workers goes back to Baily (1974). Guiso et al. (2005) use Italian data and find evidence of full wage insurance in the case of temporary shocks to firm output, although only partial insurance for permanent shocks. Using linked employer-employee data for the U.S. retail trade sector, Juhn, McCue, Monti, and Pierce examine whether shocks to firm sales are transmitted to worker earnings. The researchers examine both short-term (one-year) and long-term (five-year) changes. They also examine whether this relationship differs by gender or across workers in different parts of the earnings distribution. They find no impact for short-term changes, but small positive elasticities for longer-term changes.

Edward Lazear and Kathryn Shaw, Stanford University and NBER, and Christopher Stanton, University of Utah and NBER

Who Gets Hired? The Importance of Finding an Open Slot

Despite seeming to be an important requirement for hiring, the concept of a slot is absent from virtually all of economics. Closest is the macroeconomic studies of vacancies and search, but the implications of slot-based hiring for individual worker outcomes has not been analyzed. Lazear, Shaw, and Stanton present a model of hiring into slots. Job assignment is based on comparative advantage. Crucially, and consistent with reality, being hired and assigned to a job depends not only on one's own skill, but on the skill of other applicants. The model has many implications the most important of which are: First, bumping occurs, when one applicant is bumped from a job into a lower paying job or unemployment by another applicant who is more skilled. Second, less able workers are more likely to be unemployed because high ability workers are more flexible in what they can do. Third, vacancies are higher for difficult jobs because easy jobs never go unfilled. Fourth, some workers are over-qualified for their jobs whereas others are underqualified. The mis-assigned workers earn less than they would had they found an open slot in a job that more appropriately matches their skills. Despite that, overqualified workers earn more than the typical worker in that job. These implications are borne out using four different data sets that match the data requirements for of these point and others implied by the model.

David Card and Patrick Kline, University of California, Berkeley and NBER; Ana Rute Cardoso, IAE Barcelona (CSIC); and Jorg Heining, Institut fur Abreitsmarkt und Berufsforchung

Firms and Labor Market Inequality: A Review

John M. Abowd, Cornell University and NBER; Kevin L. McKinney, Bureau of the Census; and Nellie Zhao, Cornell University

Earnings Inequality Trends in the United States: Nationally Representative Estimates from Longitudinally Linked Employer-Employee Data

Erik Brynjolfsson, MIT and NBER, and Heekyung Kim and Guillaume Saint-Jacques, MIT

CEO Pay and Information Technology

Compensation for CEO's and other top executives has drawn increasing scrutiny from policy-makers, researchers, and the broader public. Brynjolfsson, Kim, and Saint-Jacques find that information technology (IT) intensity predicts the average CEO pay increase and the dispersion of CEO pay for top executives and explore three possible explanations. 1. IT may facilitate "winner-take-most" markets that increase the size and dispersion of firms' market value. This in turn translates in to comparable changes in CEO compensation. 2. For any given firm size, IT may increase the "effective size" of the firm by making performance more sensitive to CEO decisions. 3. IT may increase the generality of skills required to be an effective CEO by converting tacit knowledge into more explicit, data-driven decision-making. The researchers examine panel data from 3413 publicly traded firms over 23 years, controlling for other types of capital, number of employees, market capitalization, industry turbulence, firm or industry fixed effects, and other factors and find the strongest evidence for the first and third hypotheses.

Stefan Bender, Institute for Employment Research (IAB); Nicholas Bloom, Stanford University and NBER; David Card; John Van Reenen, London School of Economics and NBER; and Stefanie Wolter, Institute for Employment Research (IAB)

Of Managers and Management: Evidence From Matched Employer-Employee Data

Recent evidence suggests that an important fraction of the large productivity dispersion between firms is due to management practices. Are these management practices solely because of the allocation of talent (especially of senior managers)? Or is there an additional role for the way that successful firms combine these units of human capital more efficiently? Bender, Bloom, Card, Van Reenen and Wolter address this question by merging their survey data on management practices in the 2000s with near population employer-employee data from Germany between 1975-2011. They find a strong correlation between their management score and the ability of employees (as measured by employee fixed effects in wage equations), especially managerial talent. Looking at job inflows and outflows, the authors find that well managed firms systematically select the more able employees and deselect the less talented. Controlling for observed and unobserved human capital accounts for between one quarter and one half of the firm-level relationship between productivity and management practices. Hence, the researchers argue that the impact of management practices on firm performance is more than simply just the ability of individual managers.

David Deming, Harvard University and NBER, and Lisa Kahn, Yale University and NBER

Firm Heterogeneity in Skill Demands
Jae Song, Social Security Administration; David Price and Nick Bloom, Stanford University and NBER; Fatih Guvenen, University of Minnesota and NBER; and Till von Wachter, University of California, Los Angeles and NBER

Firming Up Inequality (NBER Working Paper No. 21199)

Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer—men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, Bloom, Guvenen, Price, Song, and von Wachter begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, they show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population.