Market Pressures, Firm Wage Policies, and Inequality: Evidence Using Matched Employer-Employee Data

Increased earnings inequality can largely be accounted for by increased variation in the wages paid to similar workers by different companies. These “firm effects” suggest a lack of competition in the labor market and an increase in companies’ ability to dictate terms of employment. Lack of competition in the labor market also reduces wage growth. Economists Laura Giuliano and Arindrajit Dube will examine how companies set wages and why they differ. They will use data from the Longitudinal Employer-Household Dynamics program to investigate the following questions: 1) Are firm effects explained by characteristics of the labor markets in which they operate (such as employer concentration) or by local variation in policies and institutions (such as minimum wage or unionization)? 2) To what extent are the affects driven by specific policies and organizational constraints of the companies themselves? 3) How do companies’ wage policies interact with market forces and regulations to shape earnings variations?