This thesis will concern research on causes of income inequality, it asks the following question: What drives income inequality at the firm-level? More precisely this would entail the questions: What influences the development of market earnings inequality between firms, understood as establishments? What influences the development of market earnings inequality between firms, understood as distinct corporate units?
I start my thesis with two recent articles that adress these questions and that employ a similar methodology to different countries. The first one is a paper by David Card, J¨org Heining and Patrick Kline Card et al. (CHK), the second one is by Jae Song, David J. Price, Fatih Guvenen, Nicholas Bloom and Till von Wachter Song et al. (SPG). CHK is concerned with firms as establishments in Germany and SPG with firms as corporate units in the U.S. Both articles are concerned with more than just between-firm inequality. For brevities sake the parts on their other research concerns will be mentioned, but not as in-depth as the parts that concern between-firm inequality.
Table of Contents
1 Introduction: Conceptualizing Inequality Research
2 Data and Conceptual Overview
2.1 Summary of Main Points
2.1.1 Card, Heining and Kline - Basic Findings
2.1.2 Song, Price, Guvenen, Bloom and von Wachter - Basic Findings
2.2 Data and Concepts
2.2.1 Time Frame
2.2.2 Data Source
2.2.3 Earnings Measure
2.2.4 Firm Measure
2.2.5 Summary of Data and Concepts
2.2.6 Potential Issues
3 Income, Income Inequality and its Drivers
3.1 Descriptive Statistics on Earnings Inequality
3.1.1 Development of overall Earnings Inequality in Germany by CHK
3.1.2 Development of Overall Earnings Inequality in the U.S. by SPG
3.2 Main Analysis: What factors drive Earnings Inequality?
3.2.1 OLS Estimation of Earnings Function
3.2.2 Decomposition of Variance
3.2.3 Results of these Decompositions in both Articles
3.3 What drives Income Inequality at the Firm-Level?
3.3.1 Components of Interest
3.3.2 Theoretical Mechanism
3.3.3 Five Potential Factors driving Inequality at the Firm-Level
4 Conclusion: The Influences at the Firm-Level
Research Objectives and Key Topics
This thesis investigates the drivers of increasing income inequality at the firm-level, comparing developments in Germany and the United States. The central research question asks what factors influence the rising market earnings inequality between corporate units and establishments, specifically analyzing how firm-related components contribute to overall inequality trends.
- Decomposition of wage variance to identify the impact of firm-specific premiums.
- Role of worker sorting and segregation across high- and low-paying firms.
- Assessment of structural factors including international trade and collective bargaining.
- Evaluation of firm-level rent-sharing and its effect on earnings dispersion.
- Comparison of compensation structures and equalizing differences across industries.
Excerpt from the Book
3.3.3 Five Potential Factors driving Inequality at the Firm-Level
The literature on the subject of between-firm inequality touches a variety of fields in economics. I found five big explanations for between-firm earnings inequalities: Worker Characteristics, rents, Equalizing Compensation, International Trade and Collective Bargaining. In the following I attempt to sketch out mechanisms in the respective fields, which would cause the observed changes of the variance components mentioned above. I attempt to give evidence, if the mechanism were at work in the U.S. or Germany in the periods studied in both articles.
Since the research in that area is relatively young and this thesis is necessarily limited, my points will not always relate to both countries.
Worker Characteristics The first literature on how firms influence overall earnings inequality emphasizes that different workers work at different firms. This is the line of research that SPG and CHK can broadly be sorted to. The literature emphasizes that differences between firms are to a substantial extent explained by the different observed or unobserved characteristics of workers working at those firms. To be specific: The components of the variance likely influenced this literature would be sorting and segregation of workers.
A first influence on rising sorting and segregation of workers would be rising outsourcing by firms, caused by a drive to limit within-firm inequality (e.g., Akerlof and Yellen (1990)), by cost-saving-considerations of reducing premiums paid to lower skilled workers (e.g., (Goldschmidt and Schmieder, 2015, p. 22) as well as by a rising complementarity of workers of certain characteristics, which demands the limitation of the workforce to persons of a certain educational background.
Summary of Chapters
1 Introduction: Conceptualizing Inequality Research: Introduces the relevance of income inequality as an economic research field and establishes the thesis's focus on firm-level drivers.
2 Data and Conceptual Overview: Compares the data, methodology, and firm definitions used by the primary studies (Card, Heining and Kline vs. Song et al.) to ensure a balanced analysis.
3 Income, Income Inequality and its Drivers: Details the empirical estimation models, provides descriptive statistics on earnings inequality, and investigates the specific drivers of firm-level inequality components.
4 Conclusion: The Influences at the Firm-Level: Summarizes findings on the non-uniqueness of drivers for firm-related variance and provides an outlook on the growing importance of firm-level research.
Keywords
Income Inequality, Firm-Level, Earnings Variance, Wage Premiums, Worker Sorting, Segregation, Establishment Effects, Corporate Units, Rent-Sharing, Outsourcing, Collective Bargaining, International Trade, Labor Economics, Wage Structure, Compensation Differentials.
Frequently Asked Questions
What is the fundamental focus of this thesis?
The thesis focuses on explaining the rise of income inequality, specifically analyzing how developments within and between firms contribute to this trend in Germany and the U.S.
What are the central thematic fields covered?
The study examines five core areas: worker characteristics, rent distribution, equalizing compensation, international trade effects, and collective bargaining.
What is the primary research question?
The primary question is: "What drives income inequality at the firm-level?"
Which scientific methods are employed?
The work utilizes a literature review based on recent seminal papers, employing variance decomposition of earnings to isolate firm-specific components and worker sorting effects.
What topics are addressed in the main body?
The main body focuses on the empirical models (OLS estimation) used to measure inequality, the decomposition of earnings variance, and a critical discussion of the potential macroeconomic drivers for these trends.
Which keywords characterize this research?
Key terms include income inequality, worker sorting, firm-level wage premiums, and earnings variance decomposition.
How do Germany and the U.S. differ regarding firm-level inequality?
The studies suggest that while both countries show rising inequality, the specific drivers—such as the role of collective bargaining in Germany versus corporate-unit developments in the U.S.—demonstrate distinct institutional influences.
Is firm-level inequality mainly driven by one factor?
No, the conclusion indicates that not one single factor explains the entire rise; rather, multiple factors influence different components of the firm-related variance.
- Arbeit zitieren
- Martin Schaller (Autor:in), 2017, What drives Income Inequality at the Firm - Level? Literature Review based on Recent Trends in Germany and the U.S., München, GRIN Verlag, https://www.grin.com/document/1270709
