A Firm Link: Overall, Between- and Within-Firm Inequality Through the Lens of a Sorting Model
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arXiv
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| Format: | Preprint |
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2024
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| _version_ | 1866913547453202432 |
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| author | Gola, Paweł Zhao, Yuejun |
| author_facet | Gola, Paweł Zhao, Yuejun |
| contents | This paper provides a new theory of the observed co-movement between overall wage inequality and its between-firm component. We develop and solve analytically a frictionless sorting model with two-sided heterogeneity, in which firms consist of distributions of tasks, choose how many workers to employ and reward their workers both through wages and amenities. We show that, for empirically-relevant parameter ranges, overall and between-firm inequality are firmly linked: A change in any of the models' primitives increases overall wage inequality if and only if it also increases the ratio of between-firm to overall inequality. Subsequently, we calibrate the model to match the Norwegian economy and find that the increase in wage inequality from 1995 to 2014 had a different primary cause (raising span-of-control cost) than the accompanying rise in welfare inequality (increased skill variance), and that the apparent decrease in wage inequality after 2015 masked a continued increase in welfare inequality. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2410_11532 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | A Firm Link: Overall, Between- and Within-Firm Inequality Through the Lens of a Sorting Model Gola, Paweł Zhao, Yuejun Theoretical Economics General Economics Economics This paper provides a new theory of the observed co-movement between overall wage inequality and its between-firm component. We develop and solve analytically a frictionless sorting model with two-sided heterogeneity, in which firms consist of distributions of tasks, choose how many workers to employ and reward their workers both through wages and amenities. We show that, for empirically-relevant parameter ranges, overall and between-firm inequality are firmly linked: A change in any of the models' primitives increases overall wage inequality if and only if it also increases the ratio of between-firm to overall inequality. Subsequently, we calibrate the model to match the Norwegian economy and find that the increase in wage inequality from 1995 to 2014 had a different primary cause (raising span-of-control cost) than the accompanying rise in welfare inequality (increased skill variance), and that the apparent decrease in wage inequality after 2015 masked a continued increase in welfare inequality. |
| title | A Firm Link: Overall, Between- and Within-Firm Inequality Through the Lens of a Sorting Model |
| topic | Theoretical Economics General Economics Economics |
| url | https://arxiv.org/abs/2410.11532 |