The kind of company you work for makes a big difference to your chances of getting raises, new research has found. This adds to growing evidence that what goes on inside firms matters beyond their walls. Researchers have shown that company-level differences have become large enough to influence national productivity growth and overall wage inequality. The new study suggests they affect income mobility, too.
Having gathered data on workers and companies from the Census Bureau and the Social Security Administration, researchers John Abowd of the Census Bureau, Kevin McKinney of the California Census Research Data Center and Nellie Zhao of Cornell University categorized workers and their employers along three dimensions: skill, earnings and average company pay. Not surprisingly, they found some correlation between workers and firms. Low-skilled workers tend to work at low-paying companies, for example, and to earn low wages.
While 27 percent of low-skilled workers are employed at low-paying companies, just 17 percent of medium-skill workers are. And almost 80 percent of the low-skilled workers at those companies are in the bottom of the earnings distribution across all workers, compared with well under half of the medium-skilled workers at those same firms. Conversely, 25 percent of high-skilled workers are employed at top-paying firms, and 89 percent of those workers are in the top earnings category overall. Those top firms employ 21 percent of medium-skilled workers, of whom 42 percent are in the highest overall earnings category.
These classifications allowed the authors to figure out the wage premium associated with working at different companies. High-paying companies, they found, not only pay low- and medium-skilled workers more than others do, but are also significantly more likely to keep such workers moving up the wage distribution.
A low-skilled worker at the top end of the earnings distribution who is employed by a low-paying company earns an average of $67,000, compared with $73,000 at a top-paying firm. For high-skilled workers in the top part of the earnings distribution, the premium associated with working at a top-paying firm is even larger: The average wage is $81,000 at the bottom end and $143,000 at the top. These differences, which are consistent with findings in past studies, are hard to reconcile with the Econ 101 model of the labor market, in which a worker’s pay depends only on his or her skills.
The more important benefit that the research found for low- and middle-skilled workers at high-paying companies is their odds of increasing pay. For medium-skilled workers in the middle of the earnings distribution who are now at low-paying companies, the chances of moving into the top overall wage category next year is less than 1 percent. At medium-paying companies, it’s 3 percent, and at top-paying ones, it’s 12 percent.
Other recent research suggests that capital returns are becoming more differentiated across companies, that productivity growth has not declined at leading firms, and that rising wage inequality mainly reflects changes across firms, not within them. For too long, policy makers and many macroeconomists have largely ignored what goes on inside companies and why some behave differently than others. If they are to understand inequality in the U.S., they need to start paying attention.
Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.