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Labor Supply, Wages, and Inequality Conference: Day 2 Overview
The second day of the Atlanta Fed Center for Human Capital Studies's recent conference on labor supply, wages, and inequality switched the focus from labor supply to wage setting. The day was kicked off by Christina Patterson, who presented her paper "National Wage Setting ," coauthored by Jonathon Hazell and Heather Sarsons. This research explores how large, multi-establishment firms, which are increasingly dominating local labor markets, set wages across space. Benchmark models suggest that firms would vary wages across space because of local differences in productivity, cost of living, and competition, resulting in variation across regions.
The authors use data from the job market analytics firm Burning Glass Technologies about posted job-level wages for online vacancies between 2010 and 2019, along with a survey of human resource managers and executives, self-reported wages from payscale.com (a compensation data site), and firm employment visa application data. Their findings suggest that a large minority of firms set wages nationally and adopt pay structures that do not differ geographically. The two most important reasons given by firms is management simplicity and the importance of nominal comparisons to workers.
The national wage setting is associated with 3 to 5 percent lower profits for firms, but evidence suggests that national wage setting reduces earnings inequality without negatively affecting employment. However, this reduced inequality holds primarily for low-wage regions. National wage setting is also associated with increased regional wage rigidity.
The second paper of the day, "Industries, Mega Firms, and Increasing Inequality," presented by John Haltiwanger and coauthored by Henry R. Hyatt and James R. Spletzer, provided a broader lens through which we can view earnings inequality, which has drastically increased over the past decades. The existing empirical studies have shown that most of this inequality increase came from the rising differences in earnings between firms. Using comprehensive matched employer-employee data from the Longitudinal Employer-Household Dynamics database at the US Census Bureau, the authors show that the rising between-firms earnings dispersion is almost entirely accounted for by the increasing earnings dispersion between industries.
Increasing dispersion among industries operates at the two tails of the income distribution and is almost entirely accounted for by just 30 four-digit NAICS industries (as defined by the Census Bureau's classification system) The employment share of low-paying industries—such as restaurants and other eating places as well as general merchandise and grocery stores—has increased substantially, while real, inflation-adjusted wages in those industries fell. As a result, the left tail of the income distribution has fallen farther behind. On the other hand, the employment share of high-pay industries—such as software publishers, computer system design, information services, and management of companies—increased and was accompanied by large growth in those industries' average pay, leading to even higher relative income of the right tail of the income distribution.
Underlying these changes are worker-industry sorting and segregation patterns. Over time, workers with less education are more likely to end up working in low-paying industries, while more educated workers are more likely to cluster in the high-paying industries. These results suggest important changes have occurred in how lowest- and highest-paying firms restructure and organize themselves. These trends are also likely to be a by-product of recent technological innovations, led largely by firms and workers in industries with high pay. Though these innovations led to hefty rewards for high-skill workers, they also facilitated the scalability and expansion of mega-firms at the bottom of low-pay service industries. During the pandemic, workers in these low-pay industries have seen significant wage gains, but it remains to be seen if these recent changes will affect future inequality.
The day's third paper, "The Distributional Impact of the Minimum Wage in the Short and Long Run ," was presented by Elena Pastorina and coauthored by Erik Hurst, Patrick Kehoe, and Thomas Winberry. Their research continues the focus on wages by developing a framework to explore the impact of a $15 minimum wage, which would be a substantial increase in the current minimum wage and would be binding for 40 percent of workers without a college degree. The framework incorporates a large degree of worker heterogeneity within education groups, monopsony power (or considerable employer hegemony) in the labor markets, and putty-clay frictions (that allow for differing short- and long-run impacts of changes in the minimum wage).
Their results suggest that increases in the minimum wage are beneficial in the short run as they increase the welfare of the target group—low-income, noncollege workers making close to the initial minimum wage—with no large employment effects. However, the authors find that in the long run, firms will reoptimize their capital investment to better fit the changed relative prices of capital and labor. Thus, this group's employment, income, and welfare will eventually decline.
The authors go on to show that the Earned Income Tax Credit (EITC), which is based on income and number of children, is more effective in improving the welfare of low-wage workers than merely increasing the minimum wage. However, they find that combining a modest increase in the minimum wage with the EITC improves welfare more than either program does alone.
The fourth and final paper of the second day of the conference was "Labor Market Fluidity and Human Capital Accumulation," by Niklas Engbom. Using panel data for 23 countries, Engbom finds a large degree of heterogeneity in labor market fluidity—specifically, job-to-job mobility across countries. He finds that mobility in highly fluid markets is about 2.5 times higher than in countries with low fluidity, and that higher fluidity is associated with higher real wage growth over a person's lifetime.
Engbom also documents that on-the-job training is more prevalent in countries that exhibit high fluidity and proposes a mechanism to explain the positive correlation among fluidity, wages, and training in which workers in highly fluid markets are able to accumulate more on-the-job skills and have higher productivity, resulting in higher wages.
The amount of labor market fluidity can also change over time, and Engbom notes that fluidity in the United States—while higher than many other countries—has declined significantly during the last 40 years. Engbom connects this secular decline to the flattening of worker lifetime wage profiles and estimates that reduced fluidity accounts for about half of this flattening.
One implication of this line of research is that there are potentially significant benefits to reducing barriers to job creation and allowing greater worker reallocation across jobs. Lower labor market fluidity reduces wage growth and human capital accumulation because it becomes harder for people to find jobs that fully utilize their skills, and it also discourages human capital accumulation.
That paper concluded the Atlanta Fed Center for Human Capital Studies's conference on labor supply, wages, and inequality. Next year's conference is already in the planning stages, so stay tuned for details.
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