Photographer: Patrick T. Fallon

The Rise of ‘Super Firms’  Is Boosting Pay Inequality

It's not just Piketty's super-managers; the gap between companies has skyrocketed

Your economic destiny is more closely linked to your company's than you might think. 

The wage divide has widened between workers at high-paying firms and those at low-paying companies over the past three decades, a trend consistent across U.S. regions and industries, new research shows.  

That means that as top 1 percent wages skyrocketed between 1982 and 2012 -- climbing 94 percent, compared with a 20 percent gain for workers at the middle of the income distribution -- the divergence didn't come from superstar chief executives increasingly out-earning their own employees. It came as some companies doled out larger paychecks across the board and others fell behind, the authors of a new working paper write. 

"There's this view out there that the main reason inequality is rising is because of super managers," Fatih Guvenen, a University of Minnesota economist who is among the paper's four co-authors, said in an interview. "We're arguing that it's the rise of super firms."

Source: "Firming Up Inequality", courtesy of Fatih Guvenen

It's unclear what makes some companies stand-outs while others fall behind, Guvenen said. The researchers hypothesize that diverging productivity could be among the reasons. Highly skilled workers might also be concentrating at certain businesses. 

"More research needs to be done to understand why inequality between firms has increased so much more than inequality within them," according to the paper, which Social Security Administration economist Jae Song and Stanford University's David Price and Nicholas Bloom also co-authored. 

There is some variation between sectors, Guvenen said. For instance, in manufacturing, managers are pulling away from their employees on the payscale.

Still, in the bulk of industries -- including finance and services -- some companies are simply outshining the others.  So much that "virtually all" of the income growth divergence between the top and the middle earner can be explained by the inter-company differences, the researchers said.

The authors note in the study that executive pay has been a major focus of inequality discussions: They contrast their own conclusions with those of Thomas Piketty, a French economist whose best-selling book “Capital in the Twenty-First Century” suggested that the rise of "super managers" -- executives with rapidly growing packages -- was a major contributing factor in boosting inequality.

Piketty said this paper's findings aren't necessarily at odds with his own.

"All these evolutions tend to interact with each other," he wrote in an e-mail. "Exploding executive compensation can have an impact on the pay determination process in other segments of the labor market." 

It's surprising that companies have played such a central role in boosting inequality, and the finding could have important policy implications, said Ben Zipperer, a research economist at the Washington Center for Equitable Growth.  

"If it is the case that inter-firm inequality matters a lot, then what you want to do is make sure that there is equal opportunity in hiring practices,'' Zipperer said. "You want to get people into the door" at those higher-paying companies.   

The paper used earnings data compiled by the Social Security Administration that counts wages and salaries, bonuses, exercised stock options and the dollar value of vested restricted stock units among income.

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