We use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We find that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred due to a rise in the dispersion of average earnings between firms. However, this rising between-firm variance is not accounted for by the firms themselves but by a widening gap between firms in the composition of their workers. This compositional change can be split into two roughly equal parts: high-wage workers became increasingly likely to work in high-wage firms (i.e., sorting increased), and high-wage workers became increasingly likely to work with each other (i.e., segregation rose). In contrast, we do not find a rise in the variance of firm-specific pay once we control for the worker composition in firms. Finally, we find that two-thirds of the rise in the within-firm variance of earnings occurred within mega (10,000+ employee) firms, which saw a particularly large increase in the variance of earnings compared with smaller firms.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper we reassess the evidence on labor income risk. There are two leading views on the nature of the income process in the current literature. The …rst view, which we call the "Restricted Income Pro…les"(RIP) process, holds that individuals are subject to large and very persistent shocks, while facing similar life-cycle income pro…les. The alternative view, which we call the "Heterogeneous Income Pro…les" (HIP) process, holds that individuals are subject to income shocks with modest persistence, while facing individual-speci…c income pro…les.We …rst show that ignoring pro…le heterogeneity, when in fact it is present, introduces an upward bias into the estimates of persistence. Second, we estimate a parsimonious parameterization of the HIP process that is suitable for calibrating economic models. The estimated persistence is about 0.8 in the HIP process compared to about 0.99 in the RIP process. Moreover, the heterogeneity in income pro…les is estimated to be substantial, explaining between 56 to 75 percent of income inequality at age 55. We also …nd that pro…le heterogeneity is substantially larger among higher educated individuals. Third, we discuss the source of identi…cation-in other words, the aspects of labor income data that allow one to distinguish between the HIP and RIP processes. Finally, we show that the main evidence against pro…le heterogeneity in the existing literature-that the autocorrelations of income changes are small and negative-is also replicated by the HIP process, suggesting that this evidence may have been misinterpreted. JEL classi…cation: C33, D31, J31.

A substantial part of this paper was completed while Guvenen was a visiting economist at the Federal Reserve Bank of Chicago, whose hospitality is gratefully acknowledged. The views expressed herein are those of the authors and not necessarily those of the Social Security Administration, the Federal Reserve Bank of Chicago, the Federal Reserve System, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.