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The Measurement of Human Capital in the U.S. Economy
April 2002
Working Paper Number:
tp-2002-09
We develop a new approach to measuring human capital that permits the distinction of both observable
and unobservable dimensions of skill by associating human capital with the portable part
of an individual's wage rate. Using new large-scale, integrated employer-employee data containing
information on 68 million individuals and 3.6 million firms, we explain a very large proportion
(84%) of the total variation in wages rates and attribute substantial variation to both individual
and employer heterogeneity. While the wage distribution remained largely unchanged between
1992-1997, we document a pronounced right shift in the overall distribution of human capital.
Most workers entering our sample, while less experienced, were otherwise more highly skilled, a
difference which can be attributed almost exclusively to unobservables. Nevertheless, compared
to exiters and continuers, entrants exhibited a greater tendency to match to firms paying below
average internal wages. Firms reduced employment shares of low skilled workers and increased
employment shares of high skilled workers in virtually every industry. Our results strongly suggest
that the distribution of human capital will continue to shift to the right, implying a continuing
up-skilling of the employed labor force.
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Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
September 2009
Working Paper Number:
CES-09-24
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible for increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across offices changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a 'hierarchical production function' in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We find that coordination costs fell broadly and steadily during this period, so that hiring one's first associate leveraged a partner's skill by about 30% more in 1992 than 1977. We find also that changes in lawyers' hierarchical organization account for about 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. These findings indicate that new organizational efficiencies potentially explain increases in inequality, especially among individuals toward the top of the earnings distribution.
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Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data
March 2002
Working Paper Number:
tp-2002-06
In this paper we provide the exact formulas for the direct least squares estimation of statistical models that include both person and firm effects. We also provide an algorithm for determining the estimable functions of the person and firm effects (the identifiable effects). The computational techniques are also directly applicable to any linear two-factor analysis of covariance with two high-dimension non-orthogonal factors. We show that the application of the exact solution does not change the substantive conclusions about the relative importance of person and firm effects in the explanation of log real compensation; however, the correlation between person and firm effects is negative, not weakly positive, in the exact solution. We also provide guidance for using the methods developed in earlier work to obtain an accurate approximation.
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Firm Entry and Exit in the U.S. Retail Sector, 1977-1997
October 2004
Working Paper Number:
CES-04-17
The development of longitudinal micro datasets in recent years has helped economists develop a number of stylized facts about producer dynamics. However, most of the widely cited studies use only manufacturing data. This paper uses the newly constructed Longitudinal Business Database (LBD) to examine producer dynamics in the U.S. the retail sector. The LBD is constructed by linking twenty-six years (1975-2000) of the U.S. Census Bureau's Business Register at the establishment level. The result is a dataset on the universe of employer establishments in the U.S. on an annual basis with detailed geographic, industry, firm ownership, and employment information. We use the LBD to examine patterns of firm entry and exit in the U.S. retail sector. We find that many of the patterns observed by Dunne, Roberts, and Samuelson (1988) are also observed within the retail sector, but interesting and important differences do exist.
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Optimal Firm Size and the Growth of Conglomerate and Single-Industry Firms
October 1998
Working Paper Number:
CES-98-14
We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. We test our model and find that growth of conglomerate and single-segment firms is related to fundamental industry factors and individual firm-segment productivity suggested by our simple neoclassical theory. Conglomerates grow less in a particular segment if their other segments are more productive and if their other segments experience a larger positve demand shock. We find that the growth rates of peripheral segments are very sensitive to relative productivity an that conglomerate sharply cut the growth of unproductive peripheral segments. We do find some evidence consistent with agency problems for conglomerate firms that are broken up. However, the majority of conglomerate firms exhibit growth across business segments that is consistent with optimal behavior.
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Entry, Exit, and the Determinants of Market Structure
September 2009
Working Paper Number:
CES-09-23
Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly.
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Decomposing the Sources of Earnings Inequality: Assessing the Role of Reallocation
September 2010
Working Paper Number:
CES-10-32
This paper uses matched employer-employee data from the U.S. Census Bureau to investigate the contribution of worker and firm reallocation to changes in wage inequality within and across industries between 1992 and 2003. We find that the entry and exit of firms and the sorting of workers and firms based on underlying worker skills are important sources of changes in earnings distributions over time. Our results suggest that the underlying dynamics driving changes in earnings inequality are complex and are due to factors that cannot be measured in standard cross-sectional data.
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Geographic Concentration as a Dynamic Process
March 1998
Working Paper Number:
CES-98-03
This degree of geographic concentration of individual manufacturing industries in the U.S. has declined only slightly in the last twenty years. At the same time, new plant births, plant expansions, contractions and closures have shifted large quantities of employment across plants, firms and locations. This paper uses data from the Census Bureau's Longitudinal Research Database to examine how relatively stable levels of geographic concentration emerge from this dynamic process. While industries agglomeration levels tend to remain fairly constant we find that there is a greater variation in the locations of these agglomerations. We then decompose aggregate concentration changes into portions attributable to plant births, expansions, contractions, and closures, and find that the location choices of new firms and differences in growth rates have played the most significant role in reducing levels of geographic concentration, while plant closures have tended to reinforce agglomeration. Finally, we look at coagglomeration patterns to test three of Marshall's theories of industry agglomeration: (1) agglomeration saves transport costs by proximity to input suppliers or final consumers, (2) agglomeration allows for labor market pooling, and (3) agglomeration facilitates intellectual spillovers. While there is some truth behind all three theories, we find that industrial location is far more driven by labor mix than by any of the other explanatory variables.
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U.S. Long-Term Earnings Outcomes by Sex, Race, Ethnicity, and Place of Birth
May 2021
Working Paper Number:
CES-21-07R
This paper is part of the Global Income Dynamics Project cross-country comparison of earnings inequality, volatility, and mobility. Using data from the U.S. Census Bureau's Longitudinal Employer-Household Dynamics (LEHD) infrastructure files we produce a uniform set of earnings statistics for the U.S. From 1998 to 2019, we find U.S. earnings inequality has increased and volatility has decreased. The combination of increased inequality and reduced volatility suggest earnings growth differs substantially across different demographic groups. We explore this further by estimating 12-year average earnings for a single cohort of age 25-54 eligible workers. Differences in labor supply (hours paid and quarters worked) are found to explain almost 90% of the variation in worker earnings, although even after controlling for labor supply substantial earnings differences across demographic groups remain unexplained. Using a quantile regression approach, we estimate counterfactual earnings distributions for each demographic group. We find that at the bottom of the earnings distribution differences in characteristics such as hours paid, geographic division, industry, and education explain almost all the earnings gap, however above the median the contribution of the differences in the returns to characteristics becomes the dominant component.
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The Role of Start-Ups in StructuralTransformation
January 2016
Working Paper Number:
CES-16-38
The U.S. economy has been going through a striking structural transformation'the secular reallocation of employment across sectors'over the past several decades. We propose a decomposition framework to assess the contributions of various margins of firm dynamics to this shift. Using firm-level data, we find that at least 50 percent of the adjustment has been taking place along the entry margin, owing to sectors receiving shares of start-up employment that differ from their overall employment shares. The rest is mostly the result of life cycle differences across sectors. Declining overall entry has a small but growing effect of dampening structural transformation.
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