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Private Equity and Workers: Modeling and Measuring Monopsony, Implicit Contracts, and Efficient Reallocation
June 2025
Working Paper Number:
CES-25-37
We measure the real effects of private equity buyouts on worker outcomes by building a new database that links transactions to matched employer-employee data in the United States. To guide our empirical analysis, we derive testable implications from three theories in which private equity managers alter worker outcomes: (1) exertion of monopsony power in concentrated markets, (2) breach of implicit contracts with targeted groups of workers, including managers and top earners, and (3) efficient reallocation of workers across plants. We do not find any evidence that private equity-backed firms vary wages and employment based on local labor market power proxies. Wage losses are also very similar for managers and top earners. Instead, we find strong evidence that private equity managers downsize less productive plants relative to productive plants while simultaneously reallocating high-wage workers to more productive plants. We conclude that post-buyout employment and wage dynamics are consistent with professional investors providing incentives to increase productivity and monitor the companies in which they invest.
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Impact Investing and Worker Outcomes
May 2025
Working Paper Number:
CES-25-30
Impact investors claim to distinguish themselves from traditional venture capital and growth equity investors by also pursuing environmental, social, and governance (ESG) objectives. Whether they successfully do so in practice is unclear. We use confidential Census Bureau microdata to assess worker outcomes across portfolio companies. Impact investors are more likely than other private equity firms to fund businesses in economically disadvantaged areas, and the performance of these companies lags behind those held by traditional private investors. We show that post-funding impact-backed firms are more likely to hire minorities, unskilled workers, and individuals with lower historical earnings, perhaps reflecting the higher representation of minorities in top positions. They also allocate wage increases more favorably to minorities and rank-and-file workers than VC-backed firms. Our results are consistent with impact investors and their portfolio companies acting according to non-pecuniary social goals and thus are not consistent with mere window dressing or cosmetic changes.
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Re-assessing the Spatial Mismatch Hypothesis
April 2025
Working Paper Number:
CES-25-23
We use detailed location information from the Longitudinal Employer-Household Dynamics (LEHD) database to develop new evidence on the effects of spatial mismatch on the relative earnings of Black workers in large US cities. We classify workplaces by the size of the pay premiums they offer in a two-way fixed effects model, providing a simple metric for defining 'good' jobs. We show that: (a) Black workers earn nearly the same average wage premiums as whites; (b) in most cities Black workers live closer to jobs, and closer to good jobs, than do whites; (c) Black workers typically commute shorter distances than whites; and (d) people who commute further earn higher average pay premiums, but the elasticity with respect to distance traveled is slightly lower for Black workers. We conclude that geographic proximity to good jobs is unlikely to be a major source of the racial earnings gaps in major U.S. cities today.
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Driving the Gig Economy
August 2024
Working Paper Number:
CES-24-42
Using rich administrative tax data, we explore the effects of the introduction of online ridesharing platforms on entry, employment and earnings in the Taxi and Limousine Services industry. Ridesharing dramatically increased the pace of entry of workers into the industry. New entrants were more likely to be young, female, White and U.S. born, and to combine earnings from ridesharing with wage and salary earnings. Displaced workers have found ridesharing to be a substantially more attractive fallback option than driving a taxi. Ridesharing also affected the incumbent taxi driver workforce. The exit rates of low-earning taxi drivers increased following the introduction of ridesharing in their city; exit rates of high-earning taxi drivers were little affected. In cities without regulations limiting the size of the taxi fleet, both groups of drivers experienced earnings losses following the introduction of ridesharing. These losses were ameliorated or absent in more heavily regulated markets.
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Employer Dominance and Worker Earnings in Finance
August 2024
Working Paper Number:
CES-24-41
Large firms in the U.S. financial system achieve substantial economic gains. Their dominance sets them apart while also raising concerns about the suppression of worker earnings. Utilizing administrative data, this study reveals that the largest financial firms pay workers an average of 30.2% more than their smallest counterparts, significantly exceeding the 7.9% disparity in nonfinance sectors. This positive size-earnings relationship is consistently more pronounced in finance, even during the 2008 crisis or compared to the hightech sector. Evidence suggests that large financial firms' excessive gains, coupled with their workers' sought-after skills, explain this distinct relationship.
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Interpreting Cohort Profiles of Lifecycle Earnings Volatility
April 2024
Working Paper Number:
CES-24-21
We present new estimates of earnings volatility over time and the lifecycle for men and women by race and human capital. Using a long panel of restricted-access administrative Social Security earnings linked to the Current Population Survey, we estimate volatility with both transparent summary measures, as well as decompositions into permanent and transitory components. From the late 1970s to the mid 1990s there is a strong negative trend in earnings volatility for both men and women. We show this is driven by a reduction in transitory variance. Starting in the mid 1990s there is relative stability in trends of male earnings volatility because of an increase in the variance of permanent shocks, especially among workers without a college education, and a more attenuated trend decline among women. Cohort analyses indicate a strong U-shape pattern of volatility over the working life, which comes from large permanent shocks early and later in the lifecycle. However, this U-shape shifted downward and leftward in more recent cohorts, the latter from the fanning out of lifecycle transitory volatility in younger cohorts. These patterns are more pronounced among White men and women compared to Black workers.
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Granular Income Inequality and Mobility using IDDA: Exploring Patterns across Race and Ethnicity
November 2023
Working Paper Number:
CES-23-55
Shifting earnings inequality among U.S. workers over the last five decades has been widely stud ied, but understanding how these shifts evolve across smaller groups has been difficult. Publicly available data sources typically only ensure representative data at high levels of aggregation, so they obscure many details of earnings distributions for smaller populations. We define and construct a set of granular statistics describing income distributions, income mobility and con ditional income growth for a large number of subnational groups in the U.S. for a two-decade period (1998-2019). In this paper, we use the resulting data to explore the evolution of income inequality and mobility for detailed groups defined by race and ethnicity. We find that patterns identified from the universe of tax filers and W-2 recipients that we observe differ in important ways from those that one might identify in public sources. The full set of statistics that we construct is available publicly as the Income Distributions and Dynamics in America, or IDDA, data set.
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The Economic Geography of Lifecycle Human Capital Accumulation: The Competing Effects of Labor Markets and Childhood Environments
November 2023
Working Paper Number:
CES-23-54
We examine how place shapes the production of human capital across the lifecycle. We ask: do those places that most effectively produce human capital in childhood also have local labor markets that do so in adulthood? We begin by modeling wages across place as driven by 1) location-specific wage premiums, 2) adult human capital accumulation due to local labor market exposure, and 3) childhood human capital accumulation. We construct estimates of location wage premiums using AKM style estimates of movers across US commuting zones and validate these estimates using evidence from plausibly exogenous out migration from New Orleans in response to Hurricane Katrina. Next, we examine differential earnings trajectories among movers to construct estimates of human capital accumulation due to labor market exposure. We validate these estimates using wage changes of multi-time movers. Finally, we estimate the impact of place on childhood human capital production using age variation in moves during childhood. Crucially, our estimates of location wage premiums and adult human capital accumulation allow us to construct estimates of the causal effect of place during childhood that are not confounded by correlated labor market exposure. Using these estimates, we show there is a tradeoff between those places that most effectively produce human capital in childhood and the local labor markets that do so in adulthood. We find that each 1-rank increase in earnings due to adult labor market exposure trades off with a 0.43 rank decrease in earnings due to the local childhood environment. This pattern is closely linked to city size, as adult human capital accumulation generally increases with city size, while childhood human capital accumulation falls. These divergent trajectories are associated with differences in both the physical structure of cities and the nature of social interaction therein. There is no tradeoff present in the largest cities, which provide greater exposure to high-wage earners and higher levels of local investment. Finally, we examine how these patterns are reflected in local rents. Location wage premia are heavily capitalized into rents, but the determinants of lifecycle human capital accumulation are not.
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Labor Market Segmentation and the Distribution of Income: New
Evidence from Internal Census Bureau Data
August 2023
Working Paper Number:
CES-23-41
In this paper, we present new findings that validate earlier literature on the apparent segmentation of the US earnings distribution. Previous contributions posited that the observed distribution of earnings combined two or three distinct signals and was thus appropriately modeled as a finite mixture of distributions. Furthermore, each component in the mixture appeared to have distinct distributional features hinting at qualitatively distinct generating mechanisms behind each component, providing strong evidence for some form of labor market segmentation. This paper presents new findings that support these earlier conclusions using internal CPS ASEC data spanning a much longer study period from 1974 to 2016. The restricted-access internal data is not subject to the same level of top-coding as the public-use data that earlier contributions to the literature were based on. The evolution of the mixture components provides new insights about changes in the earnings distribution including earnings inequality. In addition, we correlate component membership with worker type to provide a tacit link to various theoretical explanations for labor market segmentation, while solving the problem of assigning observations to labor market segments a priori.
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The Spillover Effects of Top Income Inequality
June 2023
Working Paper Number:
CES-23-29
Top income inequality in the United States has increased considerably within occupations. This phenomenon has led to a search for a common explanation. We instead develop a theory where increases in income inequality originating within a few occupations can 'spill over' through consumption into others. We show theoretically that such spillovers occur when an occupation provides non divisible services to consumers, with physicians our prime example. Examining local income inequality across U.S. regions, the data suggest that such spillovers exist for physicians, dentists, and real estate agents. Estimated spillovers for other occupations are consistent with the predictions of our theory.
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