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What Do Establishments Do When Wages Increase?
Evidence from Minimum Wages in the United States
November 2019
Working Paper Number:
CES-19-31
I investigate how establishments adjust their production plans on various margins when wage rates increase. Exploiting state-by-year variation in minimum wage, I analyze U.S. manufacturing plants' responses over a 23-year period. Using instrumental variable method and Census Microdata, I find that when the hourly wage of production workers increases by one percent, manufacturing plants reduce the total hours worked by production workers by 0.7 percent and increase capital expenditures on machinery and equipment by 2.7 percent. The reduction in total hours worked by production workers is driven by intensive-margin changes. The estimated elasticity of substitution between capital and labor is 0.85. Following the wage increases, no statistically significant changes emerge in revenue, materials or total factor productivity. Additionally, I nd that when wage rates increase, establishments are more likely to exit the market. Finally, I provide evidence that when the minimum wage increases the wages of some of the establishments in a firm, the firm also increases the wages for its other establishments.
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Downward Nominal Wage Rigidity in the United States:
New Evidence from Worker-Firm Linked Data
February 2019
Working Paper Number:
CES-19-07
This paper examines the extent and consequences of Downward Nominal Wage Rigidity (DNWR) using administrative worker-firm linked data from the Longitudinal Employer Household Dynamics (LEHD) program for a large representative U.S. state. Prior to the Great Recession, only 7-8% of job stayers are paid the same nominal hourly wage rate as one year earlier - substantially less than previously found in survey-based data - and about 20% of job stayers experience a wage cut. During the Great Recession, the incidence of wage cuts increases to 30%, followed by a large rise in the proportion of wage freezes to 16% as the economy recovers. Total earnings of job stayers exhibit even fewer zero changes and a larger incidence of reductions than hourly wage rates, due to systematic variations in hours worked. The results are consistent with concurrent findings in the literature that reductions in base pay are exceedingly rare but that firms use different forms of non-base pay and variations in hours worked to flexibilize labor cost. We then exploit the worker-firm link of the LEHD and find that during the Great Recession, firms with indicators of DNWR reduced employment by about 1.2% more per year. This negative effect is driven by significantly lower hiring rates and persists into the recovery. Our results suggest that despite the relatively large incidence of wage cuts in the aggregate, DNWR has sizable allocative consequences.
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Labor Market Concentration, Earnings Inequality, and Earnings Mobility
September 2018
Working Paper Number:
carra-2018-10
Using data from the Longitudinal Business Database and Form W-2, I document trends in local industrial concentration from 1976 through 2015 and estimate the effects of that concentration on earnings outcomes within and across demographic groups. Local industrial concentration has generally been declining throughout its distribution over that period, unlike national industrial concentration, which declined sharply in the early 1980s before increasing steadily to nearly its original level beginning around 1990. Estimates indicate that increased local concentration reduces earnings and increases inequality, but observed changes in concentration have been in the opposite direction, and the magnitude of these effects has been modest relative to broader trends; back-of-the-envelope calculations suggest that the 90/10 earnings ratio was about six percent lower and earnings were about one percent higher in 2015 than they would have been if local concentration were at its 1976 level. Within demographic subgroups, most experience mean earnings reductions and all experience increases in inequality. Estimates of the effects of concentration on earnings mobility are sensitive to specification.
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The Distributional Effects of Minimum Wages: Evidence from Linked Survey and Administrative Data
March 2018
Working Paper Number:
carra-2018-02
States and localities are increasingly experimenting with higher minimum wages in response to rising income inequality and stagnant economic mobility, but commonly used public datasets offer limited opportunities to evaluate the extent to which such changes affect earnings growth. We use administrative earnings data from the Social Security Administration linked to the Current Population Survey to overcome important limitations of public data and estimate effects of the minimum wage on growth incidence curves and income mobility profiles, providing insight into how cross-sectional effects of the minimum wage on earnings persist over time. Under both approaches, we find that raising the minimum wage increases earnings growth at the bottom of the distribution, and those effects persist and indeed grow in magnitude over several years. This finding is robust to a variety of specifications, including alternatives commonly used in the literature on employment effects of the minimum wage. Instrumental variables and subsample analyses indicate that geographic mobility likely contributes to the effects we identify. Extrapolating from our estimates suggests that a minimum wage increase comparable in magnitude to the increase experienced in Seattle between 2013 and 2016 would have blunted some, but not nearly all, of the worst income losses suffered at the bottom of the income distribution during the Great Recession.
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Does Federally-Funded Job Training Work? Nonexperimental Estimates of WIA Training Impacts Using Longitudinal Data on Workers and Firms
January 2018
Working Paper Number:
CES-18-02
We study the job training provided under the US Workforce Investment Act (WIA) to adults and dislocated workers in two states. Our substantive contributions center on impacts estimated non-experimentally using administrative data. These impacts compare WIA participants who do and do not receive training. In addition to the usual impacts on earnings and employment, we link our state data to the Longitudinal Employer-Household Dynamics (LEHD) data at the US Census Bureau, which allows us to estimate impacts on the characteristics of the firms at which participants find employment. We find moderate positive impacts on employment, earnings and desirable firm characteristics for adults, but not for dislocated workers. Our primary methodological contribution consists of assessing the value of the additional conditioning information provided by the LEHD relative to the data available in state Unemployment Insurance (UI) earnings records. We find that value to be zero.
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The Employee Clientele of Corporate Leverage: Evidence from Personal Labor Income Diversification
January 2018
Working Paper Number:
CES-18-01
Using employee job-level data, we empirically test the equilibrium matching between a firm's debt usage and its employee job risk aversion ('clientele effect'), as predicted by the existing theories. We measure job risk aversion for a firm's employees using their labor income concentration in the firm, calculated as the fraction of the employees' total personal labor income or total household labor
income that is accounted for by their income from this particular firm. Using a sample of about 1,400 U.S. public firms from 1990-2008, we find a robust negative relation between leverage and employee job risk aversion, which is consistent with the clientele effect. Specifically, when a firm's existing employees have higher labor income concentration in it, the firm tends to have lower contemporaneous and future leverage. Moreover, in terms of new hires, firms with lower leverage are more likely to recruit employees with less alternative labor income. Our results continue to hold after we control for firm fixed effects, other employee characteristics such as wages, gender, age, race, and education, and managerial risk attitudes. Further, the matching between a firm's leverage and its workers' labor income concentration in it is more pronounced for firms with higher labor intensity and those in financial distress.
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The Parental Gender Earnings Gap in the United States
January 2017
Working Paper Number:
CES-17-68
This paper examines the parental gender earnings gap, the within-couple differences in earnings over time, before and after the birth of a child. The presence and timing of children are important components of the gender wage gap, but there is selection in both decisions. We estimate the earnings gap between male and female spouses over time, which allows us to control for this timing choice as well as other shared external earnings shifters, such as the local labor market. We use Social Security Administration Detail Earnings Records (SSA-DER) data linked to the Survey of Income and Program Participation (SIPP) to examine a panel of earnings from 1978 to 2011 for the individuals in the SIPP sample. Our main results show that the spousal earnings gap doubles between two years before the birth of the first child and the year after that child is born. After the child's first year of life the gap continues to grow for the next five years, but at a much slower rate, then tapers off and even begins to fall once the child reaches school-age.
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Ranking Firms Using Revealed Preference
January 2017
Working Paper Number:
CES-17-61
This paper estimates workers' preferences for firms by studying the structure of employer-toemployer transitions in U.S. administrative data. The paper uses a tool from numerical linear algebra to measure the central tendency of worker flows, which is closely related to the ranking of firms revealed by workers' choices. There is evidence for compensating differential when workers systematically move to lower-paying firms in a way that cannot be accounted for by layoffs or
differences in recruiting intensity. The estimates suggest that compensating differentials account
for over half of the firm component of the variance of earnings.
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Sorting Between and Within Industries: A Testable Model of Assortative Matching
January 2017
Working Paper Number:
CES-17-43
We test Shimer's (2005) theory of the sorting of workers between and within industrial sectors based on directed search with coordination frictions, deliberately maintaining its static general equilibrium framework. We fit the model to sector-specific wage, vacancy and output data, including publicly-available statistics that characterize the distribution of worker and employer wage heterogeneity across sectors. Our empirical method is general and can be applied to a broad class of assignment models. The results indicate that industries are the loci of sorting-more productive workers are employed in more productive industries. The evidence confirm that strong assortative matching can be present even when worker and employer components of wage heterogeneity are weakly correlated.
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Earnings Inequality and Mobility Trends in the United States: Nationally Representative Estimates from Longitudinally Linked Employer-Employee Data
January 2017
Working Paper Number:
CES-17-24
Using earnings data from the U.S. Census Bureau, this paper analyzes the role of the employer in explaining the rise in earnings inequality in the United States. We first establish a consistent frame of analysis appropriate for administrative data used to study earnings inequality. We show that the trends in earnings inequality in the administrative data from the Longitudinal Employer-Household Dynamics Program are inconsistent with other data sources when we do not correct for the presence of misused SSNs. After this correction to the worker frame, we analyze how the earnings distribution has changed in the last decade. We present a decomposition of the year-to-year changes in the earnings distribution from 2004-2013. Even when simplifying these flows to movements between the bottom 20%, the middle 60% and the top 20% of the earnings distribution, about 20.5 million workers undergo a transition each year. Another 19.9 million move between employment and nonemployment. To understand the role of the firm in these transitions, we estimate a model for log earnings with additive fixed worker and firm effects using all jobs held by eligible workers from 2004-2013. We construct a composite log earnings firm component across all jobs for a worker in a given year and a non-firm component. We also construct a skill-type index. We show that, while the difference between working at a low-or middle-paying firm are relatively small, the gains from working at a top-paying firm are large. Specifically, the benefits of working for a high-paying firm are not only realized today, through higher earnings paid to the worker, but also persist through an increase in the probability of upward mobility. High-paying firms facilitate moving workers to the top of the earnings distribution and keeping them there.
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