Must-Read: Jason Furman and Peter Orszag: A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Must-Read: Jason Furman and Peter Orszag: A Firm-Level Perspective on the Role of Rents in the Rise in Inequality: “In Joe [Stiglitz]’s honor, we thought it appropriate to collaborate on a paper…

…that explores two of his core interests: the rise in inequality and how the assumption of a perfectly competitive marketplace is often misguided. Joe has been a leading advocate of the hypothesis that the rising prevalence of economic rents—-payments to factors of production above what is required to keep them in the market—and the shift of those rents away from labor and towards capital has played a critical role in the rise in inequality (Stiglitz 2012). The aggregate data are directionally consistent…. But this aggregate story does not fully explain the timing and magnitude of the increase in inequality…. This paper… argue[s] that there has been a trend of increased dispersion of returns to capital across firms, with an increasingly large fraction of firms getting returns over 10, 20 or 30 percent annually–a trend that somewhat precedes the shift in the profit share.

Longstanding evidence (e.g. Krueger and Summers 1988) has documented substantial inter-industry differentials in pay–a mid-level analyst may have the same marginal product wherever he or she works but is paid more at a high-return company than at a low-return company. Newer evidence (Barth et al. 2014 and Song et al. 2015) suggests that much of the rise in earnings inequality represents the increased dispersion of earnings between firms rather than within firms. This is consistent with the combination of a rising dispersion of returns at the firm level and the inter-industry pay differential model, as well as with the notion that firms are wage setters rather than wage takers in a less-than-perfectly-competitive marketplace…