Worthy reads from Equitable Growth:

1. Submit! The deadline for Equitable Growth’s Request for Proposals is January 31!
2. Read “In Conversation with Atif Mian” to understand how to do micro foundations right. In his conversation with Heather Boushey, Mian says: “Our number of theories is much larger than the number of observations we have, which is a limiting factor of macroeconomics just from an empirical standpoint … This is where I feel micro data comes in … Let me just give you one quick example … The 2000s … you see credit going up, you see aggregate income going up as well … If it were higher incomes that were driving credit growth, then since income growth is concentrated in the top 1 percent, we should really expect the top 1 percent to borrow a lot more … Yet that clearly was not the case. So, even a basic breakdown of the data along a more micro level starts to give you a lot more insights than you might be able to deduce from just looking at the macro aggregates.”
3. Let me hoist this column by Kate Bahn from last year, in which she summarizes the evidence that imposing work requirements simply does not work because it has none of the benefits that people wish that it would have and all of the drawbacks you can think of. In “Work Requirements for U.S. Public Assistance Programs Don’t Work,” she explains: “Analysis from the Center on Budget and Policy Priorities finds that imposing work requirements simply doesn’t work. One reason is because increased red tape may lead to eligible recipients losing their benefits even though they are eligible for them. People with volatile work hours or who hold multiple jobs may have a hard time collecting and submitting sufficient documentation to demonstrate they are working regularly. As CBPP points out, completing work-requirement red tape is even harder for self-employed workers, which should be cause for concern as gig-based employment becomes more prevalent.”
4. Read Liz Hipple on where the labor market is failing—and on how we have learned about these failures from economic research and could learn useful things about other market failures if only we spent more money getting better data. In “U.S. Economic Policies That Are Pro-Work and Pro-Worker,” she observes: “The Measuring Real Income Growth Act, introduced by Senate Minority Leader Chuck Schumer (D-NY), would allow policymakers to see which income segments, demographic groups, and geographic areas of the country are actually experiencing economic growth by disaggregating the Gross Domestic Product statistics that the federal government produces. This is a key first step to better measuring … There are clearly ways that policy could be doing a better job … Unpredictable schedules, the lack of paid leave, and monopsony power are all examples of areas where research shows that breakdowns in the market.”

Worthy reads not from Equitable Growth:

1. Is employer-side monopsony the reason effective labor demand appears to be so inelastic when increases in the minimum wage are concerned? Or are we just not being creative enough? And why does the idea that in America today, minimum-wage increases are “job killers” continue to have rhetorical purchase? Read Doruk Cengiz, Arindrajit Dube, Attila Lindner, and Ben Zipperer in their working paper “The Effect of Minimum Wages on Low-Wage Jobs: Evidence from the United States Using a Bunching Estimator,” in which they write: “Infer[ring] the employment effect of a minimum-wage increase by comparing the number of excess jobs paying at or slightly above the new minimum wage to the missing jobs paying below it … using 138 prominent state-level minimum wage changes between 1979 and 2016 … we find that the overall number of low-wage jobs remained essentially unchanged over 5 years following the increase. At the same time, the direct effect of the minimum wage on average earnings was amplified by modest wage spillovers at the bottom of the wage distribution.”
2. Back in the depths of the Great Recession, employers said that they wanted, needed, and required college graduates and the highly experienced. But what they meant was that they thought high unemployment meant that they could get overqualified workers when they went to the labor market. Now that unemployment has fallen, these needs and requirements have vanished. Employers still want overqualified workers. But they are no longer asking for them because they no longer expect to be able to get them. Read Matthew Yglesias, “The “Skills Gap” Was a Lie,” in which he writes: “The skeptics were right … employers responded to high unemployment by making their job descriptions more stringent. When unemployment went down thanks to the demand-side recovery, suddenly employers got more relaxed again … The skills gap was the consequence of high unemployment rather than its cause. With workers plentiful, employers got choosier. Rather than investing in training workers, they demanded lots of experience and educational credentials. And while job skills are obviously important, when the labor market is healthy employers have incentives to try to impart skills to workers rather than posting advertorial content about how the government should fix this problem for them.”
3. Adam Tooze attributes to me the idea that many of the problems of the past decade stem from the fact that we had “the wrong crisis” and that we then, in large part, reacted to the crisis we had expected but did not, in fact, have. But I think this point is more Matt’s than mine. Read Matthew Yglesias, “The Crisis We Should Have Had,” in which he writes: “The U.S. economy from 2002-2006 … someday soon, the capital flows would come to an end … the value of the dollar would crash, restraining inflation would require high interest rates, and the U.S. economy would feature a period of painful restructuring … Sections of Tyler Cowen’s The Great Stagnation” are about the crisis we should have had … Spence’s “The Next Convergence” … Stiglitz’s recent Vanity Fair article … Mandel’s piece on the myth of American productivity … I can name others … [and] an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That’s why long-term fiscal austerity is important and why there was no ‘holy crap the economy’s falling apart, let’s forget about comprehensive reform of the health, energy, and education sectors’ moment back in 2009.”
4. Increasing attention to leverage cycles and collateral valuations as sources of macroeconomic risk seems to be very welcome. Leverage and trend-chasing are the two major sources of demand-for-assets curves that slope the wrong way: When prices drop demand falls, either because you need to liquidate in order to repay now-undercollateralized loans or because you do not want to be long in a bear market. And there is every reason to think the government need to take very strong steps to make effective demand curves slope the proper way. Read Felix Martin, “Will there be another crash in 2019?” in which he writes: “One important detail is that this effect is achieved not only directly, by adjusting the cost of borrowing, but also indirectly by making assets cheaper or more expensive. When the interest rate available from the central bank falls, other, higher-yielding assets become more attractive—so their prices get pushed up. When the policy rate rises, by contrast, alternative assets look relatively less alluring—so they are sold down, until their price falls enough to entice savers back. Because borrowing at any scale depends not just on cost but on collateral, this valuation effect of monetary policy constitutes a second important channel of its effectiveness. When interest rates fall, the value of capital assets used as collateral for loans—be they shares, intellectual property, or real estate—inflates. As a result, credit becomes not only cheaper to service, but easier to access.”
5. The disjunction between beliefs in the market community and among policymakers makes me most worried about the business cycle outlook. Market observers understand how and what the Federal Reserve believes but are right now betting that events will give it a shock and force it to reverse policy. Such confidence that reality will give a shock that policymakers will not be able to ignore is worrisome. Read Muhammed El-Erian, “Why Fed and Markets Don’t Agree on Prospects for Interest Rates,” in which he writes: “The markets, anticipating no hikes this year and cuts thereafter, estimate the Fed Funds rate in 2020 a full percentage point below the median of the central bank’s dots … There simply isn’t enough data as yet to point with a high degree of confidence to a dominating explanation or combination of explanations … historically based analytical models may not be sufficiently structurally robust to capture this moment.”

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Several Equitable Growth staffed traveled to the Allied Social Science Association’s annual conference to learn about new research on economic issues across a broad spectrum. Liz Hipple compiled a round up of key research papers presented each day of the conference with a different set of papers informing many of the issues on which Equitable Growth works.

Brad DeLong rounds up his latest worthy reads on equitable growth from both inside and outside Equitable Growth.

Kate Bahn and Austin Clemens this week published their monthly analysis of the Job Openings and Labor Turnover Survey data released by the U.S. Bureau of Labor Statistics. The JOLTS data reflects a strengthened labor market characterized by elevated quit rates, fewer unemployed workers per job vacancy, and fewer hires per job opening.

Equitable Growth’s executive director and chief economist, Heather Boushey, was quoted in Claire Cain Miller and Jim Tankersley’s piece on California Governor Gavin Newsom’s proposal to give families six months of paid leave after the birth of a child and raises questions on how the proposal would be paid for. Boushey raises the point that “because we refuse to acknowledge that people have families and care issues, we’re falling behind our economic competitors.”

Links from around the web

Emily Badger and Quoctrung Bui examine whether low-skilled workers should still be flocking to cities. The duo examines the flight of low-skill jobs out of cities such as Detroit and Oakland despite workers moving into these cities for decades with the promise of abundant jobs paying decent wages. (nyt)

Newly elected Representative Alexandria Ocasio-Cortez (D-NY) floated the idea of taxing income over $10 million at a 70 percent tax rate. Jeff Stein finds that over the course of a decade, the government could raise $720 billion from nearly 16,000 Americans who earn over that threshold. (washingtonpost)

Jeff Spross argues why he believes California Governor Gavin Newsom’s new family leave plan could become a model for the rest of the country. Spross points out that Newsome’s proposal could force other states to reexamine their own policies and spark new dialogue among companies and the federal government about how to move forward on an issue that has large bipartisan support. (theweek)

Raising the minimum wage is already gaining traction as a policy priority for the 116th Congress but what are the broader consequences of doing so? Jonathan Meer examines the long-term impact of raising the minimum wage as the U.S. economy responds to the change. (econofact)

The U.S. economic recovery is nearly 10 years old, but a downturn at some point is inevitable. When that might happen is the question that Matt O’Brien attempts to tackle. He discusses what policies and decisions were taking place just before the Great Recession and how little has changed to avoid the same mistakes. (washingtonpost)

Friday Figure

Figure is from “Equitable Growth’s JOLTS Day Graphs: November 2018 Report Edition”

Worthy reads from Equitable Growth:

1. This is the word on how the government ought to analyze proposed tax regulations. It is indeed true, as Greg Leiserson and Adam Looney say, that the focus should be on revenues raised for the government and burdens imposed on the compliers. It is indeed true, as Greg and Adam argue, that there is no point in the government drawing a bottom line—there is insufficient consensus on the social value of revenues and on the appropriate distribution of burdens for such a bottom line to be at all useful. The agencies should set out the pieces of the analysis. They should leave other political actors to use the pieces and their own values to assemble their own estimates of net benefits or net costs: Read their analysis, “A Framework for Economic Analysis of Tax Regulations,” in which they write: “Treasury and the IRS should conduct a formal economic analysis … [a] for regulations that implement recent tax legislation … if they have substantial discretion in designing the regulation and if different ways of doing so would vary substantially in their economic effects. … [b] for regulations unrelated to recent legislation … if the regulation would have large economic effects relative to current practice.”
2. The ongoing replacement of the multidivisional firm by what David Weil calls the “fissured workplace” is one of the most important ongoing changes in the U.S. economy. It undermines the social policy strategy started by John Dunlop and the War Labor Board in the 1940s to use employers as intermediaries to deliver egalitarian social insurance benefits. If you have not read his book, The Fissured Workplace, then you should, but if you want a taste of its contents, read “In Conversation with David Weil” at Equitable Growth, in which he says: “Franchising started to spread … a form of business organization that allows you to shed and yet control … Information technology facilitated this because you have lower-cost mechanisms to monitor subsidiary organizations … The end result is you have broken apart the employment relationships … [not] just about employers trying to weasel out of their responsibilities … The difficulty of unwinding that behavior or changing that behavior in some way to deal with the consequences in the labor market.”
3. The Solow Growth Model became economists’ workhorse because it delivered the “Kaldor Facts” as immediate consequences of its specification. As long as those Kaldor Facts appeared reliable constants of growth, the Solow Growth Model rightly reigned. Starting in 1980, however, the Kaldor Facts ceased to be facts. Yet the Solow Growth Model continues to be what economists teach and use. This is a problem. Read Gauti Eggertsson, Jacob A. Robbins, and Ella Getz Wold. “Kaldor and Piketty’s facts: The rise of monopoly power in the United States,” in which they write: “The macroeconomic data of the last 30 years has overturned at least two of Kaldor’s famous stylized growth facts: constant interest rates and a constant labor share … Piketty and others … introduced several new and surprising facts: an increase in the financial wealth-to-output ratio … [and] in measured Tobin’s Q, and a divergence between the marginal and the average return on capital … These trends can be explained by an increase in market power and pure profits … along with forces that have led to a persistent long term decline in real interest rates. We make three parsimonious modifications … [and] show that our model can quantitatively match these new stylized macroeconomic facts.”

Worthy reads not from Equitable Growth:

1. This recent working paper by Bryan Kelly, Dimitris Papanikolaou, Amit Seru, and Matt Taddy is a very nice piece of work. Unfortunately, the major conclusion I draw from it is that there is much slippage between numbers of patents on the one hand and true economically relevant innovation on the other. So, I cannot see what conclusions to draw from what is a lot of hard and ingenious work. Read “Measuring Technological Innovation over the Long Run,” in which they write: “We use textual analysis of high-dimensional data from patent documents to create new indicators of technological innovation. We identify significant patents based on textual similarity of a given patent to previous and subsequent work: These patents are distinct from previous work but are related to subsequent innovations.”
2. Trying to blame poor nonwhite people and social democratic governance for the faults of Wall Street seemed, to me, several bridges too far a decade ago. Yet Steve Moore and Larry Kudlow seem to have gained rather than lost influence on the right from their eagerness to do so. The very sharp Barry Ritholtz takes exception. Read his “No, the CRA Did Not Cause the Financial Crisis,” in which he writes: “Two of Donald Trump’s economic advisers, Lawrence Kudlow and Stephen Moore … lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor … Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, ‘Invert, always invert.’”
3. Once again: Wage growth and employment have since 2000 been much better measures of the macroeconomically relevant state of the labor market than the unemployment rate, which our former colleague Nick Bunker—now at Indeed.com—covered in his analysis “Puzzling over U.S. wage growth,” in which he wrote: “The unemployment rate is below its Great Recession levels, but wage growth hasn’t picked up in recent years. The prime employment rate may be a better predictor of wage growth than unemployment rates. The state of U.S. wage growth these days is puzzling. The unemployment rate is below where it was before the Great Recession back in 2007, but nominal wage growth is below its level that year and hasn’t picked up in recent years (according to some data series). For economists and analysts who believe that a tighter labor market should lead to higher wages, this disconnect is confusing.”

Today was the third and last day of the three-day annual meeting of the Allied Social Science Associations. The conference, held in Atlanta this year, features hundreds of sessions covering a wide variety of economics research. Interesting research is all over the place here, so below are some of the papers that caught the attention of Equitable Growth staff during the third day. Included below are the abstracts from those papers as well as links to the sessions at which they were presented. Check out the highlights from day one and day two of the conference.

“Returning to the Promise of Full Employment: A Federal Job Guarantee in the United States”

Mark Paul, New College of Florida; William A. Darity, Duke University; Darrick Hamilton, the Ohio State University; and Anne Price, Insight Center for Community Economic Development

Abstract: We propose the passage of legislation guaranteeing every American over the age of eighteen a job provided by the government through a National Investment Employment Corps (NIEC). The permanent establishment of the NIEC would eliminate persistent involuntary unemployment and improve economic well-being, ensuring that the United States is able to achieve full employment, as outlined by the Full Employment and Balanced Growth Act of 1978. The Federal Job Guarantee (FJG) would provide a job, at wages that lead to a higher standard of living, to all Americans seeking employment. Benefits of a job guarantee would be felt far beyond those directly employed under the NIEC. For one, workers under the program would be providing socially useful goods and services to our society. If history is any guide, we can look at the wonders built under the Works Progress Administration, which employed over 8.5 million unique workers from 1935-1943. Workers could rebuild our crumbling infrastructure, help facilitate our transition to a green economy, provide high quality universal child care and education, and more. Such a policy would fundamentally transform the current labor market in the United States, greatly altering the current power dynamics between labor and capital – particularly for those at the less compensated end of the labor market and traditionally marginalized groups. While worker compensation historically tracked productivity growth, we have witnessed a troubling divergence in their paths since the 1970s. This relationship can be restored through bold policies, such as the Federal Job Guarantee, that empower workers. Indeed, such a program constitutes a direct route to producing full employment by eradicating involuntary unemployment, and reversing the trend of lost worker bargaining power by removing the employer threat of unemployment. Since the Federal Job Guarantee achieves, and maintains, full employment it relaxes some of the burden on the Federal Reserve with regards to its dual mandate of achieving price stability and stimulating the economy. Such a policy reform will effectively allow monetary policy to focus more on stable prices.

“Saving Behavior Across the Wealth Distribution”

Andreas Fagereng, Statistics Norway; Martin Holm, BI Norwegian Business School; Benjamin Moll, Princeton University; and Gisle Natvik, BI Norwegian Business School

Abstract: Do wealthier households save a larger share of their incomes than poorer ones? We use Norwegian administrative panel data on income and wealth to examine how saving rates vary across the wealth distribution. We compare our findings to the prediction of workhorse macro models that saving rates are either independent of or decreasing with wealth. We find that the relation between saving rates and wealth depends on whether saving includes capital gains. Saving rates net of capital gains (“net saving rates”) are approximately constant across the wealth distribution, seemingly consistent with workhorse models. However, saving rates including capital gains (“gross saving rates”) increase markedly with wealth. Since the predictions of economic theories are about gross saving, our findings challenge workhorse models with approximately constant saving rates. In contrast, our empirical findings are consistent with a theory featuring multiple assets and portfolio adjustment frictions.

“The ACA Medicaid Expansion in Michigan and Financial Health”

Sarah Miller, University of Michigan; Luojia Hu, Federal Reserve Bank; Robert Kaestner, University of Chicago; Bhashkar Mazumder, Federal Reserve Bank of Chicago; and Ashley Wong, University of Michigan

Abstract: Medicaid coverage is expected to relieve financial hardships associated with seeking and using medical care. This project evaluates the impact of the Michigan ACA Medicaid expansion, which resulted in the creation of the Healthy Michigan Plan (HMP), on the financial well-being of enrollees. We use a difference-in-differences approach that compares changes in financial outcomes among HMP enrollees prior to the expansion (July 2011- January 2014) and after the expansion (July 2014- January 2016) relative to individuals in low-income zip codes in states that did not adopt the ACA Medicaid expansions. The sample consisted of 282,150 HMP enrollees and 830,181 individuals living in low-income zip codes in non-expansion states. All individuals were linked at the individual-level to their credit reports for a six year period. We also examined the effect of HMP among subgroups based on income level, use of medical services, and presence of a chronic disease during the first 12 months of enrollment. We find that enrollment in HMP was associated with significant and large reductions in the amount of debt sent to a collection agency, the amount of medical debt sent to a collection agency, and the amount of credit market debt 30 days past due or more. Surprisingly, effects were quite consistent across all subgroups, suggesting that the financial benefits of Medicaid enrollment extend to almost all types of enrollees.

“Job search behavior and unemployment insurance”

Andrew Johnston, University of California-Merced, and Maxim Massenkoff, University of California-Berkeley

Abstract: In models of job search, unemployment benefits lengthen unemployment duration by decreasing search effort and increasing job selectivity or the reservation wage, but few studies can shed light on these mechanisms. I provide new evidence on job search behaviors using audits of unemployment insurance claimants surveyed as part of the US Department of Labor’s Benefit Accuracy Management program. When state unemployment is high, claimants have lower reservation wages and search for lower-paying occupations. Reservation wages are strongly predictive of reemployment earnings and, in a regression kink design, I find that they positively respond to unemployment benefits. Search effort (measured by the number of weekly work contacts) and occupational choice show no response to benefits.

“Stalled Racial Progress and Trade in the 1970s and 1980s”

Mary Kate Batistich, Purdue University, and Timothy N. Bond, Purdue University

Abstract: Many of the positive economic trends coming out of the Civil Rights Era for black men stagnated or reversed during the late 1970s and early 1980s. These changes were concurrent with a rapid rise in import competition from Japan. We assess the impact of this trade shock on racial disparities using commuting zone level variation in exposure. We find it decreased black manufacturing employment, labor force participation, and median earnings, and increased public assistance recipiency. However these manufacturing losses for blacks were offset by increased white manufacturing employment. This compositional shift appears to have been caused by skill upgrading in the manufacturing sector. Losses were concentrated among black high school dropouts and gains among college educated whites. We also see a shifting of manufacturing employment towards professionals, engineers, and college educated production workers. We find no evidence the heterogeneous effect of trade can be explained by unionization, prejudice, or changes in spatial mismatch. Our results can explain 66-86% of the relative decrease in black manufacturing employment, 17-23% of the relative rise in black non-labor force participation, and 34-44% of the relative decline in black median male earnings from 1970-1990.

“Discrimination in Hiring: Evidence from Retail”

Alan Benson, University of Minnesota; Simon Board, University of California-Los Angeles; and Moritz Meyer-ter-vehn, University of California-Los Angeles

Abstract: Using data from a major U.S. retailer, we find that black, white and Hispanic managers within the same store are 2-3% more likely to hire workers of their own race. This segregation may be caused by taste-based discrimination, whereby managers intrinsically prefer same-race applicants, or by screening discrimination, whereby managers have better information about same-race applicants. To separate between these hypotheses we use the productivity distributions of commission-based salespeople. We find workers are generally more productive when hired by a same-race manager, and that white and Hispanic workers also have lower productivity variance when hired by a same-race manager, suggesting that screening discrimination is more important than taste-based discrimination.

“The Effect of Residential Evictions on Low-Income Adults”

Robert Collinson, New York University, and Davin Reed, Federal Reserve Bank of Philadelphia

Abstract: Rising rents have increased attention to the consequences of housing instability and evictions. We assemble novel data linking housing court cases in New York City with administrative data from a number of sources and leverage the random assignment of cases to courtrooms to estimate the causal effect of evictions on homelessness, employment, earnings, public assistance receipt, and health. We find that evictions in housing court substantially increase the probability of applying to a homeless shelter and time spent in shelter. Evictions also increase the likelihood of mental hospitalizations and cause an increase in residential instability beyond the initial move-out. We find some evidence that evictions reduce quarterly earnings and employment modestly, but find no effect on receipt of public assistance.

“Economic Institutions and Social Progress”

Daniel Fehder, University of Southern California; Michael E. Porter, Harvard Business School; and Scott Stern, Massachusetts Institute of Technology

Abstract: This paper examines the role of economic institutions and performance in shaping social progress. We define social progress as the dimensions of societal performance not captured by traditional economic measures such as GDP. While a long line of research links the quality of inclusive economic institutions (such as rule of law and non-expropriation) to economic development and GDP, the link between the foundations of economic development and social progress has been largely anecdotal. To assess the relationship between economic institutions and social progress, we construct a measure of social progress that is conceptually independent of GDP, focusing on three core dimensions—basic human needs, foundations of well-being, and opportunity. From a theoretical perspective, the relationship between economic institutions and performance with these alternative dimensions of social progress is subtle. While areas such as basic human needs are likely closely connected to the overall availability of economic resources within a country, areas that depend on the investment choices of individuals and communities (such as education, health, and environmental protection) may not only depend on the availability of economic resources but the presence of inclusive economic institutions. Finally, the relationship between economic factors and the opportunity dimension is ambiguous, as factors enabling individual social freedoms (e.g., freedom of religion) and inclusion (e.g., tolerance towards minorities) may be largely independent of the level of economic development or the nature of purely economic institutions. We explore these ideas by examining how variation in economic institutions and performance across countries and over time is related to changes in social progress and its dimensions over time within countries. In addition to the close cross-sectional correlation between measures of institutional quality such as rule of law, GDP per capita, and social progress, we highlight three core findings. First, the change in social progress between 2014-2017 is associated with improvements in economic performance between 2005-2014, a result drive by the close relationship between economic growth and subsequent improvements in basic human needs. Second, even after controlling for the level and changes in economic performance, changes in economic institutions such as rule of law have a separate impact on subsequent changes in foundations of wellbeing. Finally, there is little empirical relationship between economic institutions and performance, and changes in the opportunity dimension of social progress. Together, these findings highlight the dynamic interplay between economic development and social progress, and the potential for the measurement of social progress to enhance our understanding of the drivers of societal well-being.

Today was the second day of the three-day annual meeting of the Allied Social Science Associations. The conference, held in Atlanta this year, features hundreds of sessions covering a wide variety of economics research. Interesting research is all over the place here, so below are some of the papers that caught the attention of Equitable Growth staff during the second day. Included below are the abstracts from those papers as well as links to the sessions at which they were presented. Check out yesterday’s highlights and come back tomorrow evening for even more.

“The Effect of Political Power on Labor Market Inequality: Evidence from the 1965 Voting Rights Act”

Abhay Aneja, Stanford University, and Carlos F. Avenancio, Massachusetts Institute of Technology’s Global Center for Finance and Policy & Indiana University-Bloomington

Abstract: A central concern for racial and ethnic minorities is having an equal opportunity to advance group interests via the political process. There remains limited empirical evidence, however, whether democratic policies designed to foster political equality are connected causally to social and economic equality. In this paper, we examine whether and how the expansion of minority voting rights contributes to advances in minorities’ economic interests. Specifically, we consider how the political re-enfranchisement of black Americans in the U.S. South, stemming from the passage of the 1965 Voting Rights Act (VRA), contributed to improvements in their relative economic status during the 1960s and 1970s. Using spatial and temporal variation arising from the federal enforcement provision of the VRA, we document that counties where voting rights were more strongly protected experienced larger reductions in the black-white wage gap between 1950 and 1980. We then show how the VRA’s effect on the relative wages of black Americans operates through two demand-side channels. First, the VRA contributed to the expansion of public employment opportunities. Second, in line with previous work on the importance of civil rights laws, the VRA contributed to and complemented the enforcement of labor market policies such as affirmative action and anti-discrimination laws.

“Returns in the Labor Market: A Nuanced View of Penalties at the Intersection of Race and Gender”

Mark Paul, New College of Florida; Khaing Zaw, Duke University; Darrick Hamilton, the Ohio State University; and William A. Darity, Duke University

Abstract: There have been decades of research on wage gaps for groups based on their socially salient identities such as race and gender, but little empirical investigation on the effects of holding multiple identities. Using the Current Population Survey, we provide new evidence on intersectionality and the wage gap. This paper makes two important contributions. First, we find that there is no single “gender” or “race” wage penalty. Second, we present evidence that holding multiple identities cannot readily be disaggregated in an additive fashion. Instead, the penalties associated with the combination of two or more socially marginalized identities interact in multiplicative or quantitatively nuanced ways.

“Anticompetitive Mergers in Labor Markets”

Ioana Elena Marinescu, University of Pennsylvania, and Herbert Hovenkamp, University of Pennsylvania

Abstract: Mergers of competitors are conventionally challenged under the federal antitrust laws when they threaten to lessen competition in some product or service market in which the merging firms sell. Mergers can also injure competition in markets where the firms purchase, including the labor market. Recent empirical work in economics has shown that market concentration is very high in many labor markets and that higher labor market concentration is associated with lower wages. Here, we offer an empirically based legal assessment of the problem of mergers that facilitate anticompetitive wage and salary suppression. We consider the most likely problems that courts will encounter in such litigation, including market definition, assessment of market concentration, the role of non-compete and non-poaching agreements as aggravating factors for concentration, and application of the government’s Merger Guidelines. Given the high level of concentration in many labor markets, a mature policy of pursuing mergers because of harmful effects in labor markets could yield many cases. Courts must be in a position to adequately deal with such cases based on the application of the existing merger review framework to the analysis of anticompetitive effects in the labor market.

“The Impact of Right-to-Work Laws on Worker Wages: Evidence from Collective Bargaining Agreements”

Sudheer Chava, Georgia Institute of Technology; Andras Danis, Georgia Institute of Technology; and Alex Hsu, Georgia Institute of Technology

Abstract: We analyze the impact of the introduction of right-to-work (RTW) laws across the US on wages. After the introduction of RTW laws, there is a decrease in wages negotiated through collective bargaining agreements (CBAs). Further, the number of CBAs decreases, and the gap between the fraction of workers covered by a CBA and the fraction of union members increases. Firms increase investment and employment, and reduce their financial leverage. Our results suggest a decline in union bargaining power after RTW laws are passed, which could be a contributing factor to the recent slowdown in wage growth in the US.

“Demographics and Automation”

Daron Acemoglu, Massachusetts Institute of Technology, and Pascual Restrepo, Boston University

Abstract: We argue theoretically and document empirically that aging leads to greater (industrial) automation, and in particular, to more intensive use and development of robots. Using US data, we document that robots substitute for middle-aged workers (those between the ages of 36 and 55). We then show that demographic change—corresponding to an increasing ratio of older to middle-aged workers—is associated with greater adoption of robots and other automation technologies across countries and with more robotics-related activities across US commuting zones. We also provide evidence of more rapid development of automation technologies in countries undergoing greater demographic change. Our directed technological change model further predicts that the induced adoption of automation technology should be more pronounced in industries that rely more on middle-aged workers and those that present greater opportunities for automation. Both of these predictions receive support from country-industry variation in the adoption of robots. Our model also implies that the productivity implications of aging are ambiguous when technology responds to demographic change, but we should expect productivity to increase and labor share to decline relatively in industries that are most amenable to automation, and this is indeed the pattern we find in the data.

“Complements or Substitutes? Firm-Level Management of Labor and Technology”

Susan R. Helper, Case Western Reserve University; Raphael Raphael Martins, New York University; and Robert Seamans, New York University

Abstract: Labor and technology can be treated as complements or substitutes in a firm’s production function, and the approach can vary across firms. A firm’s adoption of new technologies may therefore have very different implications for labor across different types of firms. In this paper we study how labor in the U.S. automotive supply chain is affected by firm-level adoption of new technologies, including machine vision, robots, sensors and other forms of digitization. We also categorize firm management into two generic types, those pursuing a pragmatist approach and those pursuing a Taylorist approach, and study how effects of adoption vary by these types. We use new data from an in-depth plant-level survey of automation and employment practices in the automotive supply chain conducted in early 2018 that we match to earlier plant-level data from 2011 in some cases.

“When Dad Stays Home: Paternity Leave and Maternal Health”

Maya Rossin-Slater, Stanford University, and Petra Persson, Stanford University

Abstract: A significant share of new mothers experience mental and physical health issues after childbirth, yet the causal drivers of maternal postpartum health are poorly understood. While policy discussions often center on the role of the healthcare system, this paper analyzes whether the presence of the child’s father in the home post-childbirth affects maternal health. We leverage Swedish linked administrative population-level data together with quasi-experimental variation from the introduction of two “Daddy Month” reforms, which each earmarked one month of parental leave to fathers. We find that the first reform, which had a large extensive margin impact on the share of fathers taking any leave, increased the likelihood of maternal hospitalization in the year post-childbirth, driven by conditions related to mental health and external causes. The second reform, in contrast, predominantly extended paternity leave duration on the intensive margin, and led to a decline in the likelihood of maternal hospitalization in the postpartum year, an analogous reduction in non-primary-care outpatient visits, and lower consumption of anti-depressants among mothers with low education. Our findings suggest that the impacts of increased paternal time at home on maternal health may depend on the quality of the parental relationship; paternity leave can either buffer against the fatigue and stress associated with having an infant, or exacerbate conflict between new parents.

“The Effects of Residential Segregation on Mortality Disparities in the United States”

Nancy Breen, National Institutes on Minority Health and Health Disparities; Mark Fossett, Texas A&M University; Marcia Gómez, National Institutes on Minority Health and Health Disparities; and Ernest Moy, U.S. Centers for Disease Control and Prevention

Abstract: Public health studies have shown persistently higher rates of mortality among African-Americans compared to White Americans. Understanding the causes for this disparity has eluded researchers. Economic studies have shown that mortality is associated with a range of social determinants, including education, income, and wealth. Living in segregated areas—whether segregated by race/ethnicity or income—affects health, schooling, employment and other factors including quality of life, and the effects accumulate over the life course. Historically, laws, regulations, and zoning have crowded African Americans into areas isolated from jobs and schools, which has led to the poor schools, unemployment, and over policing seen in resource-deprived African-American neighborhoods today. Because segregation may have protective and negative aspects, the pathway considers the joint effects of two causal variables, namely social isolation and economic deprivation, or racialized poverty isolation (RPI). The pathway from RPI to premature mortality for African Americans is tested and compared with racial isolation alone. The outcome is age-adjusted mortality in metropolitan counties stratified by race (non-Hispanic White and non-Hispanic Black) from the US National Vital Statistics System. Structural, community, and household stressors from the 2010 US Census are used to test whether metropolitan areas with high rates of RPI are associated with stress-related mortality. The innovation of this approach is to consider the long-term effects of social isolation and economic deprivation in combination. The RPI is used to explore how working-class African American communities are uniquely impacted by the history of racial exclusion, and how race, class and gender intersect in the United States. The study finds that counties with RPI have higher rates of black mortality than counties with racial isolation alone.

“Financial Innovation for Rent Extraction”

Anton Korinek, University of Virginia

Abstract: We show that financial innovation greatly increases the scope for rent extraction from public safety nets, and this may generate a large redistribution of wealth from the public purse to the financial sector and a stark misallocation of real resources. We develop our results in a model in which bailouts arise endogenously: when financial sector capital is low, it is cheaper for the rest of the economy to provide a bailout than to suffer from a large credit crunch. It is well known that bailouts distort incentives to invest in risky securities. We show that bailouts also provide incentives to create new securities that crystallize risk-taking on states of nature in which bailouts will be obtained. This allows for more efficient rent extraction on a significantly larger scale. The incentives for rent extraction are mediated through market prices and do not require that the agents who engage in risk-taking are aware that they are extracting rents from public safety nets, as long as their creditors are. In aggregate, the described behavior leads to large financial sector profits during good times, higher consumption volatility, greater economy-wide risk premia and stark misallocations in real investment.

“Spatial Justice, Uneven Development, and Intergenerational Inequality: A ‘Postcolonial’ United States of America”

Jordan Shipley, University of Missouri-Kansas City

Abstract: From the experience of peoples in the autonomous regions of Native American reservations, declining rural communities, to those in segregated inner cities; this paper investigates processes of spatial injustice and uneven development within the United States during the neoliberal period. The paper explores the legacy of certain colonial processes and the continuing, and self-perpetuating, pattern of uneven development oppressing peoples through the 21st century (Darity, 1992, 2005). Uneven development will be investigated through the lens of (un)employment and the particular processes generating spatial inequities in access to meaningful, living wage employment. These processes are investigated alongside continued residential and activity space segregation based upon race and class, displacement and gentrification, and neoliberal development governance at the urban and regional level (Peck, 2012, 2016; Massey et. al, 2009). The paper connects the concepts of cumulative causation, post-colonial theory, and geographical political economy to create a theoretical framework which addresses the spatiality of development and underdevelopment. A comparative case-study of Kansas City, communities in the rural south and midwest, and semi-autonomous reservations is conducted using geographic information systems and exploratory spatial analysis. The combination of these analytical tools and novel political economic framework allow for a discussion of the implications of these processes of spatial injustice. The implications of this comparative spatial analysis will be discussed with a focus on prescriptions for historically, spatially, and culturally grounded development policies.

The annual meeting of the Allied Social Science Associations started today in Atlanta. The conference features hundreds of sessions covering a wide variety of economics research. Interesting research is all over the place here, so below are some of the papers that caught the attention of Equitable Growth staff during the first day. Included below are the abstracts from those papers as well as links to the sessions at which they were presented. Check back tomorrow and Sunday evening for further highlights.

“The Role of Education and Gender in Trends in Earnings Inequality and Mobility in the United States”

Michael Carr, University of Massachusetts-Boston, and Emily Wiemers, University of Massachusetts-Boston

Abstract: This paper uses survey-linked administrative earnings data to document trends since 1980 in short-run and long-run within-group, or residual, earnings inequality and within group intragenerational earnings mobility. Our administrative data are unique in allowing the estimation of earnings inequality overall and earnings inequality within education by experience groups separately by gender, allowing for the first analysis of residual inequality and mobility with administrative earnings data. Consistent with other work, we find large increases in top-end residual inequality in both short and long-run earnings. However, while there is a small decline in short-run residual inequality at the bottom of the distribution consistent with polarizing short-run earnings, there is a substantial increase in bottom-end residual inequality in long-run earnings. This result points towards rising permanent earnings inequality and declining mobility. Indeed, we find notable declines in within group intragenerational mobility over the same time period. However, given that the skills and gender composition of the labor force has changed considerably, and the levels and trends in long-run earnings inequality and mobility could reflect this compositional change, we follow the wage inequality literature and employ a kernel reweighting method to assess the impact of the skills composition on this trend, separately by gender. Preliminary results from this counterfactual exercise demonstrate that the bulk of the rise in cross-sectional earnings inequality is due to a changing distribution of within group prices, not changes in the characteristics of the labor force. This finding is consistent with the wage inequality literature. We also find that declining within group mobility is due to rising inequality, and not to changes in the distribution of characteristics of the labor force, a new finding which sheds important light on the changing role of education in generating upward mobility.

“Inequality and Mobility Over the Past Half Century Using Income, Consumption and Wealth”

David Johnson, University of Michigan, and Jonathan Fisher, Stanford University

Abstract: Inequality in income, consumption, and wealth is increasing, and inequality in the joint distributions is increasing faster than inequality in any of the single distributions. Relatedly, increases in inequality may be contributing to decreasing intergenerational mobility. The joint distribution of all three provides more information about well-being over the life-time. Wealth informs about past savings behavior and provides a future capacity to consume. Income higher than consumption indicates that the household is saving and is increasing future consumption, while income lower than consumption indicates the opposite. Similarly, a household with high wealth but low income is very different than a household with high income and high wealth. Thus, studying the joint distribution of income, consumption, and wealth tells us something about past well-being, current well-being, and future well-being.

The Panel Study of Income Dynamics (PSID) follows individuals and families over almost five decades, making it the benchmark source for measuring intergenerational mobility. This paper builds on our previous work, in which we show that there is less income mobility at lower wealth quintiles. In this paper, we supplement the existing data available in the PSID, which includes income every wave since 1968 along with intermittent measures of consumption and wealth. We impute consumption and wealth to the earlier years to obtain measures of inequality and mobility over five decades. The long PSID panel will also allow us to compare intra-generational mobility across cohorts, at least early in their adult lives. We can compare intra-generational mobility for the early Baby Boom cohort (those born 1946-1955) through Generation X. We will be able to assess whether intra-generational mobility differs for a generation that began their working career in a low inequality era (early Baby Boomers) to a generation that began their working career in a time of increasing inequality (Gen X).

“Wealth Inequality, Income Volatility, and Race”

William A. Darity, Duke University; Darrick Hamilton, the Ohio State University; Bradley Hardy, American University; and Jonathan Morduch, New York University

Abstract: Wealth inequality has gained attention as a marker of shifting returns to labor and capital. Our attention here is on economic insecurity and the role of wealth as a buffer for households facing income volatility. Among its other roles, wealth provides households with a cushion for coping with emergencies and volatile income. Having sufficient wealth can prevent emergencies from becoming crises and provide slack to manage ups and downs without undue stress. We build from the insight that transitory shocks are only a problem to the degree that households lack wealth and financial mechanisms to cope with them. Economic insecurity is thus a product of exposure to significant risk and the lack of sufficient coping mechanisms, especially wealth. We provide evidence that these elements of economic insecurity vary importantly by race.

First, using panel data from the PSID, we show that large income and wealth gaps persist across race and ethnicity, with blacks and Hispanics faring worst along both dimensions. Added to this, we also find that year-over-year income volatility is highest among black Americans. The largest racial gaps in volatility occur at the bottom of the income distribution, where we observe substantial wealth gaps across race and ethnicity as well. Importantly, the racial and ethnic volatility gaps are robust to the measure of volatility used.

We then use the Federal Reserve Survey of Household Economics and Decision Making (SHED) to show the overlap between exposure to volatility and the lack of sufficient coping mechanisms. Across a series of measures, we show that groups facing the greatest volatility, blacks and Hispanics, also lack adequate coping mechanisms. These patterns hold controlling for income and education.

“Multi-generational Impacts of Childhood Access to the Safety Net: Early Life Exposure to Medicaid and the Next Generation’s Health”

Chloe East, University of Colorado Denver; Sarah Miller, University of Michigan; Marianne Page, University of California-Davis; and Laura Wherry, University of California-Los Angeles

Abstract: We examine multi-generational impacts of positive in utero and early life health interventions using state-year variation in public health insurance expansions that targeted low-income pregnant women and children. We use restricted use Vital Statistics Natality files to create a unique dataset linking individuals’ childhood Medicaid exposure to the next generation’s health outcomes at birth. We find robust evidence that the health benefits associated with treated generations’ early life access to Medicaid extend to later offspring’s birth outcomes. Our results imply that the return on investment is larger than suggested by evaluations of the program that focus only on treated cohorts.

“The Long Run Evolution of Absolute Intergenerational Mobility”

Yonatan Berman, Paris School of Economics

Abstract: This paper combines cross-sectional and longitudinal income data to present the evolution of absolute intergenerational income mobility in several developed economies in the 20th century. We show that detailed panel data are unnecessary for estimating absolute mobility in the long run. We find that in all countries absolute mobility decreased during the second half of the 20th century. Increasing income inequality and decreasing growth rates have contributed to the decrease. Yet, growth is the dominant contributor to this decrease in most countries. We derive a model for the relationship between absolute mobility, growth, inequality and relative mobility. Ceteris paribus, absolute and relative mobility are inversely related.

“Use It or Lose It: Efficiency Gains from Wealth Taxation”

Fatih Guvenen, University of Minnesota; Gueorgui Kambourov, University of Toronto; Burhan Kuruscu, University of Toronto; Daphne Chen, Econ One Research; and Sergio Ocampo, University of Minnesota

Abstract: This paper studies the implications of wealth taxation (tax on the stock of wealth) and capital income taxation (tax on the income flow from capital) in an overlapping-generations incomplete-markets model with persistent rate of return heterogeneity across individuals. With such heterogeneity, the effects of wealth taxation differs starkly (and are sometimes the opposite) from those of capital taxation for efficiency and some key distributional outcomes. In particular, under capital income taxation entrepreneurs who are more productive, and therefore generate more capital income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the base and shifts the tax burden from productive to unproductive entrepreneurs. This reallocation increases aggregate productivity and output. In the simulated model calibrated to the US data, a revenue-neutral tax reform that replaces capital income tax with a wealth tax raises welfare by about 8% in consumption-equivalent terms. Moving on to optimal taxation, the optimal wealth tax is positive, yields even larger welfare gains than the tax reform, and is preferable to optimal capital income taxes. Unlike optimal capital taxes, optimal wealth taxes reduce consumption inequality relative to the current US system, even though wealth inequality rises. Consequently, wealth taxes can yield both efficiency and distributional gains.

“Automation and New Tasks: The Implications of the Task Content of Production for Labor Demand”

Daron Acemoglu, Massachusetts Institute of Technology, and Pascual Restrepo, Boston University

Abstract: We present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US employment over the recent past. At the center of our framework is the task content of production. Automation, which enables capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect. As a result, automation always reduces the labor share in value added (of an industry or economy) and may also reduce labor demand even as it raises productivity. The effects of automation are counterbalanced by the creation of new tasks in which labor has a comparative advantage. The introduction of new tasks changes the task content of production in favor of labor because of a reinstatement effect, and always raises the labor share and labor demand. We show how the role of changes in the task content of production—due to automation and new tasks—can be inferred from industry-level data. Our empirical decomposition suggests that the slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, a weaker reinstatement effect, and slower growth of productivity than in previous decades.

“Common Ownership and the Secular Stagnation Hypothesis”

José Azar, University of Navarra, and Xavier Vives, IESE Business School

Abstract: Recent work has shown that investment by U.S. firms is low relative to measures of profitability and valuation, such as Tobin’s Q. This fact is even more puzzling given that real interest rates have been at historic lows for over a decade. Several observers have suggested that, at least in part, this pattern of “secular stagnation” can be explained by an increase in market power. In this paper, we explore this hypothesis by developing a macroeconomic model in which higher effective market concentration (including through common ownership) leads to lower equilibrium real interest rates. Our model is different from the ones that have been generally used in the literature on market power and macroeconomic outcomes in that it builds on models of oligopolistic competition from the industrial organization literature, as opposed to the monopolistic competition model. Another new feature of our model is that firms are large and have market power in both product and factor markets, including labor and capital markets. This implies that the wedge between the marginal product of labor and the wage is not necessarily the same as the wedge between the marginal product of capital and the real interest rate, since the level of market power can be different in both markets.

Our calibration results suggest that, without accounting for common ownership, an increase in concentration cannot explain (under plausible values for elasticity parameters) the decline in labor and capital shares in recent decades. However, when taking common ownership into account, the model implies a decline in the labor share that is similar to the actual decline, and a decline in the capital share that is somewhat larger than the actual decline.

“Explaining the Decline in the United States Employment-to-Population Ratio: A Review of the Evidence”

Katharine G. Abraham, University of Maryland, and Melissa Kearney, University of Maryland

Abstract: This paper first documents trends in employment rates and then reviews what is known about the various factors that have been proposed to explain the decline in the overall employment-to- population ratio between 1999 and 2016. Population aging has had a notable effect on the overall employment rate over this period, but within-age-group declines in employment among young and prime age adults have been at least as important. Our review of the evidence leads us to conclude that labor demand factors, in particular trade and the penetration of robots into the labor market, are the most important drivers of observed within-group declines in employment. Labor supply factors, most notably increased participation in disability insurance programs, have played a less important but not inconsequential role. Increases in the real value of the minimum wage and in the share of individuals with prison records also have contributed modestly to the decline in the aggregate employment rate. In addition to these factors, whose effects we roughly quantify, we also identify a set of potentially important factors about which the evidence is too preliminary to draw any clear conclusion. These include improvements in leisure technology, changing social norms, increased drug use, growth in occupational licensing, and the costs and challenges associated with child care. Our evidence-driven ranking of factors should be useful for guiding future discussions about the sources of decline in the aggregate employment-to-population ratio and consequently the likely efficacy of alternative policy approaches to increasing employment rates.

“From Immigrants to Robots: The Changing Locus of Substitutes for Workers”

George J. Borjas, Harvard University, and Richard B. Freeman, Harvard University

Abstract: Increased use of robots has roused concern about how robots and other new technologies change the world of work. Using numbers of robots shipped to primarily manufacturing industries as a supply shock to an industry labor market, we estimate that an additional robot reduces employment and wages in an industry by roughly as much as an additional 2 to 3 workers and by 3 to 4 workers in particular groups, which far exceed estimated effects of an additional immigrant on employment and wages. While the growth of robots in the 1996-2016 period of our data was too modest to be a major determinant of wages and employment, the estimated coefficients suggest that continued exponential growth of robots could disrupt job markets in the foreseeable future and thus merit attention from labor analysts.

“Management and Within-Firm Inequality: Evidence from Microdata”

Nicholas Bloom, Stanford University; Scott Ohlmacher, U.S. Census Bureau; and Cristina Tello-Trillo, Yale University

Abstract: We match data from the Census Bureau’s Management and Organizational Practices Survey (MOPS) to linked employer-employee data from the Longitudinal Employer-Household Dynamics (LEHD) program to examine the relationship between the use of structured management practices and within-firm worker outcomes. We document several key empirical facts. First, more structured management practices are correlated with less dispersion in within-firm wages. In particular, we see a decrease in the wage gap between workers at the 90th percentile and workers at the 10th percentile. Practices associated with more structured performance monitoring and target-setting are correlated with less dispersion in the firms’ wages, while practices associated with the implementation of performance incentives are correlated with greater dispersion. Finally, the use of structured management practices is negatively correlated with worker turnover.

“Between Firm Changes in Earnings Inequality: The Role of Productivity Dispersion, the Composition of Firms and Workers, and Industry Earnings Differentials”

John Haltiwanger, University of Maryland, and James Spletzer, U.S. Census Bureau

Abstract: Much of what we know about increasing inequality comes from publicly available statistics from the Current Population Survey (CPS) and the Internal Revenue Service (IRS). These statistics, such as the 90/10 ratio and the share of income going to the top percentiles, show that inequality has been increasing since the late 1970s / early 1980s. A recent strand of the literature documents that the firm explains a large role of this increasing inequality – specifically, most of the increasing variance of individual earnings is between firms rather than within firms. This paper creates between-firm and within-firm inequality statistics from the Longitudinal Employer-Household Dynamics (LEHD) data. The LEHD is a longitudinally linked employer-employee dataset created at the U.S. Census Bureau. We show that individual-level inequality statistics from the LEHD are extremely similar, in both levels and trends, to the published statistics from the CPS and the IRS. The LEHD also confirms the important role of the firm: between 1997 and 2013, 98% of the growth of earnings variance is between firms, where firms are defined by the state unemployment insurance identifier, and 78% of the growth of earnings variance is between firms when firms are defined by a national enterprise identifier. We then turn to the question of why does the firm matter, focusing on worker-firm sorting and rent sharing. We use standard Juhn, Murphy, and Pierce variance decomposition techniques to document which characteristics of firms explain, in an accounting sense, the increases in between firm inequality. Our results show that rent-sharing plays only a minor role, where a positive correlation between increasing dispersion of firm productivity and firm earnings is offset by the strength of the relationship between these two declining over time. The returns to worker demographics account for a substantial fraction of increasing between-firm earnings dispersion. Our most surprising empirical finding is that shifting industry earnings differentials account for 75% of the increasing variance growth of between-firm earnings in a simple model, and 48% in a model that controls for worker and firm characteristics. We conclude this paper with an empirical explanation of what industry characteristics are responsible for these shifting industry differentials, with a focus on industry characteristics such as hours, benefits, outsourcing, trade, and technology.