Spletzer Discussant Remarks_IMF OECD WB Conference Sept 2020

Discussant Comments Eeckhout et al “The contribution of market power to wage inequality” Schwellnus et al “The firm-level link between productivity dispersion and wage inequality” James R. Spletzer, U.S. Census Bureau IMF – OECD – World Bank Conference on Structural Reforms September 24, 2020 1

Disclaimer Any opinions and conclusions expressed herein are those of the author and do not necessarily represent the views of the U.S. Census Bureau.

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Summary • Common theme in this session: use firm‐level data to analyze the increase in wage inequality, ask whether this increase is efficient, and begin to examine what policies can reduce any inefficiencies ‐‐ Eeckhout et al: focus on technology and market power ‐‐ Schwellnus et al: focus on job mobility

• Two broad comments on both papers: ‐‐ Think of firm contributions to inequality in terms of an AKM fixed effects model ‐‐ Give the reader more distributional analysis

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Broad Context: Why analyze the firm’s role in wage inequality? â€?â€? In the U.S. during the 1980s, wages ↑ 90/50 and ↑ 50/10 â€?â€? This increasing inequality is easily explained by SBTC Increasing relative demand for educated workers â€?â€? Also a role for institutions in explaining 1980s ↑ inequality Minimum wages and unions â€?â€? Since the mid 1990s, wages  ↑ 90/50 and flat 50/10 Also a realization that education only takes us so far â€?â€? New explanations for wage inequality emphasize the firm ď „var(đ?‘¤ ď „var(đ?‘¤ đ?‘¤ +Â ď „var(đ?‘¤ Song et al (2019): 31% within firms, 69% between firms Haltiwanger & Spletzer (2020): 26% within, 74% between 4

Eeckhout et al (1 of 4) • Summary of paper in one slide ‐‐ Look at two firm‐based explanations for rising skill premiums Technology differences across firms Rising market power (declining number of competitors) ‐‐ Main result: technology generates rising wages but rising market power diminishes these increases, with the decline in low skilled wages more pronounced (thus generating ↑ inequality) ‐‐ Speculation on policy: market power is inefficient and reducing market power (increasing competition) would lower inequality (the skill premium) and increase output Question: what policies would reduce the rise in market power, particularly if the economy is Schumpeterian?

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Eeckhout et al (2 of 4) • Quibbles with the paper ‐‐ My reading of the paper is the effects for changing market power are conditional on existing technology. I would like to see counterfactuals (ala’ Table 7) for changing technology conditional on existing market power. ‐‐ Is rising market power a firm or industry phenomena? ‐‐ Be more explicit with the mechanisms for rising market power. ‐‐ My reading suggests that the terms “skill premium” and “inequality” are used interchangeably – is this correct? ‐‐ I would like to see how sample sizes and descriptive statistics of market power change with the data restrictions. I’m concerned that 88% of LEHD observations have imputed education and these observations are dropped.

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Eeckhout et al (3 of 4) • When I think of firms and wage inequality �� I think of the AKM model and the Song et al modification �

đ?œƒ

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đ?œƒ

Ψ đ?œƒ

đ?‘‹ đ?›˝ đ?œƒ

đ?œ€ Ψ

đ?‘‹ đ?›˝

đ?œ€

â€?â€? I can envision technology in this model: technology should not affect the distribution of đ?œƒ but could affect the distributions of đ?œƒ

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and đ?œƒ (as well as the sorting term in AKM).  AndÂ

technology will influence the distribution of Ψ . â€?â€? How should market power be interpreted in this model?  Does it affect the labor composition terms đ?œƒ

đ?œƒ

and đ?œƒ ?  Does itÂ

work through the firm pay premium Ψ ?

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Eeckhout et al (4 of 4) • The key result in this paper is that market power explains 89% of the rise in the skill premium ‐‐ I would like to see empirical statistics and counterfactuals showing low skilled wages WL and high skilled wages WH are affected by rising market power, in addition to the skill premium (WH/WL) ‐‐ I would also like to see the effects of technology on various parts of the wage distribution

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Schwellnus et al (1 of 4) • Paper in one slide ‐‐ Between firm wage premium are large in OECD countries (1/2 of overall wage inequality) ‐‐ Between firm productivity differences are related to wage differences (15% pass through from firms to individuals, and is higher for higher‐skilled workers) ‐‐ The pass through is larger in countries where job mobility is smaller ‐‐ Policy: promote job mobility that raises productivity growth by encouraging reallocation (mobility) while limiting between firm wage dispersion

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Schwellnus et al (2a of 4) • Quibbles with the paper ‐‐ It’s intuitive that job mobility is positively related to the wage level (and thus productivity), but it’s not intuitive to me that job mobility is negatively related to wage dispersion. I ask that you work on explaining this and providing some empirical work. ‐‐ Page 14 states “… with countries with lower job mobility typically displaying higher pass‐through (Figure B1).” First, figure B1 is not a scatterplot of mobility and pass‐through. When I create a scatterplot using the data in Figure 7 and Figure B1, I don’t see any relationship, negative or positive. ‐‐ Does productivity growth lead to firm births and deaths (Schumpeterian growth), and thus mobility of persons between firms? Is this considered efficient? Is this in your analysis?

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Schwellnus et al (2b of 4) • Quibbles with the paper (continued) ‐‐ The text has many statements such as “high‐productivity firms need to pay high wages” (page 2) and “high‐productivity firms need to offer …” (page 6). The word “need” is not often used in economics (need is not the same as maximizing behavior). ‐‐ I don’t understand the statement on page 9 “… in perfectly competitive labour markets …. Productivity dispersion does not translate into wage dispersion between firms.” Please explain the underlying model (particularly the source of the productivity dispersion) and why W=MPL does not hold, ceteris paribus.

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Schwellnus et al (3 of 4) • How I think about this paper in terms of AKM â€?â€? In this paper, firm effects are estimated as timeâ€?varying fixed effects zjt from wage regressions with explanatory variables Xď ˘ď€Ž â€?â€? In contrast, AKM firm effects are estimated as time invariant fixed effects [đ?œƒ Ψ ] from wage regressions with Xď ˘ and unobserved individual fixed effects. â€?â€? I worry whether firm effects are time varying or time invariant.  If they are timeâ€?varying, why? â€?â€? I also worry that Xď ˘ adequately measures unobserved individual heterogeneity.  If it does not, then firm fixed effects are biased by correlations with unobserved labor composition effects, which will bias relationship between mobility and firm effects.

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Schwellnus et al (4 of 4) • Thinking about the distribution of between firm effects ‐‐ A productivity shock that affects only high wage workers (think computers or telecommunication) will result in increased inequality with no individuals changing firms. ‐‐ Polarization results in increased inequality (measured by the variance, but not the 90/10) due to large amounts of mobility. ‐‐ The job ladder is the mobility of individuals moving from left to right in the wage distribution, with no changes in inequality. ‐‐ When the authors want to promote productivity enhancing job mobility which does not increase wage dispersion, I suggest they be very explicit about the sources and destinations of where in the wage distribution they want this mobility to occur.

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Final Thoughts • These are two good research papers that get us thinking about how wage inequality is affected by other labor market trends such as the market power of firms, firm‐ to‐firm mobility, and between‐firm wage differentials • This is relevant in the current COVID‐19 environment ‐‐ large amount of business closings (current and expected future closings, predominantly low‐wage firms) will affect firm concentration, mobility, and firm wage differentials ‐‐ these papers will hopefully encourage discussion about how worker‐firm relationships affect individual labor market outcomes

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