Do volatile firms pay volatile earnings?
Is our competitive and volatile business environment translating into volatile earnings for American workers?
This is an important question. But let’s back up and consider why unstable earnings are something to keep an eye on. From my latest publication (with references omitted):
Earnings instability — the fluctuations over time in a worker’s earnings — plays an important role in earnings inequality: the rise in earnings instability accounts for around one-third of the increase in earnings inequality from 1970 to 2004. There is evidence that households have trouble smoothing consumption in the face of earnings instability. Households of lesser means may only be able to partially insure their consumption against transitory income shocks. Income instability is associated with volatile food consumption, particularly for traditionally-vulnerable households. Earnings instability has important implications for the distributional analysis of tax policy — if earnings are unstable over time, then comparing annual and multi-year measures of effective tax rates becomes complicated. Earnings instability lowers household welfare (under standard assumptions) because risk averse households prefer stable to unstable earnings, even if average earnings are the same. Earnings instability plays an important role in earnings mobility by affecting a workers’ position in the earnings distribution.
The fluctuations over time in a worker’s earnings are important for at least these reasons. And we should be interested in the answer to the question I posed above. I study that question in the aforementioned paper. I find evidence that instability at the firm level drives earnings instability among the firm’s workers.
I dig deeper into the data as well:
Workers of different skill levels experience the labor market very differently, even within firm, and certainly within industry. In an increasingly competitive environment in which firms pass risk onto workers, earnings stability may be a non-pecuniary benefit awarded relatively more generously by firms to their most-skilled workers.
Investigating this, I find:
[T]he effect is much stronger for low-earning workers than it is for high-earning workers — low-earning workers are being passed significantly more volatility from their employing firms than are workers of other skill levels. The relationship between firm employment instability and earnings instability among a firm’s lowest-earning workers is 2 to 3.5 times the magnitude of the relationship between firm employment instability and earnings instability among a firm’s highest-earning workers.
You can find the paper here.
First published at AEIdeas.org on January 17, 2017.
