Turbulent Firms, Turbulent Wages?

60 Pages Posted: 24 Feb 2006

See all articles by Diego Comin

Diego Comin

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Erica L. Groshen

Federal Reserve Bank of New York; IZA Institute of Labor Economics

Bess Rabin

Watson Wyatt Worldwide

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

Has greater turbulence among firms fueled rising wage instability in the United States? Earlier research by Gottschalk and Moffitt shows that rising earnings instability was responsible for one-third to one-half of the rise in wage inequality during the 1980s. These growing transitory fluctuations remain largely unexplained. To help fill this gap, this paper further documents the recent rise in transitory fluctuations in compensation and investigates its linkage to the concurrent rise in volatility of firm performance documented in research by Comin and Mulani and others.

After examining models that explain the relationship between firm and wage volatility, we investigate this linkage in three complementary panel data sets, each with its own virtues and limitations: the Panel Study of Income Dynamics (detailed information on workers, but no information on employers), COMPUSTAT (detailed firm information, but only average wage and employment levels about workers), and the Federal Reserve Bank of Cleveland's Community Salary Survey (wages and employment for specific occupations for identified firms). We find support for the hypothesis in all three data sets. We can rule out straightforward compositional churning as an explanation for the link to firm performance in high-frequency (over spans of five years) wage volatility, although not in more persistent fluctuations (between successive five-year averages). We conclude that the rise in firm turbulence explains about 60 percent of the recent rise in high-frequency (five-year) wage volatility.

Keywords: transitory wage volatility, firm volatility, community salary survey, COMPUSTAT, PSID, insecurity

JEL Classification: J3, J5

Suggested Citation

Comin, Diego and Groshen, Erica L. and Rabin, Bess, Turbulent Firms, Turbulent Wages? (February 2006). Staff Report No. 238, February 2006, Available at SSRN: https://ssrn.com/abstract=886522 or http://dx.doi.org/10.2139/ssrn.886522

Diego Comin

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Erica L. Groshen (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7685 (Phone)

HOME PAGE: http://www.newyorkfed.org/research/economists/groshen/index.html

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bess Rabin

Watson Wyatt Worldwide ( email )

875 Third Avenue
New York, NY 10022
United States

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