The Contribution of Dispersion across Plants to the Increase in US Earnings Dispersion

Using an extensive set of establishment and individual data, we estimate the extent to which the variance of earnings among establishments increased in 1977-2002 and its contribution to the increased dispersion of US earnings among individuals. We find that more than 70 percent of the increase in the variance of earnings in this period occurred across establishments. More than two thirds of the growth in establishment wage dispersion arises from changes within detailed industry and region. Two industries contributed disproportionately to earnings inequality. Business services accounted for a growing share of the total variance in log earnings across plants, while the increased variance in earnings in finance, insurance, and real estate accounted for one-fifth of the growth in variance in the whole economy. Decomposing the increase in earnings among establishments between rising inequality among existing establishments and changes in inequality due to the earnings of establishments that enter or exit the economy we find that the bulk of the increase occurred among existing establishments. We reject explanations that attribute the increase in the variance among establishments to increased returns to human capital or increased sorting of observable skills across plants. The factor most closely related to the increased dispersion in earnings across plants is the increase in the dispersion in labor productivity among plants. Evidence of rent sharing and of the growing importance of inter establishment wage dispersion run, given the declining strength of union, counter to the usual analysis of wage-setting in a competitive market. JEL Codes: J3; J31; D3