Earnings Dispersion Research Articles

Has performance pay increased wage inequality in Britain?

Using data from the British Household Panel Survey (BHPS) we show performance pay (PP) increased earnings dispersion among men and women, and to a lesser extent among full-time working women, in the decade of economic growth which ended with the recession of 2008. PP was also associated with some compression in the lower half of the wage distribution for women. The effects were predominantly associated with a broad measure of PP that included bonuses. However, these effects were modest, typically not exceeding a 0.05 log points change in log wage differentials over the decade. Moreover there is no indication that PP became increasingly prevalent, as some had predicted, over the decade prior to recession.

It’s Where You Work: Increases in the Dispersion of Earnings across Establishments and Individuals in the United States

This paper analyzes the role of establishments in the upward trend in dispersion of earnings that has become a central topic in economic analysis and policy debate. It decomposes changes in the variance of log earnings among individuals into the part due to changes in earnings among establishments and the part due to changes in earnings within establishments. The main finding is that much of the 1970s–2010s increase in earnings inequality results from increased dispersion of the earnings among the establishments where individuals work. Our results direct attention to the role of establishment-level pay setting and economic adjustments in earnings inequality.

Student Earnings Expectations: Heterogeneity or Noise?

Students’ choices in education can only be based on expected outcomes. Econometric models that infer expectations based on ex post outcomes impose a rational structure of expectations on school performance and post-graduation earnings. Direct surveys suggest much ignorance and fuzziness. We use survey data on expectations in four universities in three countries and check for relations of expected probability to graduate and of expected earnings with personal abilities and attitudes. We find that most of the difference in expectations among individuals is just noise. Keywords: Student expectations; earnings; earnings dispersion; risk attitudes. JEL Codes: I21; I26; J24; D83

Credit Derivatives and Analyst Behavior

ABSTRACT This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings per share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.

Forecasting Risk in Earnings

AbstractConventional measures of risk in earnings based on historical standard deviation require long time‐series data and are inadequate when the distribution of earnings deviates from normality. We introduce a methodology based on current fundamentals and quantile regression to forecast risk reflected in the shape of the distribution of future earnings. We derive measures of dispersion, asymmetry, and tail risk in future earnings using quantile forecasts as inputs. Our analysis shows that a parsimonious model based on accruals, cash flows, special items, and a loss indicator can predict the shape of the distribution of earnings with reasonable power. We provide evidence that out‐of‐sample quantile‐based risk forecasts explain incrementally analysts' equity and credit risk ratings, future return volatility, corporate bond spreads, and analyst‐based measures of future earnings uncertainty. Our study provides insights into the relations between earnings components and risk in future earnings. It also introduces risk measures that will be useful for participants in both the equity and credit markets.

The Recent Decline of Single Quarter Jobs

Rates of hiring and job separation fell by as much as a third in the U.S. between the late 1990s and the early 2010s. Half of this decline is associated with the declining incidence of jobs that start and end in the same calendar quarter, employment events that we call "single quarter jobs." We investigate this unique subset of jobs and its decline using matched employer-employee data for the years 1996-2012. We characterize the worker demographics and employer characteristics of single quarter jobs, and demonstrate that changes over time in workforce and employer composition explain little of the decline in these jobs.We find that the decline in these jobs accounts for about a third of the decline in the fraction of the population that holds a job in the private sector that occurred from the mid -2000s to the early 2010s. We also find little evidence that single quarter jobs are stepping stones into longer-term employment. Finally, we show that the inclusion or exclusion of these single quarter jobs creates divergent trends in average earnings and the dispersion of earnings for the years 1996-2012. To the extent that administrative records measure the volatile tail of the employment distribution better than conventional household surveys, these findings show that measurement of short duration jobs matters for economic analysis.

The Changing Nature of Irish Wage Inequality from Boom to Bust

The dramatic change in economic conditions in Ireland over the last 10 years provides an opportunity to examine the impact of large macroeconomic shocks on inequality. We analyse wage inequality in Ireland from the height of an economic boom, through a very deep recession, to the start of a recovery. In keeping with previous work we find that dispersion in wages increased towards the height of the boom, driven largely by rising returns to skills. However, the economic crisis of 2008-2013 was accompanied by a significant reduction in earnings dispersion. Although the improving characteristics of the work force increased wages for everyone over this period, these increases were offset by falling returns to skills. Only workers in the lowest decile were unaffected by the declining returns, resulting in wage growth at the bottom of the distribution and a decline in inequality during the recession.

The Recent Decline of Single Quarter Jobs

Rates of hiring and job separation fell by as much as a third in the U.S. between the late 1990s and the early 2010s. Half of this decline is associated with the declining incidence of jobs that start and end in the same calendar quarter, employment events that we call “single quarter jobs.” We investigate this unique subset of jobs and its decline using matched employer-employee data for the years 1996-2012. We characterize the worker demographics and employer characteristics of single quarter jobs, and demonstrate that changes over time in workforce and employer composition explain little of the decline in these jobs. We find that the decline in these jobs accounts for about a third of the decline in the fraction of the population that holds a job in the private sector that occurred from the mid 2000s to the early 2010s. We also find little evidence that single quarter jobs are stepping stones into longer-term employment. Finally, we show that the inclusion or exclusion of these single quarter jobs creates divergent trends in average earnings and the dispersion of earnings for the years 1996-2012. To the extent that administrative records measure the volatile tail of the employment distribution better thanconventional household surveys, these findings show that measurement of short duration jobs matters for economic analysis.

Desigualdad, acción colectiva y redistribución: un nuevo indicador para una relación compleja

La literatura más influyente en economía política supone que un aumento de la desigualdad incrementa las presiones por la redistribución del ingreso, pero esta presunción no parece corroborarse empíricamente. Quizás esto se deba a que en ocasiones la desigualdad aumenta únicamente entre los tramos inferiores de la distribución total de ingresos. En estos casos, la desigualdad aumenta la dispersión de los ingresos entre los sectores más interesados en redistribuir y esto incrementa sus problemas de acción colectiva. Este artículo propone un nuevo principio teórico para el análisis de la relación entre la desigualdad y la redistribución, y desarrolla un indicador consistente con este principio. Finalmente se efectúa una primera exploración empírica para ilustrar como el indicador propuesto se encuentra significativamente asociado con los niveles de redistribución del ingreso en 19 países de la OCDE entre 1974 y 2005

Match effects

We present direct evidence of the importance of matching in wage determination. It is based on an empirical specification that estimates the returns to person-, firm-, and match-specific determinants of match productivity. We call these person, firm, and match effects. The distinction between these components is important, because they have different implications for the persistence of individual earnings and the returns to employment mobility. We find that match effects, which have been ignored in previous work, are an important determinant of earnings dispersion. They explain 16 percent of variation in earnings, and much of the change in earnings when workers change employer. Specifications that omit match effects substantially over-estimate the returns to experience, attribute too much variation to personal heterogeneity, and underestimate the extent to which good workers sort into employment at good firms.

The effect of competition on the intra-industry dispersion of earnings

© Oxford University Press 2014. Although several studies have examined the link between competition and average earnings and others have focussed on the magnitude and determinants of establishment wage differentials, very little is known about the effect of competition on the intra-industry dispersion of earnings. Using a comprehensive data set on the incidence of price-fixing across British manufacturing industries in the 1950s, I compare collusive and competitive industries and find strong evidence of a negative effect of collusion on the intra-industry dispersion of plant average earnings. This result is robust to controlling for the potential endogeneity of collusion.

Getting more unequal: Rising labor market inequalities among low-skilled men in West Germany

During recent decades, earnings differentials between educational groups have risen in most advanced economies. While these trends are well-documented, much less is known about inequality trends within educational groups. To address this issue, we study changes in labor market inequalities among low-skilled men in West Germany. Using data from the German Socio-economic Panel, we show that both risks of labor market exclusion and earnings dispersion have grown dramatically since the mid-1980s. We consider possible explanations for these trends, drawing on an analytic distinction between compositional changes with respect to worker/job characteristics and changes in the effects of these characteristics on labor market outcomes. Using a reweighting strategy and regression models, we find that both compositional trends and changes in the effects of important characteristics have contributed to the observed increase in labor market inequalities. We discuss the likely influence of German welfare state programs, labor market regulation, and of recent changes in these domains, and sketch promising avenues for future research.

It's Where You Work: Increases in Earnings Dispersion Across Establishments and Individuals in the U.S.

This paper links data on establishments and individuals to analyze the role of establishments in the increase in inequality that has become a central topic in economic analysis and policy debate. It decomposes changes in the variance of 1n earnings among individuals into the part due to changes in earnings among establishments and the part due to changes in earnings within-establishments and finds that much of the 1970s-2010s increase in earnings inequality results from increased dispersion of the earnings among the establishments where individuals work. It also shows that the divergence of establishment earnings occurred within and across industries and was associated with increased variance of revenues per worker. Our results direct attention to the fundamental role of establishment-level pay setting and economic adjustments in earnings inequality.

The Effect of Earned Versus House Money on Price Bubble Formation in Experimental Asset Markets*

Does house money exacerbate price bubbles? We compare house money asset market experiments with an earned money treatment where initial portfolios are constructed from a real effort task. Bubbles occur; however, trading volumes and earnings dispersion are significantly higher with house money. We investigate the role of cognitive ability in accounting for the differences in earnings distribution across treatments by using the cognitive reflection test (CRT). Low CRT subjects earned less than high CRT subjects. Low CRT subjects were net purchasers (sellers) of shares when the price was above (below) fundamental value. The opposite was true for high CRT subjects.

Pharmacists' earnings: Their level and distribution

From a methodological perspective, the central tendency and the spread of an earnings distribution are independent outcomes. Theoretically, they may be related to each other. Explore the direction and magnitude of the effect of changes in the mean of pharmacists' wage-and-salary earnings on earnings inequality. Specifically, the probe focused on whether an increase in the central tendency led to a wider or a narrower spread. The original data were collected using a survey questionnaire mailed to pharmacists in South Florida, USA. Earnings means and inequality indicators were calculated in a previous study for 41 groupings of pharmacists in 16 categories. Using ordinary least squares, a model was tested depicting five indicators of wage-and-salary earnings inequality (log earnings variance, coefficient of variation, lower median share, 90-10 decile ratio, and Gini coefficient) as a function of the earnings mean. Separate sets of equations were developed for all pharmacists in the data set and for only full-time pharmacists. A relationship was found between the central tendency and the dispersion of pharmacists' earnings, and this relationship was mediated by whether or not part-time pharmacists were included in the analysis. Higher levels of earnings led to less inequality for all pharmacists, but the opposite effect was observed for full-time pharmacists: higher earnings levels led to greater inequality in the distribution. The mechanics of the earnings generation process of full-time pharmacists are different from those of part-time pharmacists. The opportunity cost of leisure, which is a determinant of practitioners' number of hours worked, affects patterns of earnings and also may affect other labor outcomes.

INCOME INEQUALITY, MOBILITY, AND THE ACCUMULATION OF CAPITAL

We examine the determinants of income mobility and inequality in a Ramsey model with elastic labor supply and heterogeneous wealth and ability. Both agents with lower wealth and those with greater ability tend to supply more labor, implying that labor supply decisions may have an equalizing or unequalizing effect depending on the relative importance of the two sources of heterogeneity. Moreover, these decisions are central to the extent of mobility observed in an economy. The relationship between mobility and inequality is complex. For example, a reduction in the interest rate and an increase in the wage rate reduce capital income inequality and allow upward mobility of the ability-rich. However, the increase in the labor supply of high-ability agents in response to higher wages raises earnings dispersion and thus has an offsetting effect. As a result, high mobility can be associated with an increase or a decrease in overall income inequality.

Legal vs. Normative CSR: Differential Impact on Analyst Dispersion, Stock Return Volatility, Cost of Capital, and Firm Value

This study examines how the sell-side analysts interpret firms’ corporate social responsibility (CSR) activities. Specifically, we examine the differential impact of overall, legal, and normative CSR on the analysts’ earnings forecast dispersion, stock return volatility, cost of equity capital, and firm value. Employing a sample of U.S. public firms during 1993–2009, we find that overall CSR intensities reduce analyst dispersion of earnings forecast, volatility of stock return and cost of capital (COC), and increase firm value. However, its impact is reduced for firms with better accounting and disclosure quality. When we disaggregate CSR into legal and normative CSR, we find that legal (normative) CSR decreases (increases) analysts’ dispersion, stock return volatility, and COC, while legal (normative) CSR increases (decreases) firm value. The sell-side analysts tend to have less (greater) information asymmetry regarding the net benefits of pursuing CSR that is (not) required by laws. We find, however, that the benefit of having normative CSR realized in 1 year lag such that analyst dispersion, stock return volatility, COC decrease, respectively, and firm value increases. Furthermore, we find that the benefit of normative CSR is offset for firms with higher accounting and disclosure quality.

The Effect of Increasing Earnings Dispersion on Social Security Payroll Tax Receipts

This paper decomposes trends in the distribution of earnings over the period 1982-2009 and calculates the effect of increases in dispersion in wage and salary earnings on revenues from the U.S. Social Security Old-Age and Survivors Insurance payroll tax. This tax is levied on earnings, up to a maximum that, with minor changes, has been indexed since 1975 to movements in average wages. If the earnings of very high earners increase more rapidly than those of individuals with earnings below the taxable maximum, the percentage of total earnings that is subject to the tax will decrease and tax revenues will be lower than would otherwise be the case. Using the Continuous Work History Sample (CWHS), we show that most of the increase in the dispersion of wage and salary earnings over the above period was the result of increases of within-cohort, rather than between-cohort, earnings disparities. Between–cohort disparities increased among women, but not among men. The increases in earnings dispersion would have resulted in a substantial decline in the percentage of workers earning more than the taxable maximum, had it not been for the aging of the outsize boomer cohort into their peak earning years. The percentage of total earnings subject to the payroll tax has declined substantially. To restore this percentage to the 1982 level would require an increase in the 2009 taxable maximum from $106,800 to $144,248, which would approximate the 97th percentile of the earnings distribution, well above historic norms. We estimate that, if there had been no increase in earnings dispersion, 2009 payroll tax receipts from wage and salary earnings would have been 6 percent higher, of which 4 percent can be attributed to increases in within-cohort dispersion.

Audit Quality and Properties of Analysts' Information Environment

Prior research (Behn et al. 2008) suggests that higher audit quality is associated with increased accuracy and reduced dispersion in earnings forecasts issued by sell-side analysts. We extend this work to consider how audit quality impacts the information environment in which analysts operate. Using the method outlined by Barron et al. (1998), we examine whether higher audit quality (proxied as an industry specialist auditor) is associated with differences in the weight analysts place on common information relative to private information, as well as the extent to which audit quality separately impacts on the precision of analysts’ private and common information. Our results show that higher audit quality results in analysts placing increased weight on public information, but also that the precision of private (as well as public) information is improved. These results extend our understanding of how audit quality impacts on attributes of analysts’ forecasts and provides support for the argument that audit quality impacts users of audited financial reports.

It's Where You Work: Increases in Earnings Dispersion Across Establishments and Individuals in the U.S

This paper links data on establishments and individuals to analyze the role of establishments in the increase in inequality that has become a central topic in economic analysis and policy debate. It decomposes changes in the variance of ln earnings among individuals into the part due to changes in earnings among establishments and the part due to changes in earnings within-establishments and finds that much of the 1970s-2010s increase in earnings inequality results from increased dispersion of the earnings among the establishments where individuals work. It also shows that the divergence of establishment earnings occurred within and across industries and was associated with increased variance of revenues per worker. Our results direct attention to the fundamental role of establishment-level pay setting and economic adjustments in earnings inequality.