Firms and the Decline in Earnings Inequality in Brazil

Alvarez, Jorge and Benguria, Felipe and Engbom, Niklas and Moser, Christian (2017): Firms and the Decline in Earnings Inequality in Brazil. Published in: American Economic Journal: Macroeconomics , Vol. 1, No. 10 (January 2018): pp. 149-189.

Abstract

We document a large decrease in earnings inequality in Brazil between 1996 and 2012. Using administrative linked employer-employee data, we fit high-dimensional worker and firm fixed-effects models to understand the sources of this decrease. Firm effects account for 40 percent of the total decrease and worker effects for 29 percent. Changes in observable worker and firm characteristics contributed little to these trends. Instead, the decrease is primarily due to a compression of returns to these characteristics, particularly a declining firm productivity-pay premium. Our results shed light on potential drivers of earnings inequality dynamics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Earnings Inequality; Linked Employer-Employee Data; Firm and Worker Heterogeneity; Productivity
• Subjects: D - Microeconomics > D2 - Production and Organizations; D - Microeconomics > D2 - Production and Organizations > D20 - General; D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials

References

Abowd, John M., Francis Kramarz, and David N. Margolis, “High Wage Workers and High Wage Firms,” Econometrica, 1999, 67 (2), 251–333.

Abowd, John M., Hampton Finer, and Francis Kramarz, “Individual and Firm Heterogeneity in Compensation: An Analysis of Matched Longitudinal Employer-Employee Data for the State of Washington,” in John C. Haltiwanger, Julia I. Lane, James R. Spletzer, Jules J.M. Theeuwes, and Kenneth R. Troske, eds., The Creation and Analysis of Employer-Employee Matched Data, Amsterdam: North Holland, 1999, pp. 3–24.

Abowd, John M., Robert H. Creecy, and Francis Kramarz, “Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data,” 2002.

Adão, Rodrigo, “Worker Heterogeneity, Wage Inequality, and International Trade: Theory and Evidence from Brazil,” Working Paper, 2016.

Alvarez, Jorge, “The Agricultural Wage Gap: Evidence from Brazilian Micro-Data,” Working Paper, 2017.

Andrews, Martyn J., Leonard Gill, Thorsten Schank, and Richard Upward, “High Wage Workers and Low Wage Firms: Negative Assortative Matching or Limited Mobility Bias?,” Journal of the Royal Statistical Society: Series A (Statistics in Society), 2008, 171 (3), 673–697.

Atkinson, Anthony B. and François Bourguignon, eds, Handbook of Income Distribution, vol. 2 ed., Elsevier, 2015.

Bagger, Jesper and Rasmus Lentz, “An Empirical Model of Wage Dispersion with Sorting,” Working Paper, 2016.

Bagger, Jesper, Bent Jesper, and Dale T. Mortensen, “Productivity and Wage Dispersion: Heterogeneity or Misallocation,” 2014.

Barros, Ricardo, Mirela de Carvalho, Samuel Franco, and Rosane Mendonça, “Markets, the State and the Dynamics of Inequality: The Case of Brazil,” UNDP Discussion Paper, 2010.

Bartelsman, Eric, John Haltiwanger, and Stefano Scarpetta, “Measuring and Analyzing Crosscountry Differences in Firm Dynamics,” in “NBER Chapters,” National Bureau of Economic Research, Inc, 2009, pp. 15–76.

Bartelsman, Eric, John Haltiwanger, and Stefano Scarpetta, “Cross-Country Differences in Productivity: The Role of Allocation and Selection,” American Economic Review, 2013, 103 (1), 305–334.

Barth, Erling, Alex Bryson, James C. Davis, and Richard Freeman, “It’s Where You Work: Increases in the Dispersion of Earnings across Establishments and Individuals in the United States,” Journal of Labor Economics, 2016, 34 (S2), S67–S97.

Bertrand, Marianne and Antoinette Schoar, “Managing with Style: The Effect of Managers on Firm Policies,” The Quarterly Journal of Economics, 2003, 118 (4), 1169–1208.

Blanchflower, D. G., A. J. Oswald, and P. Sanfey, “Wages, Profits, and Rent-Sharing,” The Quarterly Journal of Economics, feb 1996, 111 (1), 227–251.

Bonhomme, Stéphane, Thibaut Lamadon, and Elena Manresa, “A Distributional Framework for Matched Employer Employee Data,” 2016.

Card, David, F. Devicienti, and A. Maida, “Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data,” The Review of Economic Studies, oct 2014, 81 (1), 84–111.

Card, David, Ana Rute Cardoso, and Patrick Kline, “Bargaining, Sorting, and the Gender Wage Gap: Quantifying the Impact of Firms on the Relative Pay of Women,” The Quarterly Journal of Economics, 2016, 131 (2), 633–686.

Card, David, Joerg Heining, and Patrick Kline, “Workplace Heterogeneity and the Rise of West German Wage Inequality,” Quarterly Journal of Economics, 2013, 128 (3), 967–1015.

Córdova, José Ernesto López and Mauricio Mesquita Moreira, “Regional Integration and Productivity: The Experiences of Brazil and Mexico,” IDB Publications (Working Papers), 2003.

de Araujo, Ana Luisa Pessoa, “Wage Inequality and Job Stability,” 2014.

Deaton, Angus, The Analysis of Household Surveys: A Microeconometric Approach to Development Policy 1997.

Dix-Carneiro, Rafael and Brian K. Kovak, “Trade Liberalization and the Skill Premium: A Local Labor Markets Approach,” American Economic Review, may 2015, 105 (5), 551–557.

Dix-Carneiro, Rafael and Brian K. Kovak, “Trade Liberalization and Regional Dynamics,” 2017.

Dix-Carneiro, Rafael, Brian K. Kovak, Rodrigo R. Soares, and Gabriel Ulyssea, “Economic Shocks and Crime: Evidence from the Brazilian Trade Liberalization,” Working Paper, 2016.

Dunne, Timothy, Lucia Foster, John Haltiwanger, and Kenneth R. Troske, “Wage and Productivity Dispersion in United States Manufacturing: The Role of Computer Investment,” Journal of Labor Economics, 2004, 22 (2), 397–430.

Engbom, Niklas and Christian Moser, “Earnings Inequality and the Minimum Wage: Evidence from Brazil,” 2017.

Engbom, Niklas and Christian Moser, “Returns to Education Through Access to Higher-Paying Firms: Evidence from US Matched Employer-Employee Data,” American Economic Review, 2017, 107 (5).

Faggio, G., K. G. Salvanes, and J. Van Reenen, “The Evolution of Inequality in Productivity and Wages: Panel Data Evidence,” Industrial and Corporate Change, 2010, 19 (6), 1919–1951.

Ferreira, Francisco H. G., Phillippe G. Leite, and Matthew Wai-Poi, Trade Liberalization, Employment Flows, And Wage Inequality In Brazil Policy Research Working Papers, The World Bank, 2007.

Ferreira, Pedro Cavalcanti and Jose Luiz Rossi, “New Evidence from Brazil on Trade Liberalization and Productivity Growth,” International Economic Review, 2003, 44 (4), 1383–1405.

Fortin, Nicole, Thomas Lemieux, and Sergio Firpo, “Decomposition Methods in Economics,” in “Handbook of Labor Economics,” Vol. 4 2011, pp. 1–102.

Guiso, Luigi, Luigi Pistaferri, and Fabiano Schivardi, “Insurance within the Firm,” Journal of Political Economy, oct 2005, 113 (5), 1054–1087.

Heathcote, Jonathan, Fabrizio Perri, and Giovanni L. Violante, “Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006,” Review of Economic Dynamics, 2010, 13 (1), 15–51.

Heckman, James J., Lance J. Lochner, and Petra E. Todd, “Fifty Years of Mincer Earnings Regressions,” 2003.

Helpman, Elhanan, Oleg Itskhoki, Marc-Andreas Muendler, and Stephen Redding, “Trade and Inequality: From Theory to Estimation,” Review of Economic Studies, 2016, (Forthcoming).

Iranzo, Susana, Fabiano Schivardi, and Elisa Tosetti, “Skill Dispersion and Firm Productivity: An Analysis with Employer Employee Matched Data,” Journal of Labor Economics, 2008, 26 (2), 247–285.

Kopczuk, Wojciech, Emmanuel Saez, and Jae Song, “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937,” Quarterly Journal of Economics, 2010, 125 (1), 91–128.

Lopes de Melo, Rafael, “Firm Wage Differentials and Labor Market Sorting: Reconciling Theory and Evidence,” 2015.

Lopez, J. Humberto and Guillermo Perry, “Inequality in Latin America: Determinants and Consequences,” 2008.

Medeiros, Marcelo, Pedro H. G. Ferreira de Souza, and Fábio Avila de Castro, “O topo da distribuição de renda no Brasil: primeiras estimativas com dados tributários e comparação com pesquisas domiciliares, 2006–2012,” 2014.

Meghir, Costas, Renata Narita, and Jean-Marc Robin, “Wages and Informality in Developing Countries,” American Economic Review, 2015, 105 (4), 1509–1546.

Menezes-Filho, Naércio Aquino, Marc-Andreas Muendler, and Garey Ramey, “The Structure of Worker Compensation in Brazil, with a Comparison to France and the United States,” Review of Economics and Statistics, may 2008, 90 (2), 324–346.

Mincer, Jacob, Schooling, Experience, and Earnings, New York: NBER Press, 1974.

Moreira, Mauricio Mesquita, “Brazil’s Trade Liberalization and Growth: Has it Failed?,” International Trade, 2004.

Muendler, Marc-Andreas, “Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986-1998,” CESifo Working Paper Series, 2004.

Organisation for Economic Co-operation and Development, “Country Note: Programme for International Student Assessment (PISA) Results from PISA 2012,” Technical Report, Organisation for Economic Co-operation and Development, Paris 2012.

Pavcnik, Nina, Andreas Blom, Pinelopi Goldberg, and Norbert Schady, “Trade Liberalization and Industry Wage Structure: Evidence from Brazil,” World Bank Economic Review, 2004, 18 (3), 319–344.

Song, Jae, David J. Price, Fatih Guvenen, Nicholas Bloom, and Till von Wachter, “Firming Up Inequality,” 2016.

Sorkin, Isaac, “Ranking Firms Using Revealed Preference,” 2015.

Tsounta, Evridiki and Anayochukwu I. Osueke, “What is Behind Latin America’s Declining Income Inequality?,” 2014.

Ulyssea, Gabriel, “Firms, Informality and Development: Theory and Evidence from Brazil,” 2014.

Van Reenen, J., “The Creation and Capture of Rents: Wages and Innovation in a Panel of U. K. Companies,” The Quarterly Journal of Economics, feb 1996, 111 (1), 195–226.

Woodcock, Simon D., “Match Effects,” Research in Economics, 2015, 69 (1), 100–121.

World Bank, “World Development Indicators,” 2016.