Inequality isn’t just rising between individuals, it’s also a rising between companies. That is, top-paying companies have boosted paychecks for their employees by much more than low-paying companies have for theirs.
This isn’t just about the earnings of executives rising faster than the working masses. According to recently published research (pdf) by economists at Stanford, the University of Minnesota, and the US Social Security Administration, about two-thirds of the rise in US income inequality from 1981 to 2013 can be explained by how much more the average employee at top-paying firms makes. Rising inequality between firms is also a factor in rising overall inequality in Germany, Sweden, and the UK as well, the researchers note.
Using tax data, the economists found that average pay—including wages, salaries, bonuses and stock options—at a company in the 90th percentile grew by 36% in the 30-odd years they studied, while pay only rose by 6% at firms in the 25th percentile. Pay at the median company barely rose over this time.
Within companies, wage growth between the highest and lowest earners was not meaningfully different in most cases. For companies with 100-999 employees, which cover about 70% of all workers in the US, an employee with a paycheck in 90th percentile at the company made 39% more in 2013 than in 1981; an employee in the 10th percentile made 40% more.
What’s going on? Stanford’s Nicholas Bloom, one of the coauthors of the study, points to the increased use of contractors. From 1995 to 2015, the share of Americans working as contractors or in temporary positions increased from 10% to nearly 16%.
The higher level of contracting impacts inequality by changing the composition of a company’s workforce. Bloom cites General Electric: Although the number of employees at GE has remained about the same since the 1960s, the proportion of high-skilled engineers and coders has risen substantially, while the share of administrative staff has fallen. This was possible because GE could contract out low-paying work, like janitorial services, that was not core to its business. This boosts the average wage of the GE workforce. It also means that when GE does well, and shares these benefits with its employees, it has less of an impact on the fortunes of low-wage workers.
Bloom adds that in Germany the percentage of workers employed by “temp agencies or cleaning, logistics, or security firms” grew from 2% to 7% from 1981 to 2008, so similar dynamics are at play there.
Economist Timothy Taylor fears the implications of a workforce segregated into high- and low-paying companies. “It means that the classic ‘American dream’ success story, of someone being hired in the mailroom or as a secretary or janitor, and then getting promoted up the company ladder, is less likely to occur,” he writes. “In that sense, some of the rungs on the bottom of the ladder of success have been sawed off.”