Results from the Great Cinnamon Experiment
Memo to Self

Wage Variability and Corporate Churn

One more via Mark Thoma. How much of wage turbulence is firms' success at laying risk off onto their workers?

Economist's View: Did the Recent Increase in Creative Destruction also Increase Wage Volatility?: A Staff Report from the Federal Reserve Bank of New York establishes a connection between creative destruction and volatility in wages. One hypothesis is that firms are smoothing profit through increased flexibility in the use of inputs to production thereby shifting the risk of profit variation onto wages:

"Turbulent Firms, Turbulent Wages?" by Diego Comin, Erica L. Groshen, and Bess Rabin, Federal Reserve Bank of New York Staff Reports, no. 238, February 2006: 1. Introduction: Has more creative destruction among firms raised wage volatility in the U.S.? Gottschalk and Moffitt [1994, 2002] called attention to the recent rise in the variation of transitory earnings for U.S. workers ... [T]hey estimated that this enhanced volatility accounts for one third to one half of the rise in wage inequality during the 1980s. What is the source of this new instability in pay? Despite its importance, little is known about its correlates or origins.

Most of the... research on the remarkable and well-documented widening of wage inequality in the U.S. over the past three decades focuses on permanent components of workers' earnings, particularly the rising returns to education and ability associated with technological change, trade, and de-unionization. However, this emphasis ignores the less-studied contribution of larger transitory fluctuations.... We conjecture that the recently documented increase in... creative destruction may drive the rise in wage volatility... Ironically, as firm volatility has risen, the same shielding that once protected workers from large macro fluctuations may now work to allow firms to share their idiosyncratic risk. That is, firms may now rely on wage or job fluctuations to smooth profitability in a riskier marketplace...The bottom line? "We conclude that the rise in firm turbulence explains about 60 percent of the recent rise in ... wage volatility."