Imagine you’re a middle class American, with an average education and average skills. You’re employed. What are the chances that next year you’ll vault into the top third of earners?
It depends quite a bit on the company you work for.
For middle-skilled, middle class workers at low-paying firms, the chance of moving into the top third of the income distribution was just 0.6%, according to a recent paper analyzing U.S. Census data from 1990 to 2013. For middle-skilled, middle class workers at middle-paying firms, the chances of moving up the following year were 2.6%. But for middle-skilled middle class workers at high-paying firms, the chance was substantially better: nearly 12%. (The paper divides earners, skillsets, and firms up into thirds. So “high-paying” means the top third of firms, “middle-paying” means the middle third, and “low-paying” the bottom third. The same is true for skills. I use “middle class” to refer to the middle third of earners.)
Where you work matters, not just for how much you make, but for your economic mobility — how much you rise or fall in income over the course of your lifetime. If that sounds obvious, consider how often conversations about economic mobility leave companies out entirely, instead focusing on education, skills, or geography.
The new paper — by John Abowd of the U.S. Census Bureau, Kevin McKinney of the California Census Research Data Center, and Nellie Zhao of Cornell — adds to a growing literature connecting how well different firms pay to rising income inequality across wealthier economies. In a recent Harvard Business Review article, Stanford’s Nicholas Bloom argued that this between-firm inequality explains most of the increase in inequality between Americans since 1980, and is caused by an increasingly winner-take-all economy.
Abowd and his co-authors used standard statistical techniques to estimate how much of a worker’s earnings are attributable to employee-specific characteristics (e.g., skills, experience, etc.) and how much are attributable to the firm where they work. They also control for numerous relevant factors, from gender and ethnicity, to part-time vs. full-time, to the strength of the labor market in each year. The part attributable to the worker should be a measure of skill, and the part attributable to firms should measure how well different firms pay, independent of who they hire.
“We show that a typical worker of any skill type would benefit from working at a middle-paying firm relative to a low-paying firm,” the authors write in the paper. “But it is the workers of any skill type employed at high-paying firms who benefit the most.” Hence middle class workers of average skill are a bit more likely to move up in the earnings distribution if they work at a mid-paying firm, relative to a low-paying one. But the big difference is between working at a high-paying firm vs. everything else.
Moreover, the researchers found that once workers find those high-paying firms, they stay there. “Once you’re fortunate enough to find a job at a top paying firm, you get the benefits of that, independent of your position in the skills distribution,” said Abowd, “and you’re much more likely to stay put. If you’re fortunate enough to find one of these jobs, you’re probably not going to quit it.”
For Abowd, the mystery is what enables firms to sustain high wages. “They’re the most successful firms in their industries in many cases,” he said. And through some combination of timing, luck, intellectual property, valuable assets, and the right combination of employees, they have created a moat that competitors struggle to cross. In economics, that’s called a mystery; in the field of strategy, it’s called success.
The worrying thing is the growing gap between firms that have figured out a strategy that supports decent wages, and those that haven’t. A few firms seem to be doing well, and paying well, while the rest fall further behind. Some argue that this productivity gap is the result of too little competition; however, a nascent-but-growing body of research attributes it to technology.
In March, Andy Haldane, the Bank of England’s chief economist, offered another explanation for the growing gap between the most productive UK firms and the rest. “For the same reason most car-owners believe they are above-average drivers, most companies might well believe they have above-average levels of productivity,” he said in a speech at the London School of Economics. In other words, many executives do not realize how poorly they’re managing their firms.
And management does matter, not just to the success of companies but for the growth of entire economies. It may have at least some role in determining economic mobility for employees, too. Individuals’ chances of climbing the economic ladder over the course of their lifetimes depends in part on where they work. And whether that firm has the strategy, the business model, and the values that enable it to pay high wages depends in part on how well it is managed.
