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Has Earnings Inequality Increased Across U.S Economics Departments?

Sunday, March 26, 2017 8:25
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(Before It's News)

Nick Bloom has published a very nice general interest piece in HBR discussing his new co-authored empirical work documenting rising inequality across firms.   Suppose I handed you Google's payroll database in the year 2005 and 2017 and I handed you similar data for Uber, McDonalds, General Motors, etc.  Nick Bloom is finding that those firms that are focused in the information technology sector are paying higher average salaries and higher salaries at each percentile of the distribution.  For example, the 90th percentile would be a lower bound for  pay for the top 10% of workers at the firm.

While I have not carefully read his academic research on this topic, this raises the usual issue of selection versus treatment. What types of workers choose to work in which industries and firms?  Does Google self select great workers and then teach them nothing? Or is there a matching process such that Google knows the profile of the men and women it wants and then shapes them to be even more productive inputs for the firm?

Now let's switch to this blog's focus.  If you think of U.S Economics Departments as “firms”, has pay inequality across these firms increased?  We know that private universities pay more than public universities.  Universities are not profit maximizing firms but they do seek out price adjusted quality inputs.  There is a competitive hedonic pricing gradient for talent that is convex as the superstar economists command a high price premium.  Some ambitious private universities are known to bid more for elite talent.

Using data from the 9 UC campuses, one could study pay inequality across the campuses over the last 10 years.   I think you would see a rising return to superstar status but that the ranks of the mean pay over time would be very similar.    There are not stock options in academic economics and the production function is stable over time.  There is little need for a risk premium in academic economics because all scholars over the age of 40 are tenured with no mandatory retirement restrictions.

In the IT world, is there risk?  Can executives at Uber hedge the risk they face if the bulk of their compensation is in stock options?   Is “inequality” an ex-ante or ex-post concept?  

My serious question for Nick Bloom focuses on the nature of the underlying production function.  For the modern firm such as Facebook, what is the human capital mix of workers at the firm?  Do any high school graduates have interesting jobs at the firm or do they just get lunch and clean up?  If the superskilled are self-selecting into narrow concentrated firms, is this a pareto-optimum?  Is cross-firm inequality “bad”?  Would a progressive (and Milton Friedman) argue that it could be bad if rich firms use their $ to buy political power?


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