Impacts of Firms, Labor Markets, and Government Policy on Income Volatility and Inequality in the U.S.: Evidence from IRS Tax Data

Abstract

Understanding the role of firms, labor markets, and government institutions in determining earnings inequality and volatility is key to addressing employment challenges in the modern U.S. economy. A comprehensive analysis of this issue has been hindered by the lack of data linking firms, workers, and labor markets over time. This project will use the universe of linked corporate and household tax filings from the U.S. to examine firms, value added, workers, earnings, households, income, and the governments' tax receipts and transfers. The project will address questions on how government policies may affect inequality and uncertainty in the economy. The project will further deliver aggregate statistics on these measures, which will serve the broader community by providing input to relevant policy issues and research.

Using detailed data and new statistical methods, the project will decompose earnings inequality into the components due to (i) worker differences in skill levels, (ii) firm differences in pay for the same skill level, (iii) the sorting of high-skilled workers into high-paying firms, (iv) the productivity complementarities arising from firm-worker matches, and (v) the pass-through of firm productivity shocks. Then, the project will derive and estimate a structural model of labor market monopsony that is consistent with empirical findings and use the model to address questions on the impact of government decisions on inequality and volatility. The project will further examine how labor markets differ between the U.S. and Europe. Also, by utilizing procurement auction data, the project will measure the rate at which demand shocks are passed through to workers by their employers.

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.