It is important to be clear that it is the increase in inequality over recent

It is important to be clear that it is the increase

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It is important to be clear that it is the increase in inequality over recent decades that is ana- lyzed in these studies of rising wage inequality and that is the focus of this article, not the deter- minants of the level of wage inequality. The level of wage inequality within organizations is much larger than between organizations. Freeman (2016: 16) notes that the increase in inequality in earnings among establishments cannot be explained by traditional differences in earnings due to factors such as industry, firm size, labor productivity, or capital per worker. Instead, he argues, it is due to “characteristics of employers that standard data sets do not measure.” This article seeks to draw these two strands of research together and provide an explanation for the widely observed increase in inequality. It seeks to answer two questions: What is the role of rent in the increased variance in earnings among firms? What is the mechanism that links the increase in rent extraction to the rise in inequality in earnings among workers with similar skills and characteristics? 2. Overview of the Argument An important mechanism linking the increasing rents described above and the rising inequality among firms and workers, I argue, is the increase in domestic outsourcing and the rise in net- worked forms of production over the past three and a half decades as firms have reorganized production processes to focus on maximizing shareholder value. This has been a multidimen- sional process involving (1) a large and changing role for finance, (2) consolidation of the largest enterprises, and (3) decentralization of the production and provision of goods and services facili- tated by new technologies. Consolidation enhances the ability of the lead firm in a production network, and in many cases key subcontractor firms, to raise prices and extract monopoly rents. Consolidation has driven market concentration in many industries, reducing competition. This has been accompanied by the decentralization and outsourcing of goods production, logistics, and service activities. Outsourcing is facilitated by innovations in digital technology and logis- tics. It results, at least in part, from demands that companies maximize shareholder value, which has provided a rationale for the focus on core competencies. Outsourcing has also been driven by deliberate efforts of firms to circumvent legal constraints, union representation, and internal equity norms that limit their ability to pay different wages to similarly qualified workers. The “fissuring” of employment (Weil 2014) as “firms shed activities to subordinate companies through subcontracting, third-party management, and other organizational forms” facilitates dif- ferences in pay for similar workers employed in different establishments (Council of Economic Advisers 2016: 3).
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