How Firm Wage Premia Shape Working Poverty

• In Event: 40225 - Mechanisms of Inequality

Abstract

How does employer power shape working poverty? Even for the same occupations, some employers pursue a high-road strategy while others offer the lowest pay possible. Employers that pursue high wages may lift workers out of poverty, but they may also screen out poor applicants. We connect the Panel Study of Income Dynamics to data on firms' wages to assess how working at a company that pays more or less for a given occupation shapes an individual's chance of poverty. Working poverty rates are 4 times as high at low-premium (9.7%) than high-premium (2.3%) companies. When poor applicants are hired by a high-premium company, only 11% remain in poverty, compared to 26% of those hired by low-premium companies. However, high-premium firms rarely hire poor workers, which means their income boost goes to the workers who need it least: the average hire at high- and low-premium firms brings equivalent poverty reduction. Counterfactually reshuffling workers across firms has little impact on poverty rates, as low-premium firms continue to pull workers into poverty. If all firms became high premium, the working poverty rate would decrease by 43%. The results demonstrate how low-paying firms harbor and produce the working poor, while high-paying firms exclude them altogether.

Authors

• Henry Gomory, Massachusetts Institute of Technology

• Nathan Wilmers, Massachusetts Institute of Technology