We use a massive,matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We find that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred due to a rise in the dispersion of average earnings between firms. However, this rising between-firm variance is not accounted for by the firms themselves but by a widening gap between firms in the composition of their workers. This compositional change can be split into two roughly equal parts: high-wageworkers became increasingly likely towork in highwage firms (i.e., sorting increased), and high-wage workers became increasingly likely to work with each other (i.e., segregation rose). In contrast, we do not find a rise in the variance of firm-specific pay once we control for the worker composition in firms. Finally, we find that two-thirds of the rise in the within-firm variance of earnings occurred withinmega (10,000+ employee) firms, which saw a particularly large increase in the variance of earnings compared with smaller firms.
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Northwestern, Princeton, RAND, Stanford, TNIT, UCLA, and Yale for helpful comments. Benjamin Smith and Brian Lucking provided superb research assistance. We are grateful to the National Science Foundation for generous funding. To combat alphabetical inequality, author names have been randomly ordered.