Wage Inequality and the Spatial Expansion of Firms

Benny Kleinman, Princeton University
Tue, Jan 17 2023, 3:30pm - 5:00pm PST
Lucas A - Landau First Floor

Multi-region firms increasingly dominate the U.S. economy. I study the implications of this trend for labor market inequalities. I document that multi-region service firms account for most of the rise in wage inequality since the 1980s, and provide evidence on the uneven nature of their spatial expansion: larger firms operate establishments in more locations, while hiring more skilled labor and paying higher wages in spatially-concentrated headquarters. I integrate this structure into a general equilibrium model, in which (a) firms open branches to serve local markets; (b) the output of headquarters workers is non-rival across branches; (c) firms have wage-setting power. The resulting wage distribution depends on the full network of firm spatial activity, and inequality rises with firms’ geographical scope. The model admits tractable aggregation despite its complex micro-structure. I estimate it for 391 U.S. labor market areas and infer frictions to spatial expansion from the universe of HQ-branch linkages. Quantitatively, the decline in these frictions since the 1980s can account for multiple trends in U.S. labor markets, including rising inequality across establishments – between and within firms – and higher inequality and segregation across space.