Jan Schymik: Earnings Inequality and the Global Division of Labor: Evidence from the Executive Labor Market

Many industrialized economies have seen a rapid rise in top income inequality and in the globalization of production since the 1980s. In this paper I propose an open economy model of executive pay to study how offshoring affects the pay level and incentives of top earners. The model introduces a simple principal-agent problem into a heterogeneous firm talent assignment model and endogenizes pay levels and the sensitivity of pay to performance in general equilibrium. Using unique data of manager-firm matches including executives from stock market listed firms across the U.S. and Europe, I quantify the model predictions empirically. Overall, I find that between 2000 and 2014 offshoring has increased executive pay levels, raised earnings inequality across executives and increased the sensitivity of pay to firm performance. JEL Classification: D2,F1,F2,J3,L2