Headhunters Blamed for Wage Inequality in Study of Top Earners

(Bloomberg) -- Here's something to talk about the next time a headhunter calls you.

The share that the top 1 percent of earners in the U.S. take from total wages has almost doubled since the 1970s, and Alexey Gorn, a researcher at Bocconi University in Milan, Italy, suggests it may have something to do with the simultaneous rise of professional recruitment firms. In a paper, presented at last week’s European Economic Association conference in Geneva he argues that at least 40 percent of top earners’ wage growth can be traced back to headhunters offering exclusive opportunities to high-skilled workers at the best firms -- along with a paycheck that less-well trained people won't ever see.

“Headhunters are better at screening because they collect huge databases of candidates, and so they can pick already knowing the person’s skills and experience levels,” Gorn said in a telephone interview. The fact that they are able to approach workers who are usually not actively seeking a job reduces labor-market frictions and allows for more efficient matching, which also leads to proportionally higher wages, he said.

The top 1 percent of earners in the U.S. made 11 percent of the nation’s wages in 2010, compared with 6 percent in 1978, according to economist Thomas Piketty, author of the 2013 bestseller "Capital in the Twenty-First Century." Gorn's research finds that countries in Europe that have become more exposed to the work of recruitment firms show similar patterns. QuickTake Click here for a QuickTake on income inequality

To determine the impact headhunters might have on wage inequality, Gorn developed a model based on U.S. labor-market features in the 1970s and 2010s. According to his calculations, the introduction of headhunters leads to a significant shift of high-skilled personnel toward the most productive firms. Likewise, less-productive firms have lost top workers, and less-skilled laborers have forgone a shot at the best-paying jobs.

Gorn suggests that finding a way to channel a part of those high incomes back to low-skilled workers may be one solution to address the inequality. The higher earnings brought by the greater efficiencies allow for a higher top rate of income tax, he said.

“Those additional taxes could then be redistributed to lower-income workers who aren’t offered those opportunities.”

(For more economic analysis, see Benchmark)

To contact the author of this story: Carolynn Look in Frankfurt at clook4@bloomberg.net.

To contact the editor responsible for this story: Jana Randow at jrandow@bloomberg.net.

©2016 Bloomberg L.P.