The focus of this paper is the increase in earnings inequality over the last 30-plus years.1 Economists have well-developed theories that explain differences in wage levels among different categories of workers. Differences in educational attainment and skills are a major source of these differences; large organizations typically employ workers with a wide range of skills and responsibilities and pay them accordingly. As a result, the level of wage inequality within organizations is quite large.

It argues, however, that these theories are not adequate to explain a relatively recent phenomenon: the increase in recent decades in wage inequality among workers with similar levels of education and similar demographic characteristics who are employed in similar occupations but in different firms or establishments. These differences in wages are how most people experience inequality. Yet much of the analysis by economists has focused on developments that have enabled leading firms in the U.S. to increase their ability to extract monopoly rents.