Are Headhunters to Blame for Rising Wage Inequality?

Are Headhunters to Blame for Rising Wage Inequality?

At Bloomberg, Carolynn Look takes note of a new paper arguing that professional recruitment firms, by funneling top talent into high-performing (and high-paying) organizations, are exacerbating the gap in pay between top earners and the average employee:

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. …

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.

This idea is reminiscent of “corporate inequality,” the theory that income inequality is driven largely by how well different firms pay. While I understand the argument this paper is making, I wonder whether it’s accurate to identify professional recruiters as the cause of this phenomenon.

Workers with fewer skills have fewer options in the current US labor market than their more highly-skilled peers, but this can be attributed to the US being in a high stage of economic development (more services, fewer goods, less production, more consumption). With or without headhunters, this stage of economic development lends itself to a more competitive talent market in which lower-skill candidates lose out. On the upside, an advanced service economy creates opportunities for jobs that didn’t exist in the manufacturing economy of the past—like headhunting. So perhaps headhunters are to blame for rising inequality, but it’s also possible that they’re just the medium through which a competitive talent market sorts candidates by skill: something it would be doing anyway.

On the other hand, I could see how headhunters might make the labor market less competitive by creating a static talent pool with fewer new ideas and less innovation. I could also see how decreased competition because of headhunting could potentially keep wages down even. I don’t have the numbers to say for certain whether or not that’s true, but the impact of headhunting on the labor market is a very interesting question to consider.