Firms’ decisions to replace workers with better applicants can explain much of the growing gap between productivity and wages in the US, according to research published by the Federal Reserve Bank of New York.

“Replacement hiring”, or hiring in excess of net employment changes, can either involve replacing workers who leave, or firing existing workers and hiring more productive ones, say Sushant Acharya and Shu Lin Wee in the staff working paper. They focus on the latter situation, which they