Inequality and the Disappearing Large Firm Wage Premium

Nicholas Bloom (Stanford University, NBER, and SIEPR)
Fatih Guvenen (University of Minnesota, FRB of Minneapolis, NBER))
Benjamin S. Smith (UCLA)
Jae Song (Social Security Administration)
Till von Wachter (UCLA and NBER)

Abstract : Large firms have paid a significantly higher wage for more than a century, but over the last thirty years this large firm premium has started to disappear. We show about half of this is due to changes in industry composition - firms in the shrinking manufacturing sector pay an earnings premium while those in the growing services sector do not. The other half is because large firms have stopped paying a salary premium in the Abowd et al. (1999) sense, particularly for lower paid and lower skilled workers. Thus, one reason for increasing overall inequality may be the disappearance of well-paid jobs for lower skilled workers in large firms.

Growing Apart: the Changing Firm-size Wage Premium and Its Inequality Consequences

J. Adam Cobb (University of Pennsylvania)
Ken-Hou Lin (University of Texas)

Abstract : Wage inequality in the United States has risen dramatically over the past few decades, prompting scholars to develop a number of theoretical accounts for the upward trend. This study argues that large firms have been a prominent labor-market institution that mitigates inequality. By compensating their low- and middle-wage employees with a greater premium than their higher-wage counterparts, large U.S. firms reduced overall wage dispersion. Yet, broader changes to employment relations associated with the demise of internal labor markets and the emergence of alternative employment arrangements have undermined large firms’ role as an equalizing institution. Using data from the Current Population Survey and the Survey of Income and Program Participation, we find that in 1989, although all private-sector workers benefited from a firm-size wage premium, the premium was significantly higher for individuals at the lower end and middle of the wage distribution compared to those at the higher end. Between 1989 and 2014, the average firm-size wage premium declined markedly. The decline, however, was exclusive to those at the lower end and middle of the wage distribution, while there was no change for those at the higher end. As such, the uneven declines in the premium across the wage spectrum could account for about 20 percent of rising wage inequality during this period, suggesting that firms are of great importance to the study of rising inequality.

Islands of Equality: Competition and Pay Inequality Within and Across Firm Boundaries

Claudine Gartenberg (Wharton School/NYU Stern)
Julie Wulf (NBER)

Abstract : How do firm boundaries affect the link between market competition and pay inequality? Using division managers as a pool of similar workers and the Canada-US Free Trade Agreement, we find that greater competition increases overall pay inequality among managers within industries, but not within firms themselves. The same pattern holds for productivity differentials between managers. Moreover, even for firms in which the differential productivity does in fact widen, we find no associated widening in pay. Internal pay equality between managers is related to higher stock returns: firms in our sample with the most equal pay outperform the market by 6-11% annually, while the most unequal firms do not. Altogether, our results suggest that, while competition leads to higher pay inequality as a whole, principals aim to maintain equality within firms and that this choice is associated with better firm performance.

Mergers and Acquisitions, Technological Change and Inequality

Wenting Ma (UNC - Econ)
Paige Ouimet (Kenan Flagler Business School)
Elena Simintzi (UBC)

Abstract : This paper documents important shifts in the occupational composition of industries following high merger and acquisition (M&A) activity as well as accompanying increases in mean wages and wage inequality. We propose mergers and acquisitions act as a catalyst for skill-biased and routine-biased technological change. We argue that due to an increase in scale, improved efficiency or lower financial constraints, M&As facilitate technology adoption and automation, disproportionately increasing the productivity of high-skill workers and enabling the displacement of occupations involved in routine-tasks, typically mid-income occupations. An increase in M&A intensity of 1% is associated with a 2.8% (2.9%) reduction in industry (industry-local labor market) routine share intensity and an one (six) percentage point increase in the share of high skill workers. These results have important implications on wage inequality: An increase in M&A activity is associated with higher hourly wages and an increase in wage polarization in an industry (industry-local labor market). Our results are robust to several robustness tests which further support the notion that firm reorganizations through M&As are a first-order driving force of job polarization and inequality.