Growing Apart: The Changing Firm-Size Wage Premium and Its Inequality Consequences

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% of rising wage inequality during this period, suggesting that firms are of great importance to the study of rising inequality.Keywords firm-size wage premium, inequality, internal labor market, employment relationship Disciplines Management Sciences and Quantitative MethodsThis journal article is available at ScholarlyCommons:

Entrepreneurship and income inequality

“…Finally, we note in Table 7 in the appendix that ISE-entrepreneurs tend to run significantly larger firms than SE-entrepreneurs. Future research may seek to bridge the role of entrepreneurship in income inequality to the role of workplace reorganization and the shrinking firm-size distribution in modern economies (Bresnahan et al, 2002;Cobb and Lin, 2017). To the extent that the rise in entrepreneurship among SE-and ISE-entrepreneurship is driven by incumbent firms' outsourcing of work to subcontractors, income inequality among entrepreneurs represents a topic of relevance for several strands of economic research.…”

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Wage Stagnation and Buyer Power: How Buyer-Supplier Relations Affect U.S. Workers’ Wages, 1978 to 2014

“…More recent strategy and exchange theory research has characterized these market power-reliant companies as value capture firms (in contrast to value creation firms) (Reagans and Zuckerman 2008). Yet since at least the early 1980s, rising market concentration has not been associated with rising firm-level pay (Autor et al 2017), and the earnings premium from working for large firms has been steadily eroding for noncollege workers (Cobb and Lin 2017;Song et al 2016). There seems to be less value around to capture and pay to production workers.…”

Understanding Economic Inequality through the Lens of Caste

“…Specifically, empirical evidence showed that as the proportion of individuals employed by large corporations decreases, income inequality increases (Cobb & Stevens, 2016;Davis & Cobb, 2010). Also, decreased wage premiums for employees at the lower and middle levels in large organizations has contributed to income inequality (Cobb & Lin, 2017). Taking a broader view of income inequality, at the societal level, Bapuji et al (2018) argued that value distribution mechanisms that follow the shareholder wealth maximization principle contribute to income inequality by handsomely rewarding executives and shareholders, and giving a short shrift to employees, government and the society at large.…”

“…The shareholder-focused management of corporations results in top executives and shareholders (who are more likely to be from asset-rich families) receiving a much higher share of wealth created in organizations; whereas employees, suppliers, and buyers receive very little (Bapuji et al, 2018;Sjoberg, 2009). Under a shareholder-value regime, downsizing, layoffs, and reduction in compensation and benefits for employees occur routinely (Lazonick & O'Sullivan, 2000;Cobb & Lin, 2017), whereas shareholders receive higher returns in the form of dividends, stock repurchases and cash holding. Also, top executives receive higher compensationboth monetary and non-monetary -to align their interests with those of the shareholders (Lazonick & O'Sullivan, 2000).…”