Does the size of companies affect wage inequality?

The potential explanations for the rise in income inequality are myriad. Inequality might be the caused by increasing demand for skilled labor, globalization, the weakening of labor market institutions, or some combination of all of the above. These theories, more or less, focus on changes in workers over time. But changes in the size of employers over time can also be an important source of rising income and wage inequality. A new National Bureau of Economics Research working paper argues that the increasing size of employers can help explain the rise in wage inequality.

Firms on average in the United States are getting bigger. The underlying reason for this shift toward bigness isn’t clear yet, but we have evidence in a decline in the start-up rate in the United States. For workers, this trend may be a positive one. Research shows that employees at larger employers receive a wage premium compared to those working at smaller firms. Consider a recent paper that looked at wages at retail stores. Workers at large box retailers make more than similar workers at smaller mom-and-pop retailers.

The new paper looks at the distribution of wages as a firm increases in size. The authors, Holger Mueller of New York University, Paige Ouimet of the University of North Carolina, and Elena Simintzi of the University of British Columbia, use a proprietary data set on wages inside firms in the United Kingdom. They divide workers within a firm into 9 groups by skill level, which also corresponds with wage levels inside the firm.

What they find is that inequality, measured by wage ratios, increase as the firm grows in size, but this trend is driven entirely by an increasing gap between wages at the top compared to those at the middle of the distribution. The ratio of middle wages to bottom wages actually doesn’t increase as the firm size does.

As the authors point out, this trend in intra-firm inequality matches up quite well with what is happening in the larger labor markets of the United Kingdom and the United States. The most recent rise in inequality in these two nations is largely the story of the top pulling away from the middle and bottom, not the bottom failing behind. And that’s exactly what happens to firms as they grow larger according to Mueller, Ouimet and Simintzi’s results. So it makes sense that the trends would match up as more workers are employed at large businesses.

The authors also point out that the ratio between the middle and the bottom of wage earners in these increasingly larger firms stays constant not because they are growing at relatively the same rate. Rather wages for these less well-compensated workers don’t appear to increase with firm size. In other words, workers at the bottom and the middle don’t make more at larger businesses. This result means that the wage-premium for working at a large employer is driven mostly by wage increases for those at the top.

One important caveat is that Mueller, Ouiment and Simintzi look at wage trends within firms while many of the studies on the wage premium are based on the size of establishments. The difference, for example, is this: Looking at a restaurant chain means looking at a firm as a whole compared to each individual franchise, which is called an establishment.

And of course, they look at data from the United Kingdom. Whether these results would be replicated with U.S. data remains to be seen. So research that tried to better understand this dynamic in the United States would be quite illuminating. Outside of their specific findings, Mueller, Ouimet and Simintzi’s paper is another reminder that looking at the dynamics of firms and workers together can help shed light on deeper trends, such as wage inequality, in our economy.

This article is published in collaboration with the Washington Center for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nick Bunker is a Policy Research Associate with the Washington Center for Equitable Growth.

Image: Workers are pictured beneath clocks displaying time zones in various parts of the world at an outsourcing centre in Bangalore. REUTERS/Vivek Prakash.