How much inequality growth is due to cross-firm productivity dispersion?

This paper surprised me, but I believe this (while not the last word) is a promising path to explore:

There has been a remarkable increase in wage inequality in the US, UK and many other countries over the past three decades.  A significant part of this appears to be within observable groups (such as age-gender-skill cells).  A generally untested implication of many theories rationalizing the growth of within-group inequality is that firm-level productivity dispersion should also have increased.  The relevant data for the US is problematic, so we utilize a UK panel dataset covering the manufacturing and non-manufacturing sectors since the early 1980s.  We find evidence that productivity inequality has increased. Existing studies have underestimated this increased dispersion because they use data from the manufacturing sector which has been in rapid decline. Most of the increase in individual wage inequality has occurred because of an increase in inequality between firms (and within industries). [emphasis added by TC]  Increased productivity dispersion appears to be linked with new technologies as suggested by models such as Caselli (1999) and is not primarily due to an increase in transitory shocks, greater sorting or entry/exit dynamics.

Here is the link.  Here are non-gated versions.  Does this mean that firm-linked inequality will smooth out over time as the loser firms (or their replacements) mimic the technologies and methods of the winner firms?  Of course some sectors may have permanently become more "winner take all."

The paper has two further results of note.  First, much of the increase in wage inequality has come from changes in productivity dispersion in the service sector, not manufacturing.  Second, Norway and France haven’t had big boosts in wage inequality, and they also have not had comparable boosts in the inequality of productivity across firms.

Speaking of inequality, here is an interesting paper on the evolution of mobility and the American dream.


With the caveat that I haven't read the paper: This can't be a long run equilibrium in the neoclassical sense then can it? If two firms in the same industry have different productivity growth rates then the price of the product would have to be higher, the rate of return lower, and/or the wages/prices paid to resources must be lower in the slow productivity growth firm relative to the high productivity growth firm. But this is not an equilibrium. In the long run, assuming open entry/exit in the relevant product and resource markets, these prices should all be the same across firms. The neo-classical prediction is that the low-productivity growth firms will go out of business as their workers look for other higher paying jobs, their wage costs rise, etc... In the end the wage inequality will self-correct as the firms go bankrupt.

Floccina -- I suspect the causal relation works the other way. Because restaurants have a supply of cheap labor it is to their advantage to use labor intensive production process. The thing I have never understood is that the restaurant industry is increasingly dominated by large corporations yet it remains a low productivity, low wage industry. I suspect it is about the only industry where you would find Fortune 500 or S&P 500 firms employing large numbers of minimum wage employees. Is it because the restaurant industry is still an industry with very low barriers to entry so that mom & pop firms keep entering it using the same old technology? In other words restaurants continue to be a low wage, low productivity industry because it comes so close to meeting the requirements of the economist perfectly competitive model?

You want to open a high-productivity restaurant? Easy: just bring the customers in, sit them down, and serve them TV dinners. The only problem is that nobody would eat there a second time. If people want high-productivity food products, they can buy them at a supermarket and eat them at home; restaurants serve as the alternative to that, so they're essentially defined as the low-productivity branch of the food business. Apparently food is one sort of good in which there's a sufficient difference between packaged products and hand-prepared ones that people are willing to pay the premium. The restaurateurs struggle against it, of course--many of them branch out into prepared foods, and some use prepared foods in their kitchens.


I agree that many consumers will reject prepared foods, and there are restaurants that cater to them.

On the other hand, McDonald's is still taking in billions of dollars. McDonald's employees do not hand-shape burger patties. They do not peel and cut potatoes. They do not mix ice cream, milk, and syrup into a milk shake. McDonald's has automated many of its processes and is still going strong.

As the meat buyer for a national chain years ago, I helped our kitchens alter food preparation processes. One example was the preparation of shredded beef. In early 1983 low-wage employees were roasting and then hand-shredding beef with forks. Six months later the beef was being cooked at the Montfort meatpacking plant in Greely, Co, and shredded by machines in large vats. The restaurant chain not only reduced labor costs, but also ensured a consistency of product across the entire chain. IMO, the latter factor was more important than the cost reduction.

"Does this mean that firm-linked inequality will smooth out over time as the loser firms (or their replacements) mimic the technologies and methods of the winner firms?"

Hrm. I'm not convinced. If we are to believe that we are in an era where technology changes rapidly and that pace of change is increasing, then I would believe that the amount of productivity difference and wage inequality will in fact increase over time.

Also, I think John Dewey has a point about differentiating yourself. Brand value is also value-added, after all. And differentiating yourself, while not a permanent advantage for any single company, can persist in the economy at large for a very long time as long as businesses have skilled marketers.

I would also like to note that globalization and technology probably increase the value of strategic partnerships, especially with foreign companies. If either foreign relations(IE, learning the language and the culture) skills or strategic and partnership management skills are lacking at present, it will be very difficult to build up these skills in a short period of time, also meaning it will take a while for this to "equalize."

This has been, in my opinion, one of the more enlightening papers I have read lately.

Strikes me that there are considerable barriers to the free movement of technologies and skills that raise productivity.

For one thing, cartelizing regulations and other entry barriers protect the dominant players in an industry from too much "creative destruction" by new, innovative firms.

More importantly, though, when the innovative technologies are owned by the dominant firms, so-called "intellectual property" keeps them from being widely adopted.

So in effect the economic system is rigged with toll gates, erected on behalf of privileged corporations, to derive rents from their ownership of productive technology as long as possible.

But there's also another possibility: state capitalism increases the wage differential by subsidizing high-tech, capital intensive sectors at the direct expense of the rest of the economy. If this is so, then the average wage in smaller, more competitive, more labor-intensive industry is lower than it would be absent special privileges for the "commanding heights."

China Tours and Yangtze Cruises A professional China travel agency offering private & group package tours, tailor-made vacations for families, couples and individual travelers, Yangtze cruises, hotel & ticket booking services.

China Travel and Tours One-stop China travel service delivering China package tours, discount Yangtze River cruises and best rate hotels.

Tibet Train Travel A reliable tour operator specializing in Tibet tour packages, adventures, hotel and train ticket booking.

China Maps A free web-based source for China travel and tour map users

Voyage Chine, Tour de Chine, Circuit Chine - Un agence sp├ęcialiste voyage en Chine

Great Wall of China A website for the Great Wall of China.

Comments for this post are closed