How much are larger business firms driving the increase in income inequality?

From Free Exchange at The Economist:

The benefits of size are thus enjoyed only by the most senior workers at a firm, who can extract a bigger premium for their skills and experience. A cleaner at a single shop does the same sort of work as those at a large chain. But managing a multinational firm such as Walmart requires a different—and much rarer—set of skills than that required to run a corner store. Over time this pushes up the salaries of the top brass at Walmart compared with corner-shop managers.

The authors find that the relationship between the growth in the size of companies and the level of inequality holds across the rich world. They looked at data from 1981 to 2010 on wages and the size of largest firms for 15 countries in the OECD, a club mostly of rich countries. The relationship between rising levels of income inequality and the size of firms was strong.

This effect is particularly noticeable in America and Britain, where firms have grown rapidly in recent decades. In America, for instance, the number of workers employed by the country’s 100 biggest firms rose by 53% between 1986 and 2010; in Britain the equivalent figure is 43.5%. On the other hand, in places where the size of firms has not changed much, such as Sweden, or where it has shrunk, such as Denmark, wage inequality has grown much less. Part of what is perceived as a global trend towards greater disparity in wages may actually be the result of the biggest firms employing a greater share of workers.

The piece is interesting throughout.  The original source by the way is H. Mueller, E. Simintzi and P. Ouimet, “Wage inequality and firm growth”, LIS Working Paper 632 (March 2015), gated here, earlier version here.  One implication is that we can expect quite high rates of income inequality from a mature Chinese economy.  Another is that we simply shouldn’t expect the United States to be as equal as the smaller northern European polities.


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