The Rise Of The “Super Firms” And Inequality

Ronald Janssen in Social Europe:

Related work from the OECD reveals itis indeed suggesting a new and complementary narrative besides the usual skills biased technology one.

This starts from the observation that for some countries (the US primarily but also Germany and Sweden), the overall increase in wage inequality appears to be caused by wage differences between firms and not by different wages being paid within firms. “Inequality, to quote (at page69) the OECD, “has risen because some firms now pay all their employees more than other firms, not because top managers have increasingly been paid more than support staff”.

So, why have some firms raised wages for (all or most of) their staff more than other firms? Here, the OECD comes up with another phenomenon which is that some firms (the so-called ‘frontier’ firms, the 100 or 5% most productive firms in each sector across the world) have apparently been able to systematically increase their productivity performance whereas productivity growth for the rest (the ‘laggards’) is dwindling (see graph below).

‘Frontier’ firms are thus able to increase pay for their workforce substantially, whereas ‘laggard’ firms find it quite difficult to do so. In other words, rising wage inequalities are to be explained by the rise of a group of ‘super firms’.

This narrative, however, sounds pretty familiar: It resembles the old neo-classical theory where the marginal productivity of individual workers determines their wage, with the theory on productivity divergences between individuals transformed into a tale of productivity divergence between firms. The practical effect of this is that the focus firmly remains on productivity performance (in this case the productivity of firms, not of individual workers) while the question of how value added is distributed remains in the background. This in turn allows one to revert to traditional policy recipes such as ease of firing to ‘liberate’ workers otherwise locked up in ‘zombie’ firms while overlooking pre-distribution policies such as robust collective bargaining that can give wage earners a fair share of the value added…

The new OECD narrative is, to large extent, based on research for the US (with one paper fittingly called ‘firming up inequality”). The International Labor Organisation’s 2016/2017 Global Wage report focusses on Europe. Using similar techniques to those used in the US research, it reveals that there is a significant degree of wage inequality in Europe that is explained by wage differences within firms.

More here.