Entry deregulation, firm organization, and wage inequality

Abstract

This paper identi…es a causal link between changes in product market competition, …rm reorganization and within-…rm wage inequality. We exploit a unique episode of comprehensive …rm entry deregulation as a quasi-natural experiment and use exceptionally detailed linked employer-employee data for the universe of private sector …rms and workers. We …nd that following deregulation a¤ected …rms ‡atten their hierarchies: the number of layers is reduced and managers'spans of control increased. Dropping a hierarchy layer is accompanied by a signi…cant reduction in wage inequality within the …rm, by 10% for the average pay ratio between the top and the bottom layer, showing that there are real changes arising from …rm reorganization. Overall dispersion is also reduced. We discuss mechanisms and interpretations for these changes.