Workforce composition, productivity and pay: the role of firms in wage inequality

Abstract

This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. 2  ECO/WKP(2020)11 Unclassified OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s). Working Papers describe preliminary results or research in progress by the author(s) and are published to stimulate discussion on a broad range of issues on which the OECD works.

The firm-level link between productivity dispersion and wage inequality: A symptom of low job mobility?

“…Labour market concentration reduces wages but raises productivity-wage pass-through In many OECD countries, there are large and increasing productivity differences between firms, even within narrowly defined industries (Andrews et al, 2016; Syverson, 2011). At the same time, in these countries, differences in average wages between firms have also increased, explaining more than half of the overall increases in wage inequality (Criscuolo et al, 2020 [1]). To some extent, such increases in between-firm wage differences reflect the sorting of workers with higher education and more experience into firms paying higher wages.…”

“…But differences in wages between firms are large even for workers with similar characteristics, suggesting the existence of firm wage premia. Recent OECD work suggests that increased dispersion in firm wage premia accounts for around two-thirds of increased between-firm wage inequality (Criscuolo et al, 2020 [1]). This raises the question of the structural and policy determinants of the link between productivity and firm-level wage premia, with possibly large implications for wage inequality and the allocation of workers across firms.…”

“… Mobility across geographical areas could be fostered by reforming housing policies, including by redesigning land-use and planning policies that raise house price differences across locations, reducing transaction taxes on selling and buying a home, and relaxing overly strict rental regulations (Causa and Pichelmann, 2020 [11]). Social cash and in-kind expenditure on housing could also support residential mobility by raising the affordability of housing for low-income households, especially if such expenditure is designed in such a way that benefits are fully portable across geographical areas.…”

“…Wage setting in the static monopsony model is analysed inRobinson (1933[44]),Manning (2003[42]), Card et al (2018[18]) and Lamadon et al (2020), while analyses of the dynamic monopsony model includeBurdett and Mortensen (1998[45]) and Manning (2011[41]). Another alternative micro-foundation for an upward-sloping labour supply curve are efficiency wage models in which the effective labour input that firms receive rises with the wage because higher-paid workers exert more effort(Manning, 1995[48]) 11. In the static monopsony model, wages of all firms are marked down by a constant factor relative to their marginal products of labour but firm-level wages are proportional to firm-level productivities.ECO/WKP(2021)7  15Unclassified…”

The firm-level link between productivity dispersion and wage inequality

“…In many OECD countries, there are large and increasing productivity differences between firms, even within narrowly defined industries (Andrews et al, 2016;Syverson, 2011). At the same time, in these countries, differences in average wages between firms have also increased, explaining more than half of the overall increases in wage inequality (Criscuolo et al, 2020 [1]). To some extent, such increases in between-firm wage differences reflect the sorting of workers with higher education and more experience into firms paying higher wages.…”