The Role of Firms in Wage Inequality
Policy Lessons from a Large Scale Cross-Country Study
Even though firms play a key role in shaping wages, wage inequality and the gender wage gap, firms have so far only featured to a limited extent in the policy debates around these issues. The evidence in this volume shows that around one third of overall wage inequality can be explained by gaps in pay between firms rather than differences in the level and returns to workers’ skills. Gaps in firm pay reflect differences in productivity and wage setting power. To address high wage inequality while fostering high and sustainable growth, worker-centred policies (e.g. education, adult learning) need to be complemented with firm-oriented policies. This involves notably: (1) policies that promote the productivity catch-up of lagging firms, which would not only raise aggregate productivity and wages but also reduce wage inequality; (2) policies that reduce wage gaps at given productivity gaps without limiting efficiency-enhancing reallocation, especially the promotion of worker mobility; and (3) policies that reduce the wage setting power of firms with dominant positions in local labour markets, which would raise wages and reduce wage inequality without adverse effects on employment and output.
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Worker skills or firm wage-setting practices? Decomposing wage inequality across 20 OECD countries
In many OECD countries, low productivity growth has coincided with rising wage inequality. Widening wage and productivity gaps between firms may have contributed to both developments. This chapter uses harmonised linked employer-employee data for 20 OECD countries to analyse the role of firms in wage inequality. The main finding is that, on average across countries, differences in average wages between firms explain about one-half of overall wage inequality. Two-thirds of between-firm wage inequality (i.e. about a third of overall wage inequality) reflect firms’ wage-setting practices or wage premia, i.e. the part of wages that is determined by the firm rather than the characteristics of its workers. The remaining third (i.e. a sixth of overall wage inequality) can be attributed to differences in workforce composition across firms. The contribution of differences in wage premia to wage inequality tends to be larger in countries with decentralised collective bargaining systems and lower levels of job mobility. Overall, these results suggest that firms play an important role in explaining wage inequality, as wages are to a notable extent determined by firm wage-setting practices rather than being exclusively by workers’ skills.