A Discussion of “The Productivity-Wage Premium: Does the Size Still Matter in a Service Economy?”
We turn today to another piece in the puzzle of determining why it seems income inequality has grown in the United States in recent decades.
Knowing why a variable is trending a certain way makes it easier to devise policies to alter it or address it if it cannot be altered. Without an understanding of what is happening, new policies can make things worse.
A previous article I reviewed examined a feature of our economy in recent years that impacts this issue: more industries are being dominated by one large firm even if there are still numerous other firms in the industry.
Superstar Firms Causing Concentration of Market Power
That article investigated why we had observed labor’s share of total income had decreased and found superstar firms are concentrating market power while also using relatively less labor proportional to the smaller firms.
They can produce large shares of output in an industry with fewer people so in aggregate labor income becomes a smaller share of total national income.
Today’s article reminds us many studies have shown that wages grow with the size of the firm. Thus, these must be some well-paying jobs, right?
Well, maybe not. Past performance is no prediction of future results, as many a disclaimer reminds us.
Does this positive size-wage premium still exist today?
For that I turn to Berlingieri, Calligaris and Criscuolo (2018) who find the size-wage premium only is true for manufacturing industries. Since service industries are a growing sector of our economy, we need to examine how size impacts wages for them.
They cite a lot of previous research showing that wages grow as the size of the firm grows.
The fact that larger businesses pay higher wages has long been considered a stylized fact in the literature. Since Moore (1911), numerous papers have confirmed the presence of a positive firm size-wage premium. (p. 328)
Primarily as a result of issues of available data, this previous work focused on manufacturing firms. Manufacturing is approximately 15% of the economy of the OECD economies, which is a group comprised of the larger industrialized economies. And manufacturing’s share is on a declining trend. (p. 333)
Thus, our authors rightly demonstrate a need to examine the size-wage premium beyond manufacturing firms.
The Model
They first take the OECD data and do some simple graphs.
They graph the size of the firm against wages. (p. 329)
- For the manufacturing firms, this shows a positive slope as expected.
- For the service firms the line is much flatter. There is some positive relationship that flattens out around the size of 50 or more employees.
They repeat the exercise but this time they graph the size of the firm against labor productivity (a measure of output per worker).
Against productivity you do see a positive relationship to wage for all firms. This is their fundamental assertion.
While manufacturing firms typically do have higher productivity associated with size, this relationship does not hold in the service industry.
The positive size-wage premium that has been observed then is really a positive productivity-wage premium. (p. 328)
The authors report 3 major findings.
- As expected in the manufacturing industry, as firms grow in size both wages and productivity grow.
- Productivity and wages do not show a pronounced relationship to size for companies in the service industry.
- Wages increase as productivity increases, regardless of the size of the firm in both industries.
Conclusion
It seems to me the size-wage premium was a mistaken or misleading relationship we focused on in the past. It was true but only because we were focusing on manufacturing firms where productivity tends to rise with wages.
What our authors have shown here is that the real relationship is wages rise with increasingly productive firms.
They do not explore what makes service firms more productive, just that the ones that are more productive pay better.
Our focus then could be on determining how to increase productivity in the service industry and thus increase wages.
However, rising productivity is comes from adopting technology that allows one person to produce more with the technology than without.
Such technology is much easier to apply to the manufacturing industry than to the service industry.
The good news then is that we have another article exploring structural changes to our economy that explains why labor income is falling, and it is not due to exploitation or lack of antitrust enforcement.
The type of jobs that seem to be growing are the type that tend to have slower growth in productivity. A firm can only afford to pay people based on what is being added to the bottom line which is why wages rise with productivity.
Going back to the current observed trend towards superstar firms, if those firms have high productivity then wages will be high. If not, the wage-productivity relationship examined in this paper seems to indicate another reason the labor share of income has been falling in recent decades.
References:
Berlingieri, Giuseppe, Sara Calligaris, and Chiara Criscuolo (2018). “The Productivity-Wage Premium: Does Size Still Matter in a Service Economy.” AEA Papers and Proceedings, 108: 328–333.
By Ellen Clardy, PhD on .
Exported from Medium on December 15, 2022.
