Wage inequality and firm growth Paul Walker Mar 27

At Holger Mueller, Paige Ouimet and Elena Simintzi look at the relationship between Wage inequality and firm growth. Rising wage inequality has received much attention recently and this column describes new evidence on the determinants of the ‘skill premium’.

There are two basic findings:

1) larger firms have grown substantially and
2) skill premia are larger at larger firms.

They therefore conclude that the growth of larger firms could help explain growing wage inequality.

To get to these results first it is necessary to identify the ‘skill premium’ and know how to measure it. The ‘skill premium’ is simply the wage difference between high and low skill workers. Defining the skill premium is one thing, measuring it is another.

Existing measures of skill premia, such as education, experience, or even occupations, are not adequate as they do not reflect a one-to-one mapping between job tasks and skill requirements. [...].

In our data, provided by Income Data Services (IDS), we observe how much a firm pays workers employed in different occupations and, crucially, how these occupations map into broader ‘job level’ categories which are comparable across firms. Since job levels are determined based on the skills required for the job, comparing wages for a worker classified at a high job level to a worker classified at a low job level allows us to more directly measure the skill premium. Moreover, since we have these data for a broad cross-section of firms measured at multiple points in time, we can observe within-firm and across-time patterns in the skill premium.

To provide further detail, consider a cleaner and a finance director. The cleaner corresponds to job level 1, work that “requires basic literacy and numeracy skills and the ability to perform a few straightforward and short-term tasks to instructions under immediate supervision”. The finance director corresponds to our highest skill category – job level 9 and involves “very senior executive roles with substantial experience in, and leadership of, a specialist function, including some input to the organisation’s overall strategy”. We measure skill premium using a ratio of a high-skill to low-skill job, at the same firm, in the same year.


When examining ‘top-bottom’ wage ratios in our sample (e.g., the wage associated with job level 8 divided by the wage associated with job level 1 within the same firm and year), we find they increase with firm size. A similar, albeit weaker, relationship arises when we look at ‘top-middle’ wage ratios (e.g. the wage associated with job level 8 divided by the wage associated with job level 4 within the same firm and year). In contrast, ‘middle-bottom’ wage ratios (e.g. the wage associated with job level 4 divided by the wage associated with job level 1 within the same firm and year) stay flat, or if anything slightly decrease with firm size.
  • What is interesting is that when low job levels (1 to 5) are compared to one another, an increase in firm size has no effect on within-firm skill premia.
  • In contrast, when high job levels (6 to 9) are compared to either one another or low job levels, an increase in firm size widens the wage gap between higher and lower skill categories.

The question this give rise to is Why do wages in high-skill job categories increase with firm size but not wages in low- and medium-skill job categories?

We provide two possible explanations.
  • First, larger firms invest more in automation which allows them to replace labour with technology in certain routine jobs [...].

Consistent with this hypothesis, we find that wages associated with routine jobs decline relative to those associated with non-routine jobs as firms become larger, especially in medium-skill job categories.

  • Second, larger firms may pay relatively lower entry-level managerial wages in return for providing better career opportunities [...].

Consistent with this hypothesis, we find that managerial wages in low- to medium-skill job categories are relatively lower in larger firms, while those in high-skill job categories are relatively higher in larger firms.

Is there a third factor here? We know that the division of labour is limited by the extent of the market and bigger firms have larger internal labour markets which gives raise to a greater levels of specialisation with some areas of specialisation being more valuable than others. These higher value jobs receive greater remuneration.

The last question is, What do the results say about overall wage inequality?

An increasing skill premium at larger firms will lead to greater wage inequality inside those firms. But how has the size of the median employer changed over the last two decades? US firms with 500 or more employees accounted for 51.5% of all employment in 2011. As such, we measure firm size by focusing on the largest firms and find evidence of strong firm growth among larger firms in practically all of the developed countries in our sample. These results suggest that part of what may be perceived as a global trend toward more wage inequality may be driven by an increase in employment by the largest firms in the economy.

So the upshot of this is that the growth of larger firms in the economy may partially explain the rise in wage inequality seen over the last few decades.

Meshblock mysteries solved Aaron Mar 26

Previously I posted about some mysteries in New Zealand meshblock datasets, and in particular the differences in the sets of meshblocks contained in the Census meshblock dataset and other geographic data files. One of the wonderful, helpful people at Statistics New Zealand read my post and sent me a detailed email about these “mysteries”, and […]

Competitive ODI matches Seamus Hogan Mar 26

Before the current cricket world cup started, the International Cricket Council (ICC) announced that the next event (in 2019), would feature only 10 teams, the eight highest-ranked to qualify automatically, and two to be selected by a qualifying tourna…

Crowdfunding the Arts Eric Crampton Mar 25

Christchurch Art Gallery’s budget is being hit in the latest round of Christchurch Council austerity measures.

The Christchurch Art Gallery’s fund for purchasing artworks will be cut by more than two thirds under wide-ranging budget cuts proposed for the arts.
The cuts mean the gallery’s art buying fund will fall from $250,000 a year to $80,000 a year, making it one of the most poorly funded art collections in the country.
It has to trim 6 per cent from its budget over the next three financial years as part of operational spending cuts proposed in the Christchurch City Council’s draft long-term plan.
Under the cuts, the gallery would host about 12 exhibitions a year compared to about 18 before the 2011 earthquakes, reopen later this year without some hoped-for building improvements, and not replace some staff cut after the earthquakes.
Gallery director Jenny Harper said the cuts would mean more reliance on external fundraising.
“Everyone knows that $80,000 doesn’t buy you much, even from younger and less established artists.
“It is fair to say that this is a city with multiple priorities. We will still be able to buy a few things and we will still be able to receive gifts and fundraise. We will be increasingly reliant on community funding to build the collection.”

One potential solution for new acquisitions? Crowdfunding through PledgeMe.

The latest Art Gallery bulletin has entries from a few folks on crowdfunding and the arts. I’ve copied mine below.

Crowdfunding is a new take on an old method for funding the arts: patronage. Count Ferdinand von Waldstein earned lasting fame by his early sponsorship of Beethoven. While patrons supporting the arts through Kickstarter can hardly expect similar name recognition, they can similarly enjoy a sense of part-ownership of the final production.

Arts patronage was typically, and remains, the domain of the wealthy. Smaller patrons could never really be sure how much difference their contributions made. Consequently, donations can suffer from what economists call a public goods problem: because everyone can benefit from a work when it is produced, it is often best to sit back and wait to see whether the work might be produced without your contribution. And so arts organisations provide special bonuses for members of their affiliated groups of supporters.

While this comes some way towards solving the public goods problem, crowdfunding alternatives provide a more direct approach: no donor is charged unless the project has enough pledged support to go ahead. Each donor can then feel part-ownership of the project. Because of the donor’s support, along with that of like-minded others, an artist could make something new and beautiful – as judged by the donor. The New York Times reported in January that the traditional fine arts have some of Kickstarter’s highest success rates.

The public goods problem remains where some would-be supporters delay pledging in hopes that the threshold is reached without their contribution. Clever crowdfunding initiatives can mitigate the problem by providing bonuses to early pledgers, like signed tokens from the artists that can be produced at low cost but are of high value to supporters as it enables them to display their affiliation and support.

Even better, arts organisations can use crowdfunding mechanisms to gauge support for the different initiatives they might undertake. A gallery could propose commissioning several different works; patron support through PledgeMe would determine which were commissioned, and supporters could receive small versions of the commissioned work in acknowledgement, from pins through prints.

PledgeMe supporters of a [hypothetical] Christchurch Art Gallery commission of a new painting (by an artist like Jason Greig, for example) would hardly earn Waldstein’s fame. But, a supporters’ limited-edition lithograph of the newly commissioned work could be fame enough for many supporters – including me.

When the city can barely manage to get its roading in order post-quake, art gallery acquisitions are a luxury – though I’d agree with anybody arguing that the anchor projects need a strong re-think in the current budgetary environment too.

Gallery collections can be supported through donation though. The Press reports that the Challenge Grant, where Council matches raised funds, will remain at $220,000 per year. Were this dedicated to acquisitions where half the cost were covered by crowdfunding, the Gallery could nicely leverage the crowdsourced contributions and ensure that it acquires the pieces that its patrons think most valuable.

And my offer to pledge towards any new Greig commission, in exchange for a lithograph, stands. I’m so annoyed that I didn’t pick up his early pieces when he showed at Gallery O in the Arts Centre. Just didn’t have the budget for it then.


GST on imports – yet again Eric Crampton Mar 25

Not sure that I’m a fan of the latest idea for applying GST on lower-valued imports.Recall that New Zealand uses a de minimus minimis regime – no tariff or GST applies for imports where the total amount that would be collected is less than the cos…

Visualising Auckland rail trips Aaron Mar 24

Late last year, TransportBlog posted some detailed data on trips on Auckland’s rail network using HOP cards over 12 months. I understand they went to a considerable amount of effort to get the data, which is awesome, and also awesome that Auckland Transport released it. I created a visualisation of the data — you can […]

The eugenic effects of minimum wage laws Paul Walker Mar 24

I came across a bit of the history of the minimum wage that I didn’t know today. A 2005 article by Thomas C. Leonard in the Journal of Economic Perspectives (Vol. 19 No. 4 Fall 2005) discusses Eugenics and Economics in the Progressive Era. Leonard opens the article by noting,

American economics transformed itself during the Progressive Era. In the three to four decades after 1890, American economics became an expert policy science and academic economists played a leading role in bringing about a vastly more expansive state role in the American economy. By World War I, the U.S. government amended the Constitution to institute a personal income tax, created the Federal Reserve, applied antitrust laws, restricted immigration and began regulation of food and drug safety. State governments, where the reform impulse was stronger still, regulated working conditions, banned child labor, instituted “mothers’ pensions,” capped working hours and set minimum wages.

Less well known is that a crude eugenic sorting of groups into deserving and undeserving classes crucially informed the labor and immigration reform that is the hallmark of the Progressive Era (Leonard, 2003). Reform-minded economists of the Progressive Era defended exclusionary labor and immigration legislation on grounds that the labor force should be rid of unfit workers, whom they labeled “parasites,” “the unemployable,” “low-wage races” and the “industrial residuum.” Removing the unfit, went the argument, would uplift superior, deserving workers.

He goes on in the article to write about “The eugenic effects of minimum wage laws”.

During the second half of the Progressive Era, beginning roughly in 1908, progressive economists and their reform allies achieved many statutory victories, including state laws that regulated working conditions, banned child labor, instituted “mothers’ pensions,” capped working hours and, the sine qua non, fixed minimum wages. In using eugenics to justify exclusionary immigration legislation, the race-suicide theorists offered a model to economists advocating labor reforms, notably those affiliated with the American Association for Labor Legislation, the organization of academic economists that Orloff and Skocpol (1984, p. 726) call the “leading association of U.S. social reform advocates in the Progressive Era.”

Progressive economists, like their neoclassical critics, believed that binding minimum wages would cause job losses. However, the progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the “unemployable.” Sidney and Beatrice Webb (1897 [1920], p. 785) put it plainly: “With regard to certain sections of the population [the “unemployable”], this unemployment is not a mark of social disease, but actually of social health.” “[O]f all ways of dealing with these unfortunate parasites,” Sidney Webb (1912, p. 992) opined in the Journal of Political Economy, “the most ruinous to the community is to allow them to unrestrainedly compete as wage earners.” A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants (Henderson, 1900) and also by removing from employment the “unemployable,” who, thus identified, could be, for example, segregated in rural communities or sterilized.

While both progressive economists and their neoclassical critics believed that a minimum wage caused unemployment, it was the neoclassical economists of the time, like Alfred Marshall, Philip Wicksteed, A. C. Pigou in the U.K. and John Bates Clark in the U.S, who regarded the job losses as a social cost of minimum wages, not as a putative social benefit as the progressives saw them.

Leonard continues,

Columbia’s Henry Rogers Seager, a leading progressive economist who served as president of the AEA in 1922, provides an example. Worthy wage-earners, Seager (1913a, p. 12) argued, need protection from the “wearing competition of the casual worker and the drifter” and from the other “unemployable” who unfairly drag down the wages of more deserving workers (1913b, pp. 82–83). The minimum wage protects deserving workers from the competition of the unfit by making it illegal to work for less. Seager (1913a, p. 9) wrote: “The operation of the minimum wage requirement would merely extend the definition of defectives to embrace all individuals, who even after having received special training, remain incapable of adequate self-support.” Seager (p. 10) made clear what should happen to those who, even after remedial training, could not earn the legal minimum: “If we are to maintain a race that is to be made of up of capable, efficient and independent individuals and family groups we must courageously cut off lines of heredity that have been proved to be undesirable by isolation or sterilization … .”

The unemployable were thus those workers who earned less than some measure of an adequate standard of living, a standard the British called a “decent maintenance” and Americans referred to as a “living wage.” For labor reformers, firms that paid workers less than the living wage to which they were entitled were deemed parasitic, as were the workers who accepted such wages—on grounds that someone (charity, state, other members of the household) would need to make up the difference.

For progressives, a legal minimum wage had the useful property of sorting the unfit, who would lose their jobs, from the deserving workers, who would retain their jobs. Royal Meeker, a Princeton economist who served as Woodrow Wilson’s U.S. Commissioner of Labor, opposed a proposal to subsidize the wages of poor workers for this reason. Meeker preferred a wage floor because it would disemploy unfit workers and thereby enable their culling from the work force. “It is much better to enact a minimum-wage law even if it deprives these unfortunates of work,” argued Meeker (1910, p. 554). “Better that the state should support the inefficient wholly and prevent the multiplication of the breed than subsidize incompetence and unthrift, enabling them to bring forth more of their kind.” A. B. Wolfe (1917, p. 278), an American progressive economist who would later become president of the AEA in 1943, also argued for the eugenic virtues of removing from employment those who “are a burden on society.”

Frank Taussig, one of the leading economists of the time, asked the question “how to deal with the unemployable?” in his book Principles of Economics (Taussig 1921, pp. 332–333)

Taussig identified two classes of unemployable worker, distinguishing the aged, infirm and disabled from the “feebleminded . . . those saturated with alcohol or tainted with hereditary disease . . . [and] the irretrievable criminals and tramps. . . .” The latter class, Taussig proposed, “should simply be stamped out.” “We have not reached the stage,” Taussig allowed, “where we can proceed to chloroform them once and for all; but at least they can be segregated, shut up in refuges and asylums, and prevented from propagating their kind.”

The idea held by progressive economists that the unemployable could not earn a living wage was bound up with the progressive view of wage determination.

Unlike the economists who pioneered the still-novel marginal productivity theory, most progressives agreed that wages should be determined by the amount that was necessary to provide a reasonable standard of living, not by productivity, and that the cost of this entitlement should fall on firms.

But how should a living wage be determined? Were workers with more dependents, and thus higher living expenses, thereby entitled to higher wages? Arguing that wages should be a matter of an appropriate standard of living opened the door, in this era of eugenics, to theories of wage determination that were grounded in biology, in particular to the idea that “low-wage races” were biologically predisposed to low wages, or “under-living.” 7 Edward A. Ross (1936, p. 70), the proponent of race-suicide theory, argued that “the Coolie cannot outdo the American, but he can underlive him.” “Native” workers have higher productivity, claimed Ross, but because Chinese immigrants are racially disposed to work for lower wages, they displace the native workers.

John R. Commons, one of the leading (old) institutional economists (the new institutional economics follows from the work of Ronald Coase) argued that wage competition not only lowers wages, it also selects for the unfit races.

“The competition has no respect for the superior races,” said Commons (1907, p. 151), “the race with lowest necessities displaces others.” Because race rather than productivity determined living standards, Commons could populate his low-wage-races category with the industrious and lazy alike. African Americans were, for Commons (p. 136), “indolent and fickle,” which explained why, Commons argued, slavery was required: “The negro could not possibly have found a place in American industry had he come as a free man . . . [I]f such races are to adopt that industrious life which is second nature to races of the temperate zones, it is only through some form of compulsion.” Similarly, Wharton School reformer Scott Nearing (1915, p. 22), volunteered that if “an employer has a Scotchman working for him at $3 a day [and] an equally efficient Lithuanian offers to the same work for $2 . . . the work is given to the low bidder.”

Leonard continues by looking at the reaction of the progressives to the situation in other countries,

When U.S. labor reformers reported on labor legislation in countries more precocious with respect to labor reform, they favorably commented on the eugenic efficacy of minimum wages in excluding the “low-wage races” from work. Harvard’s Arthur Holcombe (1912, p. 21), a member of the Massachusetts Minimum Wage Commission, referred approvingly to the intent of Australia’s minimum wage law to “protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese.” Florence Kelley (1911, p. 304), perhaps the most influential U.S. labor reformer of the day, also endorsed the Australian minimum-wage law as “redeeming the sweated trades” by preventing the “unbridled competition” of the unemployable, the “women, children, and Chinese [who] were reducing all the employees to starvation . . .”

For these progressives, race determined the standard of living, and the standard of living determined the wage. Thus were immigration restriction and labor legislation, especially minimum wages, justified for their eugenic effects. Invidious distinction, whether founded on the putatively greater fertility of the unfit, or upon their putatively greater predisposition to low wages, lay at the heart of the reforms we today see as the hallmark of the Progressive Era.

As an aside, Austria wasn’t the only place down-under which tried to protect the white workers standard of living against competition from the Chinese. New Zealand however used a taxes rather than labour regulation. The 1881 Chinese Immigrants Act has imposed a 10 pound poll tax on Chinese immigrants. There were also steep custom duties on opium.

So the history of the minimum wage isn’t, unfortunately, just about making the worst-off better-off.

EconTalk this week Paul Walker Mar 23

Paul Romer of New York University talks with EconTalk host Russ Roberts about reforming cities to allow growth and human flourishing. Topics discussed include charter cities, the role of population density in city life, driverless cars, and various way…

From Red Tape to Green Gold Eric Crampton Mar 23

Those in Wellington might wish to join us on Monday night for the launch of Jason Krupp’s report on regulatory reform in mining. Jason shows that we’re well inside the production-possibilities frontier: we could get both more mining and better env…

Oil vs GDP Aaron Mar 20

Via Erik Brynjolfsson on Twitter, I found the chart below of US oil consumption and GDP, which is part of a nice interactive by Bloomberg. It’s interesting to take a close look at the data from around 2008 onwards; I’ve made some crude (pun intended) annotations: Up to about 2011, US oil consumption correlates pretty […]

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