Growing Apart: The Changing Firm-Size Wage Effect and Its Inequality Consequences

Abstract

Wage inequality in the United States has risen dramatically over the past several decades, prompting scholars to develop a number of theoretical accounts for the upward trend. This study takes an organizational approach to examine how changes in the firm-size wage effect (FSWE) — a phenomenon whereby otherwise similar workers earn more when employed by large firms — have affected the wage distribution in the U.S labor market. Using data from the Current Population Survey and Survey of Income and Program Participation, our findings reveal that in 1987, although all workers benefited from a firm-size wage premium, the premium was significantly higher for individuals at the bottom (e.g., 10th and 25th percentiles) and middle of the wage distribution (e.g., 50th percentile) compared to those at the top (90th percentile). Between 1987 and 2014, however, whereas the average FSWE declined markedly, the decline was exclusive to those at the bottom and middle of the wage distribution while there was no change for those at the top. As such, the uneven declines in the FSWE across the wage distribution explain between 20 and 30 percent of rising wage inequality during this period, suggesting firms are of great importance to the study of rising inequality.

Keywords: Inequality; Firm-Size Wage Effect; Employment; Organization

JEL Classification: D21, D31, J31, M51