Managing Inequality: Manager-Specific Wage Premiums and Selection in the Managerial Labor Market

Abstract

This paper studies how managers affect worker wages and wage inequality. We use a manager-firm-worker matched dataset covering the entire population of Denmark from 1995 to 2011 to identify manager-specific wage premiums from worker and manager movements across firms. We document four findings. First, leveraging manager movements across firms and exogenous manager turnovers such as retirements and sudden deaths, we show that the identity of managers does matter for wages, and that manager-specific wage premiums are transferrable across firms. Second, manager fixed effects are almost as important as firm fixed effects in explaining between-firm wage inequality. Third, managers who pay higher wages are more likely to be replaced in the managerial labor market. In particular, mergers and acquisitions target high-paying managers and reduce wage premiums at their firms. Finally, the manager-specific component of firm wage premia is not correlated with firm productivity and seems to stem from managers’ traits and fairness views. Our results highlight the role of managers in understanding between-firm wage inequality and suggest that the managerial labor market tends to select low-paying managers and redistribute wealth from workers to shareholders.

Keywords: management, wages, inequality, mergers and acquisitions

JEL Classification: J31, J30, M50, J53, G34