Owner Culture and Pay Inequality within Firms
78 Pages Posted: 23 Nov 2021
Date Written: November 18, 2021
We examine the effect of culture on within-firm pay inequality by studying the pay setting behaviors of closely-held firms owned by immigrants in Canada. Using matched employer-employee-owner tax filing data, we show that within-firm pay inequality varies significantly with a firm owner’s country of origin. With-firm pay inequality is higher if the owner immigrated from a more individualistic country. To further isolate the effect of culture, we investigate the change in pay inequality among “employee stayers” after a change of the firm’s owners. We find that within-firm pay inequality increases in firms taken over by owners from more individualistic countries or from countries with higher within-firm pay inequality compared to prior owners’ countries. We find similar results using a subsample of the Accommodation and Food Services sector where the production is more homogenous and the confounding effect from the unobservable production technology difference is minimal. We also find similar results when the changes of firms’ owners are driven by the deaths of owners.
Keywords: national culture, pay inequality, individualism, immigration
JEL Classification: J31, J15, Z10
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