Owner Culture and Pay Inequality within Firms

Abstract

We study the role of national culture in explaining differences in within-firm pay inequality among closely-held firms owned by immigrants in Canada. Using a unique matched employer-employee-owner tax filing data, we find that the culture that immigrant owners bring from their home countries has an economically significant influence on the pay inequality within their firms. Relative to firms owned by immigrants from the United States, firms owned by immigrants from most other countries have significantly smaller pay inequality. Consistent with the argument that individualistic owners emphasize monetary incentives, individual achievement, and individual accountability, while focusing less on group harmony and equal pay, we show that that Hofstede’s individualism is a key driver of within-firm pay inequality. We find that within-firm pay inequality is higher if a firm’s owner immigrated from a more individualistic country. We further conduct a series of analyses showing that the impact of culture on within-firm pay inequality is likely to be causal. In the difference-in-differences setting, we find an increase in within-firm pay inequality after the firm was taken over by immigrant owners from a more individualistic country. Overall, our findings suggest that informal institutions such as national culture may be important determinants of income inequality.

Keywords: national culture, pay inequality, individualism, immigration

JEL Classification: J31, J15, Z10