Big Firms = Greater Inequality?

inequality2The Economist in their Free Exchange column had an interesting piece on the size of firms and the growing disparity in wages.  In America the best-paid 1% of workers earned 191% more in real (ie, inflation-adjusted) terms in 2011 than they did in 1980, whereas the wages of the middle fifth fell by 5%.

Economists have long recognised that economies of scale allow workers at bigger firms to be more productive than those at smaller ones. That, in turn, allows the bigger firms to pay higher wages. This should not, in theory, cause a rise in inequality. If the chief executive and cleaner at a larger firm are both paid 10% more than their counterparts at a small firm, the ratio between their wages—and thus the overall level of inequality—should remain the same.

However two reasons are given for why this has not happened:
1. Larger firms find it easier to to automate tasks than smaller ones and if there is resistance from unskilled workers over the wage rate then mechanisation is always another option.
2. Because of the potential promotional prospects in a big firm workers are more willing to accept lower wages.

But if governments wish to reverse the inequality big firms foment, reforms to the labour market are unlikely to do the trick. Instead, they will have to spur competition by reducing barriers to entry for smaller firms, most notably by improving their access to credit. That should reduce income inequality and boost economic growth at the same time.

Source: The Economist

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