Study: Pay Inequality Within Large Companies Has Increased Since 1987

Chris Gaetano
Published Date:
Feb 14, 2017

For many years, workers in at large organizations could expect to make between 30 to 50 percent more than those in comparable positions at smaller organizations, a phenomena called the Firm-Size Wage Effect (FSWE). However a recent study has found that this effect has diminished since 1987—but mainly for workers at the bottom of the wage distribution scale at these organizations, according to the Harvard Business Review

The researchers found that between 1987 and 2014 the FSWE for workers in the 10th percentile of wage distribution dropped from 19 percent to 14 percent at companies with 100 to 499 employees, 24 percent to 16 percent at companies with 500 to 999 employees and 23 to 16 percent at companies with 1000 or more. Conversely, workers at the 90th percentile employed by firms with 1000 or more workers actually experienced "a moderate but statistically non-significant increase in recent years." 

"Overall, Figure 4 suggests that the FSWE was greater for low-or median-wage workers in the earlier period but has been converging over time, mostly driven by the declines of those who received larger premiums in the earlier period," said the paper. 

The paper posits several possible reasons for this. One is declining union membership, which has generally benefited low- and median-wage workers at large organizations. Another is more organizations choosing to outsource services, such as those performed by cleaning staff, that had once been done in-house. When these workers were paid directly by the company, said the paper, there was an incentive to avoid too much inequality as a way to head off labor discontent, but this doesn't matter as much if they contract with another company. 

"The rise of outsourcing and other nonstandard work arrangements has had a particularly deleterious effect on lower-and middle-wage employees. Outsourcing limits the amount of within-firm heterogeneity of abilities and rewards, allowing firms to disperse wages without triggering perceptions of inequity among high- and low-skilled workers.. Rather than administrative rules and procedures determining the pay, once outsourced, the external market for a job becomes a reference point through which wages are set," said the paper. 

Regardless of cause, the study's authors believe the diminishing FSWE for workers has significantly contributed to overall economic inequality in society, as firms make decisions about who they hire, how much to pay and how many to employ. 

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