The Role of Firms in Wage Inequality
Policy Lessons from a Large Scale Cross-Country Study
Even though firms play a key role in shaping wages, wage inequality and the gender
wage gap, firms have so far only featured to a limited extent in the policy debates
around these issues. The evidence in this volume shows that around one third of overall
wage inequality can be explained by gaps in pay between firms rather than differences
in the level and returns to workers’ skills. Gaps in firm pay reflect differences
in productivity and wage setting power. To address high wage inequality while fostering
high and sustainable growth, worker-centred policies (e.g. education, adult learning)
need to be complemented with firm-oriented policies. This involves notably: (1) policies
that promote the productivity catch-up of lagging firms, which would not only raise
aggregate productivity and wages but also reduce wage inequality; (2) policies that
reduce wage gaps at given productivity gaps without limiting efficiency-enhancing
reallocation, especially the promotion of worker mobility; and (3) policies that reduce
the wage setting power of firms with dominant positions in local labour markets, which
would raise wages and reduce wage inequality without adverse effects on employment
and output.
Published on December 09, 2021Also available in: French