Edward Conard

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  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

AI Summary. Wage differences across firms are positively correlated with overall wage dispersion, driven mainly by pay gaps between firms within the same sector rather than between sectors. Globalisation and digitalisation are linked to wider wage divergence, while higher minimum wages and unionisation are associated with less wage inequality but a weaker productivity-wage link.

Giuseppe Berlingieri, Patrick Blanchenay, and Chiara Criscuolo Organisation for Economic Co-operation and Development
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Btw-firm wage dispersion is significantly and positively correlated with overall wage dispersion, driven by pay differences across firms within sectors.

How do pay gaps between firms drive overall wage inequality?

Core argument: Wage inequality measured by the 90-10 ratio has risen, with widening concentrated in the lower tail (50-10 ratio) while the upper tail (90-50 ratio) has diverged mainly in the service sector since 2005.

Between-firm wage dispersion is significantly and positively correlated with overall wage dispersion, driven by pay differences across firms within sectors rather than across sectors. Wage inequality, measured by the 90-10 wage ratio, has increased, particularly in the lower tail (50-10 ratio), with the upper tail (90-50 ratio) diverging mainly in the service sector since 2005. Productivity dispersion, measured as real value added per worker or multi-factor productivity, has also risen, primarily due to within-sector differentials. Globalisation and digitalisation are linked to higher wage divergence, enhancing the connection between productivity and wage dispersion. Policies like higher minimum wages and unionisation reduce wage inequality but weaken the productivity-wage link, except when minimum wages strengthen this link over time.

Takeaways by Macro Roundup® AI

  1. Wage inequality measured by the 90-10 ratio has risen, with widening concentrated in the lower tail (50-10 ratio) while the upper tail (90-50 ratio) has diverged mainly in the service sector since 2005.
  2. Between-firm wage dispersion is significantly and positively correlated with overall wage dispersion, driven by pay differences across firms within sectors rather than differences between sectors.
  3. Higher minimum wages and unionisation reduce wage inequality but weaken the link between productivity and wages, except where minimum wages strengthen that link over time, while globalisation and digitalisation are linked to higher wage divergence.

“…. Between-firm wage dispersion is found to be significantly and positively correlated to the overall wage dispersion across workers and its evolution over time. Most of the between-firm wage variance is driven by differences in pay across firms within sectors rather than by differences in average wages across sectors. There has been a steady increase in wage inequality, measured as the 90-10 wage ratio, driven mainly by an increased dispersion in the lower tail (50-10 ratio); the divergence of the upper tail (90-50 ratio) only happens in the service sector and only since 2005…. Similarly, we find that dispersion in productivity, whether measured as real value added per worker (labour productivity) or as multi-factor productivity (MFP), has also significantly increased in the last decade. Most of the increase is driven by within-sector productivity differentials across firms, rather than by cross-sectoral differences. Similar dynamics of increase at the bottom throughout the entire period and at the top only after 2005 are also present in the productivity data, which might point to a link between the co-evolution of wage and productivity dispersions…. Wage dispersion is linked to increasing differences between high and low productivity firms, even controlling for the sectors’ skill composition. Firm-level correlation between wages and productivity is systematically weaker at the top and at the bottom of the productivity distribution….Both globalisation, as indicated by measures of greater openness, greater import penetration and greater export intensity at the sectoral level, and digitalisation, measured by more intense use of ICT capital at the sectoral level, are associated with higher wage divergence, and tend to strengthen the link between productivity and wage dispersion within sectors and countries over time….Finally, the report provides some preliminary analysis of the impact of policies and institutions on the link between wage inequality and productivity dispersion focusing on minimum wage, employment protection legislation, trade union density, and coordination in wage setting. The results point to a positive link between higher minimum wages, unionisation, EPL, coordination in wage setting, and reduced wage inequality, but usually accompanied by a weaker link between productivity and wages, especially for more centralised wage bargaining. On the contrary, over time, the minimum wage tends to strengthen the link between productivity and wage dispersion…”

Giuseppe Berlingieri, Patrick Blanchenay, and Chiara Criscuolo, “The Great Divergence,” Organisation for Economic Co-operation and Development (OECD), May 12, 2017, http://www.oecd-ilibrary.org/science-and-technology/the-great-divergence-s_953f3853-en

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