Wage inequality and firm reorganization when firm competition changes

November 19, 2021

This paper studies how increased domestic product market competition induces firms to change their internal organization and how this change affects wage inequality. The paper exploits the Empresa na Hora (Firm On the Spot) program in Portugal as a quasi-natural experiment of a shock to competition. The paper uses detailed employer-employee data for the analysis.

The main findings are that increased domestic competition following the “Firm On the Spot” program leads firms to flatten their hierarchies by delayering and that reorganization is accompanied by a reduction in within-firm wage inequality.

Effect of the “Firm On the Spot” program on firm entry (left) and on the number of job layers (right) over time.
Caption: Effect of the “Firm On the Spot” program on firm entry (left) and on the number of job layers (right) over time.
The paper shows that the “Firm On the Spot” program significantly increased firm entry and reduced sales, output and employment of affected incumbents. The negative shock to production following the introduction of the new program induced firms to reorganize by dropping layers. The paper documents that lower sales are associated with flatter hierarchies. With the reduction in the depth of the hierarchy, the span of control of top managers is expected to have increased.

The reduction in hierarchical layers is accompanied by an 8% drop in the average pay ratio between the top and the bottom layer and a 4.4% drop in the 90-50 percentile pay ratio, showing that there are real changes arising from the reorganization. The flattening of firms’ hierarchies induced by the reform, carried effects to pay and the career paths of individual workers in incumbent firms.

Click here to go to the paper by Dudley Cooke, Ana P. Fernandes, and Priscila Ferreira.


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