the corporation and inequality

This blog post is the third in a blog forum about inequality and organizational theory (see parts 1 and 2).  Adam Cobb of Penn’s Wharton School of Management wrote the post and Leslie McCall of Northwestern University provided commentary.

Adam Cobb

An imbalance between rich and poor is the oldest and most fatal ailment of all republics.

- Plutarch

Corporations are the essence of inequality. Within them, workers are sorted into pyramid-shaped hierarchies where a privileged few at the top garner disproportionate perks from their status.  Executives benefit from skyrocketing levels of  compensation that are not tightly coupled with sustained company performance, while those at the lower rungs of the firm receive stagnant wages, declining benefits, and less security despite overall increases in labor productivity over the past 30 years.   At first glance, it’s logical to assume that the prevalence of large-scale corporate enterprises in a society would be associated with greater levels of inequality.

One afternoon, Jerry Davis (my recovering advisor and current co-conspirator in this research) and I began thinking about this question in detail.  Jerry had recently finished his book tour for Managed by Markets, which chronicled the decline of the large corporation and concomitant rise of finance as the central institution in US society.  We discussed how income inequality rose during a period when financial markets took an increasingly large role in redefining the purpose of the firm – the corporation was no longer a stabilizing institution providing large numbers of quality jobs, retirement and health care, and opportunities for advancement and mobility.  Could rising income inequality be a consequence these changes?   Our hunch was yes.

Whereas economic theory explains wage differentials to variations in labor supply and productivity, the structuralist approach in sociology argues that organizations are the central source of inequality because firms provide unequal access to remuneration, rewards and opportunities for advancement.  Organizations and their practices, therefore, have much to inform us about societal-levels of income inequality.  How corporate size relates to inequality is because large organizations are more likely to standardize their employment practices through bureaucratized procedures.  They are also more likely to utilize internal labor markets (ILMs) in which workers are buffered from the vagaries of market forces.  ILMs also provide a clear pathway for mobility – jobs are organized into promotion ladders that enable workers to move upward through the corporate ranks.  As more employees are brought within the boundaries of a single organization, their remuneration and opportunities for advancement are standardized.  Extremes at the top and bottom of a country’s income distribution are most likely to occur outside of bureaucratized corporations.  The top end consists of winner-take-all markets, investment partnerships and other boutique firms where the spoils are shared by a relatively small number.  The very bottom is characterized by low wages and economic insecurity.  Workers in large corporations are more likely to occupy the middle.

In a recent study, Jerry and I tested this hypothesis.  We operationalized the presence of large corporations in a society by creating a measure of employment concentration – the proportion of the labor force employed by the largest 10, 25, or 50 firms – and tested whether this has any relationship with a country’s level of inequality.  The results are startling and indicate an almost mechanical relationship between inequality and employment concentration in the US over time

Three-Year Moving Average of Income Inequality and Employment Concentration in the United States, 1950 – 2008

Cross-national results, while less straightforward, are also suggestive.

Cross-National Comparison of Income Inequality and Employment Concentration

The observed pattern indicates a ‘‘wedge’’: low employment concentration is compatible with both great inequality (Latin America) and relative equality (the former state socialist countries), but high concentration seems to drive out inequality. (Preliminary cross-national, longitudinal work suggests that this relationship is equally as strong in the  UK (ρ = -.75) as in the US (ρ = -.81), though much less so in Canada (ρ = -20).) There exist a number of alternative explanations for these findings and while space constraints limit my ability to discuss those here, we do our best to account for those both empirically and conceptually in our paper.

I do not wish to romanticize the halcyon days where large corporations dominated the societal landscape.  However, the results here suggest that a society’s level of corporate employment is negatively associated with inequality.  Future work in this area will help uncover when, where and under what conditions these relationships hold.

[Shameless plug]  Currently, I am developing a website to serve as a portal where researchers can find, access and contribute data and research to the study of this topic.  It should be up soon, so check out http://www.worldinequality.net in the next few weeks!

 

Discussion by Leslie McCall

Organizational sociologists have long studied the relationship between organizations and labor market structures, including labor market inequalities and insecurities of many kinds. Until recently, however, they have been relatively absent from debates over the causes and consequences of rising economic inequality.  No doubt this reflects the difficulties of measuring corporate-level changes in a manner that isolates their unique impact on aggregate levels of economic inequality.

In the absence of such aggregate, organization-level data, scholars interested in understanding the social dynamics of rising inequality have focused on the impact of changes in families, unions, the minimum wage, partisan shifts, tax policy, and other major social and political institutions. I come back to politics at the end, but for the moment I simply want to emphasize that economists and political scientists already recognize that institutional factors are important in shaping the rise of earnings and income inequality. Current debates revolve around which institutions matter the most, and when and why they do, as the trend in rising inequality varies considerably over time and depending on the measure of inequality (e.g., earnings inequality versus family income inequality, the 50^th/10^th ratio versus the share of income held by the top .01%).

It is especially in this light that Davis and Cobb’s research is so welcome, given its international and historical scope. If they can help explain both the ups in the 1980s and the downs in the 1960s in the U.S., in addition to cross-national variation, that would be impressive indeed. The considerable empirical evidence they harness does suggest that employment concentration in large firms is associated with income inequality. And so this—employment concentration— might represent one of the best ways that organizational sociologists can begin to measure organizational change and its connection to aggregate inequality.

In the spirit of furthering this broader project, I want to say a bit more about Davis and Cobb’s findings, their explanations of these findings, and how their research squares with the research of a small but hopefully growing number of other sociologists studying the impact of corporate structure on inequality (and here I focus mainly on the U.S.).

First, in terms of the findings, the figure of trends in employment concentration and income inequality in the U.S. appears most convincing in the period from 1950 to the late 1980s (see also Figure 7 in the published paper). It is especially interesting to observe the decline in employment concentration in the 1970s prior to the steep rise in inequality in the 1980s, as one would expect this lag in cause and effect. It is also widely assumed that the 1970s were a “pivotal decade” in terms of setting the stage for rising inequality.

But thereafter, the measure of employment concentration flattens out even though income inequality continues to rise, albeit less steeply than in the 1980s (note that the sharp increase in the early nineties is due to a change in the Census Bureau’s methods).

This latter period coincides with evidence of the declining significance of large firms in shaping the structure of wages and inequality. Matissa Hollister shows that the well-known wage premium accruing to workers in large firms declined from the late 1980s to the 1990s. And a paper she presented at the 2012 ASA meetings gives a new clue as to why: managers as a share of employment declined in large firms but rose in small firms, adding nuance to Adam Goldstein’s recent evidence in support of David Gordon’s Fat and Mean hypothesis.

In an earlier ASA paper, I explored the effect of establishment size on earnings inequality in a panel of urban areas from 1970 to 2000. I too found that the depressing effect of large establishments on aggregate levels of inequality ceased by 1990.  As noteworthy, average establishment size (as a measure of “downsizing”) declined in the 1980s but by just a small amount. It then increased (also by a small amount) in the 1990s. Similar evidence is provided by Baumol, Blinder, and Wolff.

Thus the decline of the large firm, at least by these definitions, is less consequential than the decline of what the large firm once stood for in terms of equity norms enforced by struggle (i.e., unions) and reinforced by a lack of competition. (And here I agree with Shamus Kahn that changes in constraints are likely more important than changes in norms.)

But you could argue that what we are really after are the practices of such firms, rather than their size or size distribution per se (though Jesper Sorensen and Olav Sorenson provide an elegant and persuasive theory of how the number and diversity of firms affects wage inequality). This is where Davis’ path breaking research is so crucial, and the published paper by Davis and Cobb fills in many of the blanks between Davis’s prior work on changes in corporate structure and rising economic inequality.

The next step is to operationalize some of these changes in corporate governance in finer detail. Take mergers and acquisitions, for example. Ola Sjoberg has already shown that they are correlated with cross-national variation in earnings inequality, even relative to a number of more common explanations (e.g., globalization). As I said at the outset, so much has changed over this period that isolating exactly which changes matter the most, and when, is the biggest challenge.

Finally, what I most look forward to reading from organizational sociologists are their ideas of how corporations can be reorganized to reduce market inequality. The prescriptive literature in economics, sociology, and political science speaks in near unison when it comes to the best and most viable solution to rising inequality in the U.S.: progressive taxes. The market is impossible to tame.

But my forthcoming book on public opinion about income inequality shows that Americans concerned about income inequality (and, yes, they are concerned) want less market inequality and more market opportunity. And they don’t necessarily see taxes as achieving either of those goals. There is a huge vacuum in public discourse, in other words, around the question of what the market institutions of the future can and should look like. Many are working on this question, but their collective voice is weak, and new and creative ideas are still desperately needed.

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