The influence of firm size on income inequality

Abstract

Income inequality has attracted much interest in recent years and has become one of the key challenges of our generation. In countries where income earned through wages forms the bulk of an individual s wealth, disparity of wages can be a significant factor of income inequality. There has also been a growing trend in the world towards larger firms that have the ability to pay workers higher wages than smaller firms. For the purpose of this research paper, the researcher focuses on the wage segment of income inequality, and more specifically how the size of firms, over time, influences income inequality. Using secondary data, in the form of listed companies annual financial statements and various other data sources, the researcher conducted a study focusing on five developing (Indonesia, Philippines, India, Poland and South Africa) and five developed countries (United Kingdom, Germany, Sweden, Australia and the United States of America), totalling 644 sample firms, with the aim of assessing the following hypotheses: the first stated that the mean growth rate of average wages per employee for larger firms would be higher than smaller firms; the second stated that the mean growth rate of average wages per executive would be higher for larger firms than for smaller firms; lastly, within firms, the mean growth rate of average wages per executive would be greater than the growth rate of average wages per of the rest of the firms. The findings suggest that, when considering all employees, larger firms do not pay higher increases in wage than small firms. However, executives in larger firms in the Philippines, India and South Africa have higher increases in their wages than executives in smaller firm. This may be a contributing factor to income inequality within those countries. Lastly, this paper looks at wage disparity within firms and the findings suggest a high prevalence of increasing wage inequality, within firms.