Abstract

Abstract Using time-series data from the US since 1950 and from 53 countries around the world in 2006, this chapter documents a strong negative relation between an economy's employment concentration (that is, the proportion of the labor force employed by the largest 10, 25, or 50 firms) and its level of income inequality. Within the US, we find that trends in the relative size of the largest employers (up in the 1960s and 1970s, down in the 1980s and 1990s, up in the 2000s) are directly linked to changes in inequality, and that corporate size is a proximal cause of the extravagant increase in social inequality over the past generation. We conclude that organization theory can provide a distinctive contribution to understanding societal outcomes. 3 The triumph of shareholder capitalism in the United States over the past generation has corresponded to a dramatic increase in income inequality. The proportion of the nation's income going to the top 1% of earners has reached levels not seen since the stock market boom of the 1920s One economic explanation for increasing inequality focuses on technologicallydriven changes in the mix of skills required by the economy, which widens the wage gap between those who have these skills (e.g., computer literate college graduates) and those who do not. Similar explanations were offered to explain the rise in inequality during the Second Industrial Revolution in the late 19th century. But cross-national comparisons are inconsistent with this interpretation. France, for instance, has seen no substantial change in inequality since the Second World War We propose that the most immediate cause of increasing (or decreasing) inequality in advanced economies is aggregate change in corporate organization. More specifically, change in the relative size of the largest organizations in an economy has a direct and-we argue-causal relation to the degree of income inequality. Factors that influence the size of organizations-technology, managerial methods, innovations in organization design, power struggles over the purpose of the corporation-thereby indirectly influence inequality. We present evidence that, both cross-nationally and over 4 time within the US, there is a very strong correlation between the level of corporate employment concentration--the proportion of the labor force employed by the 10 or 25 or 100 largest domestic businesses--and income inequality at the societal level. Within the US from 1950 to 2006, this correlation year-to-year was roughly -0.8. That is, the greater the sizes of the largest employers relative to the size of the labor force, the lower the level of economy-wide income inequality. When employment concentration increased during the merger wave of the 1960s, inequality dropped to the lowest levels on record. As corporations shrank due to bust-up takeovers, spinoffs, layoffs, and outsourcing during the 1980s and 1990s, employment concentration declined, while inequality correspondingly increased. The reasons for the merger wave and the the subsequent "demerger" waves are well-known from the literature in organization theory (e.g., Our findings reveal a paradox. Corporate hierarchies are the defining structures of inequality in modern societies, and earnings inequality is greater in big firms than small firms 1 In Denmark, the most equal society in our sample, the ten largest 1 Throughout the paper, we use the Gini coefficient as our measure of income inequality at the economywide level, and explain it in more detail later. 6 hierarchy is analagous: unequal organizations aggregate into collectively more equal societies. In this chapter, we briefly review the literature on economic inequality and the part played by organizations in social stratification. We then review some of the major organization. We conclude with a somewhat speculative discussion of the sources of this relationship and its implications for future research on the effects of organizational forms on social inequality. Our approach is frankly exploratory: to our knowledge, this is the first paper to examine the correlates of employment concentration. But we believe the results indicate that this may be a rich construct for further investigation. 7 Organizations and social inequality Explaining social inequality is one of the defining problematics of sociology as a discipline, animating theorists from Marx and Durkheim to Otis Dudley Duncan and Jeffrey Pfeffer. By definition, inequality is a relational term. The unit of analysis for examining inequality can be the group, the organization, the society, or the world economy (e.g. Firebaugh, 1999 examines inequality among national averages). We focus on the societal level--specifically, on inequality within a national economy as the unit of analysis. The extant literature on social inequality is wide and deep, and we can only engage a small segment of it. Inequality is distinct from poverty. Poverty is a first-order problem, and among low-income countries, policies for alleviating poverty take precedence over questions of inequality. But above a threshold level of economic development, inequality is strongly related to a range of social ills. Among the world's developed economies, inequality is correlated with lower life expectancies, higher rates of infant mortality, higher teenage pregnancy rates, higher rates of homicide and other crime, higher rates of incarceration, and higher rates of mental illness (see The most frequently replicated findings are correlations between inequality and life expectancy at birth, and between inequality and infant mortality. Subsequent works found that the inverse-U relation was not an immutable law of nature, and the years since Kuznets wrote have produced challenges to the simple version of the Kuznets curve (e.g. In the US, inequality dropped substantially during WWII and did not return to pre-War levels for decades. The most equal year on record in the US was 1968. But more recently there has been a vast upsurge in inequality, returning the US to a new Gilded Age-perhaps more of an N-curve than an inverse-U. The implication of these findings is that the source of the potential link between economic development and inequality is 2 Indeed, authors disputing the causal link between inequality and aggregate health outcomes suggest something very similar to what we examine as their "third factor: "...industrial restructuring or other employment shocks may have detrimental effects for individual health outcomes (through the loss of insurance coverage or income), while at the same time increasing income inequality...Given the omission of factors that simultaneously affect inequality and health, it should be no surprise to sometimes observe a significant association between inequality and aggregate health measures, regardless of the sign of that association" (Mellor & Milyo, 2001, p. 515) 9 ambiguous. Technology-based changes in required skills are one possibility, but the direct evidence on this is not yet compelling. Insert Figure 1 about here Bureaucracy and social inequality A separate literature on stratification in sociology focused on individual-level attainment. The prototypical study would contain a regression in which individual income, or socio-economic status, was modeled as a function of education, sex, race, mother's education, and so on (e.g. organizations are where stratification happens The literature on organizational stratification has empirical implications for society-wide inequality, but these implications have rarely been directly tested 10 previously. A notable exception is a study by Increasing vertical differentiation by increasing the number of firms of the same type can increase inequality by sorting the highest quality (most productive) workers into the highest quality firms, thus increasing the dispersion of wages within that industry. On the other hand, increasing horizontal differentiation (that is, diversity in the kinds of organizations) can reduce inequality by sorting workers into firms that best match their talents. The authors find that increased numbers of organizations in the same industry operating within a region leads to increased earnings inequality, whereas wage inequality declines with greater variation in the kinds of organizations within a region. This argument about corporate demography can be extended to explain developmental patterns in inequality at the national level. The Kuznets curve can be partly attributed to changes in the nature and size of employers due to industrialization. Economies of scale that became feasible at the turn of the 20th century encouraged the growth of very large-scale production within single organizations, often created through the consolidation of dispersed regional industries into national oligopolies 11 Michigan, for instance, employed 75,000 persons when it was completed in 1927, more than the US Department of War at that time--and it continued to grow during the Great Depression and the Second World War. Employees in vertically integrated industries were subject to more regularized bureaucratic wage policies within a firm than outside a firm, as internal labor markets replaced external ones. Of course, what this should mean for aggregate inequality depends on the employment practices of the relevant organizations. On the one hand, corporate hierarchies are the essence of inequality, from the pyramid-shaped organization chart to the corporate jets that whisk executives to their golf outings, and earnings are more dispersed in large firms than small ones. On the other hand, the procedures for stratification--sorting and ranking--are regularized and rationalized. CEOs may be wellpaid relative to their employees, but the divergence probably does not compare with that between feudal lords and their serfs, or between hedge fund managers and temps at a call center. Moreover, organizations vary among themselves in their stratification procedures, even within the same industry This tendency is amplified by the ascendance of "winner-take-all" markets, in which rewards are both highly concentrated among top performers and payoffs are determined by relative rather than absolute performance As with inequality, organizations are central to individual economic mobility through their hiring and promotion practices. During the post-War era in the US, the largest employers adopted systems intended to maintain and develop employees over careers that could extend up to retirement. Pensions and benefits rewarded extended commitments to the firm by premising their payouts on one's tenure with the company. Put another way, once an employee was "vested," he or she paid a price to change employers Internal labor markets buffered jobs within the firm from external market forces. As Doeringer and Piore (1971) defined the term, an internal labor market was characterized by external recruiting for entry-level jobs and internal recruiting for higherlevel jobs through promotion. Jobs were typically organized into promotion ladders that provided clear paths to upward mobility. Formalized job analysis, which tied wages to 14 objective characteristics of the work rather than to external market comparisons, further bureaucratized the employment relation. ILMs fit with practices of on-the-job training and worker investments in firm-specific skills In recent decades, commentators have mourned the breakdown of the system of internal labor markets and the "death of the career." Peter Cappelli The implication of this discussion is that if stratification happens in organizations, then broad changes in organizational processes should lead to changes in inequality and 16 mobility at the societal level. We next discuss how the corporate world in the US has organized and re-organized over the past half-century.