The Role of Firms in Wage Inequality

Policy Lessons from a Large Scale Cross-Country Study

image of The Role of Firms in Wage Inequality

Even though firms play a key role in shaping wages, wage inequality and the gender wage gap, firms have so far only featured to a limited extent in the policy debates around these issues. The evidence in this volume shows that around one third of overall wage inequality can be explained by gaps in pay between firms rather than differences in the level and returns to workers’ skills. Gaps in firm pay reflect differences in productivity and wage setting power. To address high wage inequality while fostering high and sustainable growth, worker-centred policies (e.g. education, adult learning) need to be complemented with firm-oriented policies. This involves notably: (1) policies that promote the productivity catch-up of lagging firms, which would not only raise aggregate productivity and wages but also reduce wage inequality; (2) policies that reduce wage gaps at given productivity gaps without limiting efficiency-enhancing reallocation, especially the promotion of worker mobility; and (3) policies that reduce the wage setting power of firms with dominant positions in local labour markets, which would raise wages and reduce wage inequality without adverse effects on employment and output.

English Also available in: French

Annex Figure 5.A.3. The role of differences in tasks and responsibilities, pay for work of equal value and firm wage-setting practices in the evolution of the gender wage gap over the life-course

Difference in average hourly wages between similarly-skilled women and men as a share of average hourly wages of men by age, early-2000s to mid-2010s


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