[Diagnosis and Prescription] Wage Gaps by Firm Size: Problems, Causes, and Solutions

Table of Contents

I. Raising the Issue

II. The Severity of the Wage Gap

III. Causes of the Wage Gap

1. Workers’ Productivity: Capital

2. Workers’ Productivity: Education

3. Labor Unions

4. Other Factors

5. Synthesis

IV. Solutions to the Wage Gap

V. Conclusion

References

I. Raising the Issue

It is a well-known fact that wages at large firms are higher than those at small and medium-sized enterprises (SMEs). It is nothing new that crowds of applicants flock to global conglomerates such as Samsung and LG, while SMEs struggle because they cannot secure enough workers. The former is often called a “job shortage,” and the latter a “labor shortage.” In particular, SMEs in so-called 3D industries have long been unable to find enough domestic workers and have therefore, with government permission, hired workers from abroad.

However, the existence and persistence of both a job shortage and a labor shortage mean that the resource called labor is being misallocated. It is impossible to know exactly how many prospective workers are waiting to enter large firms and how many positions remain vacant because suitable workers cannot be found. But it is clear that the number is by no means small and that this phenomenon has persisted for a long time. This means that the misallocation of labor as a resource has been significant in the past and remains so today. And this is an important factor making the Korean economy inefficient.

If wages at large firms are so high, why, conversely, are wages at SMEs so low? Is this the result of the free market? Some claim that workers receive high wages simply because they work at large firms. But such a claim is absurd. Unless the entrepreneur or manager of a large firm is a philanthropist, they would not pay workers high wages merely because the company is large. Nor would they be able to do so. Likewise, entrepreneurs and managers of SMEs would not pay lower wages than large firms merely because they are SMEs.

If the wage gap by firm size is the result of the free market, then we cannot take issue with it. If firms, through competition in a free market, have decided to pay such wages, then that in itself is justified. But if such a gap is not the result of competition in the free market, then we should identify its cause by whatever means necessary and remove that cause so as to eliminate the “unjust” wage gap.

The conclusion of this series may be summarized very briefly. There are many factors that affect wage determination. However, for purposes of analysis, the effects of regular versus non-regular employment status, gender, educational attainment, the minimum wage, and working hours on wage determination are excluded. That leaves three factors that are decisively important in determining wages.

First, the amount of capital each firm invests. In general, the amount of capital a firm invests is proportional to its size. And the more capital that is invested, the more proportionally the productivity of that firm’s workers increases. Therefore, larger firms pay higher wages than smaller firms, and as a result the wage gap among firms of different sizes is not small and is persistent. But such a gap is justified as the result of competition in the free market, so any government effort to artificially eliminate it is “anti-free-market” and “equality-oriented.”

Second, the amount of capital each worker invests in himself or herself—that is, education. Education here includes not only formal education but informal education as well. Education is the result of workers investing capital in themselves. Therefore, the higher a worker’s level of education, the higher his or her productivity in proportion, and as a result, the higher the wage paid.

In reality, however, education is subject to a maximum-price regulation, so investment in education by individual workers involves considerable waste. In other words, while investment in education is optimal behavior at the individual worker level, resources are being wasted from the perspective of the system as a whole. If one wishes to resolve the wage gap among firms of different sizes, one must eliminate the waste of resources in the education market. This is because eliminating such waste would reduce capital consumption and increase the amount of capital that can be invested at the firm level, which would be especially advantageous for small and medium-sized firms rather than large ones. It is also desirable to abolish the various regulations that cause capital to be consumed.

Third, the existence of labor unions. Labor unions are organizations that force entrepreneurs to pay restrictionist wages to workers. Of course, restrictionist wages are always higher than free-market wages. Labor unions raise wages at large firms where union activity is vigorous above the free-market wage. They also raise the wages of other large firms competing in the labor market above the free-market wage. However, labor unions at large firms not only push wages at non-unionized SMEs below the free-market wage, but also reduce the profits of the self-employed. As a result, the existence of labor unions makes the wage gap among firms of different sizes even larger than it would be under the free market. Because this is predation, it is not justified. The unjust wage gap should be reduced by abolishing the labor union system.

* For the full text, see the attached PDF file.

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=31

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Original title: [진단과 처방]기업규모 간 임금 격차: 문제, 원인 그리고 해법

Author: Yong-deok Jeon

Date: 2019-05-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=2&idx=20191