New companies entering the market recently seem to be making money matters worse. A study from Duke Fuqua found that these newcomers tend to pay their workers with more inequality compared to older companies.
The study dug into payroll info from the U.S. Census Bureau and discovered that firms born after the 2010s are all over the map when it comes to paying their average employees. This is a problem because once companies set their pay policies, they don’t change them much. This suggests that in the coming decades, workers might see a rise in income inequality.
Growing inequality
To give you a bit of context, income inequality in the U.S. has been gradually climbing over the past 50 years. Nowadays, if you pick 100 workers at random, the 10th highest-paid worker makes about 13 times more than the 10th lowest-paid worker. Back in the 1980s, it was only nine times more.
The study suggests that a big part of this growing income gap, around 70%, is because different companies pay their workers differently, rather than differences within a company itself. So, this new trend in how firms pay their employees could be a sign that income inequality will keep going up in the future.
“It’s not the difference between how much CEOs make versus how much their firm’s average worker makes that explains most of the recent rise in inequality,” the researchers explain.
The study also found that there are now fewer new companies starting up each year, a trend that has continued for the past 25 years. Consequently, a growing portion of workers are ending up in older, more established companies. Here’s the crux: as these newer firms, which have different ways of paying their regular employees, get older and hire more people, it’s likely that pay inequality will go up in the future.
Pay factors
There are a few reasons why these newer firms tend to have more pay differences. It could be because they pay employees doing the same job differently, or they hire a different type of workforce. It’s also possible that they specialize in technologies and ways of doing things that result in lower pay.
These new firms also have specific preferences when it comes to the people they hire. For example, some of them only hire college-educated folks, which makes pay differences more noticeable across different companies.
In addition to this, other big trends affecting pay fairness include companies hiring workers from outside, changing how they share profits with their employees, and fewer people being part of labor unions.
“However, we don’t think that unionization decline is driving the vast majority of this trend,” the researchers explain. “The rise in pay inequality among newer entrants is common across all different types of sectors, not just sectors where unions have declined.”
These macrotrends can influence the kinds of people newer firms hire and the pay they offer them. This is because firms tend to decide on a compensation structure in the early stages and then stick with that.
