Firms polarize, too

While the last decade will be remembered for the financial crisis, another marked new trend that is emerging in all industrialized economies is that of polarization. Not of the political kind, although this is also quite new and annoying, but rather in terms of a widening in the distribution of wages, with a gaping hole in the middle. Call it the disappearance of the middle class, globalization finally hitting the middle class, or the increasing weight of the top earners, there is not that much debate about the origin of this change in wages. It is skill-biased technological change, namely the emergence of the computer and robot taking over the routine jobs of the middle class. But those who can manage those computers carry a substantial skill-premium on the labor market. This has been amply documented when comparing the distribution of wages across education groups as well as across economic sectors.

Petri Böckerman, Seppo Laaksonen and Jari Vainiomäki look at firm-level data and find the same. Specifically, they take Finnish wage statistics and look at how the distribution of wages changes within firms, taking R&D expenses as an indicator of technological change. That is actually much better than previous aggregate-level studies for two reasons: First, the authors do not have to rely on time dummies only to identify the evolution, second they can better understand what is happening at the microeconomic level. For example, the wage bill share of middle-educated workers performing routine tasks decreases with increases in R&D expenditures, a clear sign that the middle class is getting pushed down.