Earnings Inequality and Reoganization: A Field Experiment

Gerard Pfann, Department of Economics, Maastricht University

This paper shows that without substitution of skills and without adjustments of individual
wages changes in work organization can lead to a widening productivity gap and hence to
increased earnings inequality between skill groups. This is caused by changes in authority
within skill groups. Shocks in favor of the relative demand for workers in higher hierarchical
levels will induce an increase in inequality among skill groups. The current paper considers
four different types of shocks. To investigate the effects of each shock separately we present a
hierarchical decision model that is estimated using personnel data of a large firm in demise.
Model simulation shows that technology shocks and UI policy shocks are positively related to
increases in earnings inequality within the firm. Shocks in uncertainty and worker rent shares
are found to have opposite effects.

Date: 08 November-00 0000