Within-Firm Wage Inequality and Corporate Innovation: Evidence from China’s Listed Firms

ABSTRACT

Within-firm wage inequality, which individuals face daily, has largely been neglected by the literature on wage inequality. However, it may affect an individual’s incentive to work, resulting in an overall impact on a firm’s operation. This study discusses the effects of within-firm wage inequality on corporate innovation. Using data from Chinese firms listed over the period 2000–2015, we found that (1) within-firm wage inequality promotes innovation, (2) the use of two instrumental variables for our analysis confirms that the chain of causality goes from inequality to innovation, and (3) possible mechanisms are incentivizing managers to increase R&D inputs and using bank loans to finance innovation.

KEYWORDS:

• Within-firm wage inequality
• innovation
• listed firms

JEL:

• J31
• O31
• O32

Notes

1. In 2002, state-owned enterprises in China first implemented the “annual salary system” for managers. On May 7, 2002, the “Outline of National Talent Team Construction Plan from 2002–2005” was passed by the Organizational Department of the Central Committee and the “annual salary system” was put into effect in July. The plan’s aim was to “try to implement the annual salary system of the senior management of enterprises”.

2. The policy is “Opinions on further regulating the remuneration of central enterprises’ managers”, which was launched by the Ministry of Social Affairs, the Ministry of Finance, the Ministry of Supervision, Organizational Department of the Central Committee of the CPC, National Audit Office, and State-owned Assets Supervision and Administration Commission of the State Council (SASAC).

3. We choose not to report the placebo tests’ results here in order to save space. Readers who are interested in this part can obtain the results by emailing the authors.

4. We are grateful for the referee’s suggestion that long-term loans are channels through which wage gaps could affect corporate innovation. The coefficients of sales growth are insignificant here but do not contradict our previous results. We thank the referee for helping us to clarify this mechanism.

Additional information

Funding

Our work is supported by the National Natural Science Foundation of China [71573272], Research on Investment Decision of Incremental Power Distribution Project and Management Technology of the Whole Process Operation [SGHBJY00PSJS1900082], the Fundamental Research Funds for the Central Universities [XYMS201905], Science and Technology Planning Project of Guangdong Province [2019A101002004]. Also, we would like to thank Bank of Finland Institute for Economies in Transition (BOFIT) for their support in writing this paper.