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University of Bayreuth, Press Release Nr. 038/2022 - 23 March 2022

Higher wages with greater distance to the owner: New Bayreuth study analyses corporate hierarchies

Companies in a group often have highly varying hierarchical distance from their ultimate owner. A team of economists at the University of Bayreuth led by Prof. Dr. Hartmut Egger and Prof. Dr. Elke Jahn has now discovered that greater distance to the owner of a group of companies tends to have  a positive effect on the wages of workers. Their wages are higher than in companies with a smaller distance to the owner. The study was recently published in the English-language "Journal of Economic Behavior and Organisation".

Stefan Kornitzky, University of Bayreuth. Photo: UBT.

It is the first broad-based study to investigate the effect of the organisational structure of groups of companies on the wages of their workforce. A clear tendency emerges: the remuneration of workers increases with the hierarchical distance from the owner of the group of companies. It is therefore not disadvantageous per se for workers to be employed in a subsidiary that is relatively far-removed from the owner.

"This result surprised us. One might well have expected a negative effect," says Stefan Kornitzky M.Sc., co-author of the study and doctoral student at the University of Bayreuth. "First of all, it would be reasonable to assume that the owners of groups of companies seek quick access to important steps in production, and therefore locate them in organisational proximity. The workers employed there would then receive comparatively high remuneration. This consideration is supported by the analogy with global supply chains. Critical production steps in a value chain are mostly carried out where a low probability of error can be expected as a result of a high – and highly remunerated – quality of work," Kornitzky explains.

But the new study shows that the opposite is true. One explanation for the discovered effect could be monitoring of work quality. The greater the hierarchical distance to the respective subsidiary, the more difficult for the owner monitoring becomes. Greater hierarchical distance increases the number of instances within a group of companies that the owner has to go through, and thus reduces monitoring efficiency. To prevent this from creating an incentive to reduce the quality of work, the owner is willing to pay higher wages. "However, this explanation cannot be supported directly with the present data set and would have to be confirmed by collecting additional information," Kornitzky emphasises. He stresses that the results of the study do not support the theory of so-called knowledge hierarchies. This theory assumes that workers with higher problem-solving abilities are  located higher up in a company hierarchy. Accordingly, this argument would suggest that companies at a greater hierarchical distance are responsible for production steps that require less complex skills and workers there receive lower wages.

For the statistical analysis, the study combined extensive data from different sources. The  Orbis database by Bureau van Dijk provided information on ownership structures of groups of companies whose subsidiaries are often located in different countries. The Institute for Employment Research in Nuremberg (IAB Nuremberg) contributed extensive data on German establishments and the remuneration of their workers. The resulting data set covers  the years 2013 to 2017 and about 120,000 German establishments in  business groups with more than seven million employees.

Photo for Download:
Stefan Kornitzky, University of Bayreuth. Photo: UBT.

Publication:
Hartmut Egger, Elke Jahn, Stefan Kornitzky: How does the position in business group hierarchies affect workers’ wages? Journal of Economic Behavior & Organization (2022), Vol. 194, 244-263. DOI: https://doi.org/10.1016/j.jebo.2021.12.011

Kontakt:
Stefan Kornitzky
Economics II
University of Bayreuth
Phone: +49 (0)921 55-6059
E-mail: Stefan.Kornitzky@uni-bayreuth.de