Abstract

This paper shows that the high relative price of middle management in developing countries inhibits the adoption of large, multi-establishment business enterprises. We provide new empirical evidence using a database with compensation of 300,000 middle managers working at leading firms in 146 countries. We estimate that the elasticity of real managerial compensation with respect to GDP per worker is close to zero. We quantify the importance of this finding using a calibrated appropriate technology model where firms choose whether to adopt a large-scale, management-intensive modern business organization. The revenue share of modern business enterprises would increase from 17 to 56 percent and aggregate output would rise by 31 percent if poor countries instead faced U.S. relative prices. We provide evidence supporting a number of different mechanisms that might explain relative wage trends, including the global market for talent, the use of efficiency wages, as well as cross-country differences in educational quality.

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Citation

Hjort, Jonas, Hannes Malmberg, and Todd Schoellman. "The Missing Middle Managers: Labor Costs, Firm Structure, and Development." Columbia Business School, July 14, 2021.

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