Does Modern Management Increase Inequality?

This paper examines whether modern management, characterized by performance and target based practices, explains the recent rise in wage inequality. I hypothesize that modern management’s shift to performance pay, management-skill complementarity, and managementtechnology complementarity contribute to the increase in wage inequality within establishments. The period after the Asian Financial Crisis in South Korea provides a unique setting to examine the impact of management practices on wage inequality. The IMF provided emergency loans to Korea conditional on it making drastic structural reforms in the corporate sector. The neoliberal economics views at the IMF shaped the reforms, and management practices, which traditionally valued organizational harmony and firm expansion, shifted to emphasizing individual performance and firm profitability. I examine manufacturing firms when the reforms were being implemented using a workplace survey from 2002 and 2003 and construct a standardized management index. To generate plausibly exogenous variation, I use the industry level management practices of western advanced economies as instrumental variables. I find that modern management increases the white-collar blue-collar wage gap. A standard deviation increase in the management index increases the wage gap by about 36 percent. Skilled wages increases but unskilled wages decreases. Modern management increases the demand for skilled workers, especially managers and technical workers, and decreases the demand for production workers. Better management increases both return on capital and the wage gap in large establishments. In short, modern management improves e ciency but also increases inequality within establishments.