The rise of the superstar firms also offers an explanation for why overall wage inequality has been rising: some firms are now much more profitable than others and they pay higher wages. It is also true that profitability is more variable than it used to be, with more clear winners and clear losers, even outside the set of superstars. In fact, in the United States, the increase in inequality between the average salaries at different companies can explain two-thirds of the overall rise in inequality (increase in inequality between workers within the same company explains the rest). A lot of this increase in inequality between firms seems due to changes in who works where; the highest-paid workers in low-paying firms are moving to those that pay more. If one assumes that higher earnings reflect higher productivity (which is probably true on average), then the more productive workers are increasingly working with other high-productivity workers. This is consistent with a theory in which superstar firms attract both capital and good workers. If more productive people benefit more from being paired with other productive people, then the market should drive such people to come together to form high-productivity firms that would, as a result, have higher wages and salaries than other firms. Moreover, once a firm has invested in a galaxy of talents, the CEO of such a firm is in a position to make a big difference; if he pushes them down the wrong path, he would waste a whole lot of productive capacity. Therefore, such firms should strive to get the best CEO possible even if that requires paying him or her what some may feel is an obscene salary. The rise in top incomes, in this view, is just the flip side of the rise of superstar firms that value getting the best top management and are willing to pay a lot for them.
One of the trends I have remembered reading was the high (market value) / (no of employees) ratio of some of the biggest technology companies in the world. Put in contrast to the biggest market cap companies decades ago such as General Electric, and the ratios are on a completely different scale.
A lot of the difference in scale is enabled by technology, and how digital mediums have allowed a smaller group of people to disproportionately impact society much more than before. It makes sense that knowledge workers are valued more and since there are fewer employees, it might be justifiable to the firm to find the best talent as each employee can potentially impact the firm’s bottom line much more than before.
