Firm Organization and Information Technology: Micro and Macro Implications

The last 30 years in the US have seen: i- A rise in inequality with flat wages at the bottom of the wage distribution, ii-A reduction in the labor share (LS) of national income and, iii-A notable decline in the price of Information Technology (IT) capital. I show these facts can be rationalized with optimal capital choices of firms organized as hierarchies. The theory is consistent with capital-labor complementarity, for each skilled and unskilled labor, as in the data. In the model, cheaper IT capital enables faster managerial problem solving, and reallocates knowledge and wages away from the low levels of the hierarchy towards the higher ones. Larger firms use more IT capital, over time they reduce their marginal cost and expand more than smaller firms, hence capturing a larger share of aggregate value added. In the quantitative section, I discipline the model with firm-level moments and explain key features of firm organization. As firm value added increases there is 1-a lower LS of production costs, 2- a higher capital-labor ratio, and 3-higher wages conditional on the numbers of layers. Within a firm, as IT prices fall: 4- wage declines at low layers and increases at top layers, 5-increasing employment shares of managers; and, at the aggregate level, as a share of GDP: 6-increasing LS for managers, 7-declining LS for plant-level workers. Finally, the model explains: 8- the decline in the LS of value added of large firms, and 9-the decline in the aggregate LS. The last two results require both IT price declines and increasing mark-ups, the latter smaller than in recent demand-based explanations.