Saturday, 7 October 2017: 5:45 PM
Recent empirical studies suggest that corporate diversification across industries benefits employees by increasing wages. This paper examines the possibility that the effect of firm scope on wages is more nuanced than suggested by earlier studies. That is, while the effect is positive when employees have strong power to appropriate value generated by their firm, it turns to negative as employees lose power, because corporate diversification insures them against the risk of losing jobs due to firm failures and generates pressure for the intra-firm pay convergence across divisions. I examine this scenario based on firm-level wage data of 2,900 Japanese firms that were publicly traded from 2001 to 2010, using firm-level unionization as a measure of employees’ power. Data were analyzed using ordinary least squares (pooled cross-sectional regressions) as well as fixed-effects regressions. An important obstacle in identifying an economic effect of firm scope is that diversified firms differ considerably in the industry mix of business portfolios. I address this problem by matching the industry segments of diversified firms to representative focused (single-business) firms in the same industries. Evidence lends strong support to the hypothesis. After controlling for various firm and employee attributes, regressions reveal that when employees are unionized, diversified firms pay wages that are significantly higher than those of focused firms in the same industries. However, the effect of diversification on wages is significantly negative for firms with nonunionized employees. The asymmetric effects of firm scope are robust to alternative measures of employee power and survive the controls for unobserved heterogeneity and the endogeneity of firm scope. Overall, my results suggest that how corporate diversification affects employees is importantly moderated by their value-capturing power.