Large companies and different salaries | Business

I have always believed in the virtues of the market and in the advantages of healthy competition. A naive view could lead us to think that it is the businessmen who seek to cleanly confront their competitors in the market, under the motto “may the best man win”, which would be great, since it would lead companies to make an effort to do the things very well, for the benefit of their customers, but it is not always so.

Adam Smith, in his famous work The Wealth of Nations, from 1776, shows his mistrust of businessmen. His phrases are: “It is rare that people from the same business meet, even if it is to have fun and be distracted, and that the conversation does not end in a conspiracy against the public or in some ploy to raise prices.” Or also: “The interest of businessmen is always to widen the market but narrow the competition.” Normally, monopoly or oligopoly is more comfortable for an entrepreneur: he can set prices and obtain huge profits at the expense of consumers without the need to continually innovate and improve to serve his customers.

The reality is that in the last 40 years we have seen the creation and growth of what are today huge companies, many in the technology sector. The truth is that we find ourselves in a world in which competition, as we normally understand it, is sometimes difficult to maintain: the more people there are in a network, the more interesting it becomes, then the size increases its competitiveness. The same happens with many computer tools where their value increases the more users you have. Simultaneously, the entry barriers are getting higher and we are getting closer to the monopoly.

I have recently listened and read several times Jan Eeckhout, from Pompeu Fabra University, a specialist in these matters, and I agree with him that we have to address this problem seriously and solve it, probably through strong and independent institutions that guarantee competition. The market power of large companies is very detrimental to the economy, they raise the prices of their products and reduce their supply. In addition to losing incentives, in many cases, for innovation or customer service.

When a company, due to its large size, dominates the hiring of certain workers, it tends to lower their salaries. If workers are not mobile enough, they will be trapped by the company with low wages. On the other hand, monopolies try to raise the prices of their products or services, reducing the quantity offered; which cuts GDP while reducing jobs: more unemployment and lower wages. In general, these clearly negative processes, a consequence of a high business concentration, are proven to be suffered especially by less qualified workers. There are many reasons why the salary differences between less qualified workers and managers are increasing; one of them is the power that certain companies are achieving.

The great virtue of competition is that everyone has to strive to offer the best product or service. This will make customers choose you and you will achieve benefits. But those huge companies on which we depend so much have very little competition, which in many cases goes out to play thinking that they have already lost the game. The least competition impoverishes us as a society and it seems that especially the most vulnerable.

Certain salary differences are consubstantial with the market system, but the current ones are scandalous in some cases. Redistributive fiscal measures can be taken, which are necessary; the minimum wage can be raised by law (always with prudence so as not to exclude certain workers from the market), certain salaries could be bumped (I don’t see that), but it is a problem that must be faced.

I think it would be good to subject the salary differences in each company to public scrutiny, especially in the largest ones. In this sense, the GRI (Global Reporting Initiative) 102-38 ratio (total annual compensation of the highest paid person compared to the median of the rest of the employees) must be analyzed and discussed in organizations. In addition, we have to stimulate competition, allowing economies of scale, but guaranteeing a competitive market. And when it is not possible, it will be necessary to control the excessively powerful companies.

Fernando Gomez-Bezares He is Professor of Finance at Deusto Business School.