Managers and productivity differences

Abstract

We document that for a group of high-income countries the life-cycle earnings growth of managers relative to non-managers is positively correlated with output per worker. We interpret this evidence through the lens of an equilibrium life-cycle, span-of-control model where managers invest in their skills. We use the model to quantify the importance of exogenous productivity differences and the size-dependent distortions emphasized in the misallocation literature. Our findings indicate that such distortions are critical to generate the observed differences in the growth of relative managerial earnings across countries. Distortions that halve the growth of relative managerial earnings, a move from the U.S. to Italy in our data, lead to a reduction in managerial quality of 27% and to a reduction in output of about nearly 7% – more than half of the observed gap between the U.S. and Italy. Cross-country variation in distortions accounts for about 42% of the cross-country variation in output per worker gap with the U.S.