Spatial Wage Differentials, Geographic Frictions and the Organization of Labor within Firms

Abstract

This paper studies the spatial structure of firms, both theoretically and empirically. Two new facts in Danish register data motivate the analysis. First, firms have become more fragmented over time. Second, headquarters (HQ) establishments have become more manager intensive, despite a significant increase in managerial wages at HQ locations. We study the roles of exogenous changes in wages across locations and communication costs in explaining these two trends. Immigration shocks are the source of identifying variation for changes in relative labor supply. Estimates indicate that increases in the wage of managers at the HQ relative to non-HQ, explain 50% of the increase in HQ managerial intensity. This can be explained by the associated increasing demand for headquarter services as satellite establishments become larger. Simulations suggest that wider wage gaps across locations can also lead to more establishments per firm, and this effect strengthens as communication costs fall.