O-ring Wage Inequality

This paper looks at the relationship between technological complexity and wage inequality. We present an efficiency wage model that adopts Kremer's (1993) O-ring production function. The model has two main implications: (i) when the production process becomes more complex, within-task wage differences will increase between plants, and (ii) between-task wage differences will increase within plants. We study these implications empirically using Finnish metal industry data that provide quantified information on the complexity of the tasks. We find that wages increase in all the tasks with the complexity of the production process. Furthermore, the relationship between the complexity of the tasks and wages is steepest in the firms with more complex production processes.