The Occupational Structure of Firms

Abstract

When firms grow, the occupational composition of their workforce shifts systematically. This pattern is industry-specific: within each industry, some occupations scale less than proportionally with firm growth ("overhead" occupations), while others scale more than proportionally ("direct" occupations). Management occupations are overhead across all industries, while direct occupations vary— for example, production workers in manufacturing, medical staff in health care, and sales workers in retail. We classify occupation-industry cells based on these within-firm elasticities. Despite scaling less than proportionally within growing firms, overhead employment increases with firm size in the cross-section. Further, the overhead share is positively correlated with survival, growth, and proxies for productivity. We show these facts are consistent with a model in which firms draw a fixed productivity type that determines their optimal overhead share. Overhead share thus correlates with type, but decreases with growth even within high-type firms. We find firms that increase their overhead share have worse outcomes, despite the positive cross-sectional correlation between overhead and performance. Leveraging a minimum wage increase that raised the relative cost of direct labor, we find that firms shed direct workers while maintaining overhead employment. This increase in overhead share carries a survival penalty, while firms that entered the period with higher overhead survive at higher rates. These results are consistent with the view that the overhead share signals, rather than determines, productivity.

This is joint work with Anahid Bauer (Institut Mines-Telecom Business School) and Leticia Juarez (Inter-American Development Bank)