The impact of hierarchies on wages

Hierarchical production theory has only one consistent prediction, that wages increase with level in a hierarchy. Theoretical disagreement exists as to what causes this wage premium and how it might be affected by the number of levels of superiors above an employee. 

By empirically analyzing these issues we find that: (i) level one supervisors receive a premium due to some unobserved characteristic; (ii) higher level supervisors receive a premium through higher rates of return on human capital; and (iii) the marginal effect on wages of increasing the level of an employee declines with the number of levels above the employee.