Employers and Wages

The Puzzle Wage paid to a given type of labour should be independent of employer characteristics But wages seem correlated with employer characteristics –Size – employer size-wage effect –Productivity/profitability e.g. Blanchflower, Oswald, Sanfey, QJE 96 –Industry e.g. Krueger-Summers, Ecta 88

Explanations Perfectly competitive model right but something wrong with the evidence: –Unobserved Worker Quality –Compensating differentials Rent-sharing Monopsony

Unobserved Worker Quality Basic idea is that it is hard to directly observe worker quality so will see apparent effect of employer characteristics if correlated (omitted variables bias) True that higher levels of education in bigger, more profitable firms so might think same is true of unobserved worker quality

Ways to test this Use panel data – does a given individual changing jobs get a change in wage that is correlated with change in employer characteristics (Gibbons-Katz QJE 1992) Effect is weaker but is still there so correlation of wages with employer characteristics seems a true phenomenon. Abowd & Kramarz (2000) use matched (employer-employee, LEED) data

A&K: decompose firm/worker effects

Compensating Wage Differentials Have assumed workers only care about wages But non-pecuniary aspects very important Really utility not wages that should be equalized in a perfectly competitive market.

Simple Model of Compensating Differentials Utility is given by u=w-e `e’ is effort Perfect competition equalizes u so that wages for individual i can be written as: w i =u i +e i If jobs require more effort (so have higher productivity) than must pay higher wages) But can be applied to other working conditions

Evidence on Compensating Differentials Simple regressions of wages on working conditions often give wrong ‘sign’ Most common explanation is that good working conditions are a normal good so tend to be negatively correlated with u i Looking at separations gives more sensible estimates

An example: Night-Working UK LFS 123 Coeff on Night (0.013) (0.010) (0.015) Other Controls NoYes C-S/PanelC-SC-sFixed effects

Link to Employer Characteristics Employer characteristics correlated with non-wage characteristics of work But if higher wages are not associated with any difference in utility then no reason for any difference in quits But quits are lower in high wage firms so suggests workers are better-off in these firms

Rent-Sharing Basic idea is that some firms get rents and workers manage to get a share of them Might be through unions but also other possible mechanisms There are problems with simple regression of wages on productivity as productivity=APL which is correlated with MPL=w under perfect competition

Better studies e.g. Abowd-Lemieux, QJE 1993 use instruments – they use exchange rate movements Many studies seem to find that rent- sharing as strong or stronger in non-union as compared to union sector This seems a bit odd

Monopsony explanation Defining idea of monopsony is that labour supply curve to firm is upward-sloping – have to pay higher wages to get more workers Can obviously explain the employer size wage effect But more productive employers will also want to choose to pay higher wages

A Simple Picture

Conclusions Does seem to be the case that ‘better’ employers pay same worker higher wages Workers do seem to be better-off in these employers