The determination of wages of newly hired employees: Survey evidence on internal versus external factors

This paper reports findings on the relative importance of internal versus external factors in the setting of wages of newly hired workers. The evidence, from a rich firm-level survey on wage and price-setting procedures in 15 European Union countries, suggests that external labour market conditions are less important than internal pay structures in determining hiring pay, with internal pay structures binding even more often when there is labour market slack. When explaining their choice firms allude to fairness considerations and the need to prevent a potential negative impact on effort. Cross-country differences are found to depend on institutional factors: countries in which collective agreements are more prevalent and collective agreement coverage is higher report more often internal pay structures as the main determinant of hiring pay. Within-country differences are found to depend on firm and workforce characteristics: there is a strong association between the use of external factors in hiring pay, on the one hand, and skills (positive) and tenure (negative) on the other.     

Monopsonistic competition for the “best” workers

In this paper we analyse an economy where firms use labour as the only production factor, with constant return to scale. We suppose that jobs differ in their non-wage characteristics so each firm has monopsonistic power. In particular, we suppose that workers are heterogeneous with respect to their productivity. Then, each firm has incentives to offer higher wages in order to recruit the most productive workers. Competition among firms leads to a symmetric equilibrium wage, which is higher than the reservation wage, and to involuntary unemployment for the less productive workers, who are willing to work at the current wage but are not hired because their productivity is lower than the wage level. If firms have no institutional constraint on paying lower wages for the same job, an endogenous labour market segmentation emerges.     

Wage differentials across firms: an application of multilevel modelling

Multilevel modelling techniques are applied to a dataset that matches firms and workers, to pinpoint and explain contrasts among company wage policies. Results indicate that wage differences across firms are statistically significant, affecting every parameter of the pay policy (returns to schooling, tenure, experience, the penalty imposed on newly hired workers and on women). Gross labour productivity, average schooling in the firm, firm size and economic sector are relevant forces shaping the contrast between employers' pay policies. Copyright © 2000 John Wiley & Sons, Ltd.     

Minimum wages,wages and employment in various sectors in Honduras

This paper contributes to our understanding of the impact of minimum wages on labor markets of developing countries, where there are often multiple minimum wages and compliance is weak. We examine how changes in more than 22 minimum wages over 1990–2004 affect employment, unemployment and average wages of workers in different sectors, defined by coverage under the legislation. The evidence suggests that minimum wages are effectively enforced only in medium and large-scale firms, where a 1% increase in the minimum wage leads to an increase of 0.29% in the average wage and a relatively large reduction in employment of ? 0.46%. We find that public sector wages emulate minimum wage trends but the higher cost of labor does not reduce employment there. There are no discernable effects of minimum wages on the wages of workers in small-firms or the self-employed; yet, higher minimum wages may create more unemployment. We conclude that (even under our upper bound estimate of the effect on the wages of workers) the total earnings of workers in the large-firm covered sector fall with higher minimum wages in Honduras, which warrants a policy dialogue on the structure and level of minimum wages.     

Patterns of employment relationships: the association between compensation policy and contractual arrangements

Firms respond differently to labour market regulations and develop an employment relationship accordingly. We use linked employer–employee data to examine the relationship between compensation policies and contractual arrangements in large-sized firms in Portugal. In this country, the wages are regulated through minimum wage and collective agreement, while employment is protected by stringent employment legislation. The empirical analysis starts with a fuzzy clustering to identify typical compensation policies. Three major segments emerge from this analysis: Competitive, Internal Labour Markets and Incentive. The first segment comprises low-wage firms, which are highly responsive to market conditions. The other two reveal properties of internal labour markets, although the incentive-based firms reinforce the use of discretionary power to differentiate the workforce. Subsequently, we estimate a regression model to examine how the compensation policy interacts with contractual arrangement. Empirical evidence confirms the segmentation predictions, i.e. low, flexible wages and flexible contracts prevail in the same firms. Furthermore, vulnerable categories like young workers and female workers are over-represented in Competitive firms, while high-wages are associated with incentive devices benefiting white-collar employees. Apparently, firms foster inequality among segments of workers and often penalise or favour the same category of workers.     

Firm heterogeneity and wages in unionised labour markets: Theory and evidence

In many countries wages are set in two stages, where industry-level collective bargaining is followed by firm-specific arrangements determining actual paid wages as a mark-up on the industry wage floor. What explains the wage set in each of these stages? In this paper we show that both the industry wage floor and the average wage cushion are systematically associated with the degree of firm heterogeneity in the industry: The former (latter) is negatively (positively) associated with the productivity spread. Furthermore, since the response of the wage floor dominates that of the wage cushion, workers in more heterogeneous industries tend to get lower actual paid wages. These conclusions are reached in a model of Cournot oligopoly with firm productivity heterogeneity and a two-tiered wage setting system. They are then confirmed by administrative data covering virtually all workers, firms and collective bargaining agreements of the Portuguese private sector for the period 1991–2000.     

The importance of firms in wage determination

Firms are central to many theories of the labor market. However, the actual degree to which firms shape the structure of wages is still not well understood. This paper investigates (i) the importance of firms in explaining wage differences across individuals and industries, and (ii) how the nature of interfirm mobility – job-to-job vs. job-unemployment-job – affects the relative importance of firms and workers in wage determination. Results indicate that (i) firms are much more important in explaining the variance of average wages across industries rather than across individuals, and (ii) using job-to-job transitions to identify the firm's contribution to the wage rate reduces the importance of firm wage policies in explaining wage differences by as much as 50%.     

Habit formation and wage determination

We analyse the implications of habit formation relating to wages in a multiperiod efficiency‐wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same consequences, because wage adjustments counteract the initial level impact. The firm's response additionally depends on the wage dependency of dismissal costs, because such costs make an increasing wage profile over time more attractive and mitigate the effects of greater intensity of habit formation. We further show that short‐lived productivity shocks have long‐lasting wage and employment consequences. Moreover, habit concerns by firm owners reduce wages.     

Managers and Wage Policies

Do individual top managers matter for wages and wage policies? Are there general differences in “style” among managers with respect to worker compensation? To shed light on these questions, we exploit a large panel dataset from Portugal that allows us to match workers, firms, and managers, and follow the movements of the latter across different firms over time. While accounting for the effect of worker and firm heterogeneity, we estimate the role of top manager fixed effects in determining wages and wage policies. The estimates suggest that (i) top managers have a significant influence on wages and wage policies; (ii) there exists different managerial “styles”; and (iii) managers’ (observable) attributes matter for worker compensation.     

Labour market oligopsonistic competition: The effect of worker immobility on wages

We suggest that firms in a local labour market may be able to exploit worker mobility costs and offer immobile workers wages that are lower than their marginal product. If so, the ability of employers to exploit worker immobility in setting wages would decline in the competitiveness of the local labour market. We test this intuition using a measure of individual mobility costs and measures of local labour market competition. Our findings suggest that worker immobility causes substantial wage variation across workers in small, weakly competitive markets, and in occupations where wages are individually bargained.     

Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness

This paper presents new evidence on the patterns of price and wage adjustment in European firms and on the extent of nominal rigidities. It uses a unique dataset collected through a firm-level survey conducted in 17 European countries and covering various sectors. Several conclusions are drawn from this evidence. Firms adjust wages less frequently than prices, on average every 15 and 10 months, respectively. Price and, especially, wage adjustment exhibit a substantial degree of time-dependence. In particular, wage changes tend to cluster at a specific time of the year, mostly January in the majority of countries. The results of a multivariate analysis indicate that prices are more flexible when competitive pressures in product markets are strong and when labor costs account for a lower fraction of firms' total costs, whereas wages are more flexible when bargaining is decentralized and when the coverage of collective bargaining and the stringency of employment protection legislation are low. Price rigidities are higher in firms with a larger share of high-skilled/white-collar workers.     

Setting the minimum wage

The process leading to the setting of the minimum wage so far has been overlooked by economists. There are two common ways of setting national minimum wages: they are either government legislated or the byproduct of collective bargaining agreements, which are extended erga omnes to all workers. We develop a simple model relating the level of the minimum wage to the setting regime. Next, we exploit a new data set on minimum wages in 68 countries having a statutory national minimum level of pay in the period 1981–2005. We find that a Government legislated minimum wage is lower than a wage floor set within collective agreements. This effect survives to several robustness checks and can be interpreted as a causal effect of the setting regime on the level of the minimum wage.     

Should managerial delegation contracts be made before or after union wage setting? A game‐theoretic analysis

This paper analyzes a multiple‐stage game in which, at the final stage, two (managerial) firms compete over quantities in the product market. Prior to this stage, firm‐specific unions set the workers' wages, while the owners of both firms hire managers and provide them with incentive contracts. Owners can freely decide to arrange the managerial contract before or after the (non‐managerial) wage determination stage. Hence, the endogenous choice of the incentive contract stage is derived. The possibility of multiple equilibria arises, where both owners choose managerial contracts before or after unions' wage setting, crucially depending on unions' preferences. Such results also prove to be true for a remarkable degree of asymmetry in preferences over wages vis‐à‐vis employment across unions.     

Work Recognition and Labor Productivity: Evidence from French Data

We empirically investigate whether labor productivity is related to work recognition. Using survey data about a large sample of French firms (N = 5309), we find that firms in which employees think their work is recognized are likely to report higher labor productivity, compared with firms where employees do not feel recognized. Our estimation results also suggest that labor productivity is strongly related to wages. Copyright © 2014 John Wiley & Sons, Ltd.     

Flexible pay,firm performance and the role of unions. New evidence from Italy

This paper focuses on the effects of a shift in the firm pay strategy from a fixed wage to a flexible pay scheme on the performance of the “treated” firms. Theory predicts that the introduction of performance-related pay (PRP) may produce both incentive and sorting effects, making the incumbent workers more productive and attracting the most able workers from outside. Furthermore, productivity gains may be shared with the workers through higher wages and heterogeneous effects may be expected by union density. Matching estimates based on panel data for a representative sample of Italian metalworking firms in the 1990s show positive effects on labour productivity (around 7–11%) and to some extent on wages (around 2–3%), while worker sorting is negligible. Estimates by union density suggest that incentive effects are more present in low unionized firms, while wage effects are more significant in highly unionized ones. Extended sensitivity analysis shows that these results are overall robust with respect to the existence of unobserved confounding factors.     

Czech female managers and their wages

This paper examines gender gaps in employment and wages among top- and lower-level managerial employees in the Czech Republic at the time of its accession to the EU. Using both least-squares and matching-based decomposition techniques, we find the wage gap among comparable men and women to be sizeable, but quite similar across firm hierarchy levels. The key reason why the average relative wage position of female top managers is worse compared to lower-ranking female employees is that women tend not to be at the helm of the highest-paying companies. Overall, the representation of women at the top of Czech firms as well as the structure of the gender wage gap there appears quite similar to those in the US.     

The distribution of changes in manufacturing employment and the impact of the minimum wage

That employment for workers in durable goods industries is more sensitive to the pace of economic activity than for non-durable goods employees is not a surprising result. What is noteworthy about the conclusions of this study, however, is the manner in which increases in the minimum wage have altered the distribution of employment and sensitivity to short-run changes in employment of production workers in manufacturing industries. By focusing on the distribution of employment and how that distribution changes over the cycle, estimates of some aspects of the impact of the minimum wage that have not previously been analyzed have been developed.The evidence indicates that increases in the minimum wage over the period 1947–1975 have had a significant impact on employment patterns. Minimum wage legislation has had the effect of decreasing the share of projected employment and increasing vulnerability to cyclical changes in employment for the group of workers most ‘marginal’ to the work force low-wage industry employees. Hence, as a result of increased minimum wages, low-wage industry employees are able to obtain fewer jobs during periods of normal employment growth and their jobs are less secure in the face of short-run employment variations.Minimum wage legislation has undoubtedly resulted in higher wages for some of the relatively-low-productivity workers who were able to obtain employment than these workers would have received in its absence. The cost in terms of lost employment opportunities and cyclical vulnerability of jobs, however, has apparently been borne most heavily by low-wage industry employees. The primary beneficiaries of the shifts in the pattern of employment shares occasioned by minimum wage increases were high-wage industry workers, particularly in the ordnance, food, tobacco, and petroleum industries.     

Minimum wages and training

The paper analyzes the influence of minimum wages on firms' incentive to train their employees. We show that this influence rests on two countervailing effects: minimum wages (i) augment wage compression and thereby raise firms' incentives to train and (ii) reduce the profitability of employees, raise the firing rate and thereby reduce training. Our analysis shows that the relative strength of these two effects depends on the employees' ability levels. Our striking result is that minimum wages give rise to skills inequality: a rise in the minimum wage leads to less training for low-ability workers and more training for those of higher ability. In short, minimum wages create a ”low-skill trap.” We indicate that this effect may be important empirically. Finally, including workers' incentives to train themselves makes no major difference to our results.     

Wage-setting institutions as industrial policy

Centralized wage-setting arrangements compress wage differentials along many dimensions, but how do they affect employment structure? To address this issue, we relate the evolution of US–Swedish differences in the industry distribution of employment to relative wages between and within industries. We find that centralized wage setting shifted Swedish employment away from industries with high wage dispersion among workers, a high mean wage and, especially, a low mean wage. The dissolution of Sweden's centralized wage-setting beginning in 1983 led to widening wage differentials and a reversal in the evolution of US–Swedish differences in industry structure.