Flexible Labour,Firm Performance and the Dutch Job Creation Miracle

Unlike internal (‘functional’) forms of flexibility of labour, external (‘numerical’) forms of flexibility (i.e. high shares of people on temporary contract or a high turnover of personnel) yield substantial savings on a firm’s wage bill. Savings on wage bills lead to higher job growth, but do not translate into higher sales growth. Externally flexible labour appears to be related to lower labour productivity growth, the effects being different for innovating vs non‐innovating firms. We discuss these findings from firm‐level and worker‐level data against the background of the Dutch job creation miracle during the 1980s and 1990s. Modest wage increases and flexibilization of labour markets may indeed create lots of jobs. However, this is likely to happen at the expense of labour productivity growth, raising serious doubts about the long‐run sustainability of a low‐productivity–high‐employment growth path.     

Unobserved Individual and Firm Heterogeneity in Wage and Job‐Duration Functions: Evidence from German Linked Employer–Employee Data

Abstract. We analyse the correlations between individual and firm fixed effects, and wage and job‐duration functions. Our results for large firms suggest that low‐wage firms tend to be stable firms, suggesting that lower wages can buy job stability. Furthermore, high‐wage workers sort into the stable low‐wage firms. Our interpretation is that high‐wage workers have a higher wage to insure against job loss and can afford more easily to forgo wages in favour of job stability. This may provide an explanation of the puzzle identified in previous literature that high‐wage workers are matched to low‐wage firms.     

Job creation,job destruction,labour mobility and wages in Poland, 1988–19981

Longitudinal data from interviews with Poles of working age conducted in 1988, 1993 and 1998 combined with longitudinal firm‐level data present a detailed view of the transition from a state‐dominated to a market economy. Job losses in state firms and job creation in new private firms are the dominant employment changes, other than retirements from the labour force. In the Polish case, a significant proportion of this movement over the 1988–1998 period involves a spell of unemployment or exit from the labour force before obtaining a private sector job. This results in considerable job competition between workers leaving the state sector and those who are out of the labour force or unemployed. Income differences between the state sector and the de novo sector appear to have little association with mobility. These results suggest that movement to the new private sector is more likely to be the result of job loss than the result of people looking for better, higher paying jobs. Self‐employment plays an important role in the development of the private sector. People working on their own account have higher incomes than wageworkers and are likely to become owners employing additional workers. Incomes are higher in regions with high rates of job creation and depressed in regions with job destruction.     

Worker flows, job flows and firm wage policies

Like many transition economies, Slovenia is undergoing profound changes in the workings of the labour market with potentially greater flexibility in terms of both wage and employment adjustment. To investigate the impact of these changes, we use unique longitudinal matched employer‐employee data that permits measurement of employment transitions and wages for workers and enables links of the workers to the firms in which they are employed. We can thus measure worker flows and job flows in a comprehensive and integrated manner. We find a high pace of job flows in Slovenia especially for young, small, private and foreign‐owned firms and for young, less educated workers. While job flows have approached the rates observed in developed market economies, the excess of worker flows above job flows is lower than that observed in market economies. A key factor in the patterns of the worker and job flows is the determination of wages in Slovenia. A base wage schedule provides strict guidelines for minimum wages for different skill categories. However, firms are permitted to offer higher wages to an individual based upon the success of the worker and/or the firm. Our analysis shows that firms deviate from the base wage schedule significantly and that the idiosyncratic wage policies of firms are closely related to the observed pattern of worker and job flows at the firm. Firms with more flexible wages (measured as less compression of wages within the firm) have less employment instability and are also able to improve the match quality of their workers. JEL Classifications: J23, J31, J41, J61, P23, P31.     

Wage posting without full commitment

Wage posting models of job search typically assume that firms can commit to paying workers exactly the posted wage. We relax this assumption and impose “downward” commitment; firms can commit only to paying at least their advertised wage. As each firm can only commit to pay at least their advertised wage, workers may demand that the firm pay more than the advertised wage. In labor markets with a finite number of workers and firms, the strategic interaction between firms makes it costly for firms to provide applicants the incentive not to demand wages in excess of the advertised wage. In equilibrium, firms may settle for running job auctions at the cost of losing control of the number of applicants that they can attract. When this strategic interaction between firms vanishes, workers never choose to demand more than the advertised wage.     

Does Price Stability Exacerbate Labour Market Rigidities in the EMU?

How will the commitment to price stability affect labour market rigidities in the European Monetary Union? I explore a model where firms choose between fixed wage contracts (where the employer cannot lay off the worker, and the wage can only be changed by mutual consent), or contracts where employment is at will, so that either party may terminate employment (with strong similarities to temporary jobs). A fixed wage contract provides better incentives for investment and training, while employment at will facilitates efficient mobility. Inflation erodes the real value of a fixed contract wage over time, and badly matched workers are more likely to quit for other jobs. Disinflation has opposing effects on labour market rigidity: fixed wage contracts become more rigid in real terms, but fewer firms will choose fixed wage contracts.     

Wage Determination and Occupational Attainment in the Rural Industrial Sector of China

The development of China's rural township, village, and private enterprises (TVP), in which real wages have grown at around 11% per annum over the past decade, is one of the most remarkable achievements of China's economic reform. This achievement has taken place despite relatively rigid control of labor mobility and job assignment by local authorities. Individual firms, however, have considerable influence over wage determination. This study applies human capital theory to explore the wage setting process in this sector. It is found that the impact of both labor market experience and education reflect labor productivity rather than sociopolitical rules of wage setting. The paper employs a logit model to investigate the links between education and occupational attainment. The relationship between wages, education, and occupational attainment, for those who find jobs through their own efforts, is similar to that of western market economies. Although education does not affect wages of those assigned jobs it affects their occupational attainment.     

Wage/tenure contracts with heterogeneous firms

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster “promotion” rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.     

Firm heterogeneity and immigrant wage assimilation

This article investigates the role of job mobility in immigrant wage assimilation. I use longitudinal linked employer–employee data for Portugal to estimate the immigrant wage catch-up in log wage regressions with both individual and firm fixed effects. I show that moving to firms with higher wage premiums accounts for approximately 30% of the immigrant wage catch-up in the first years.     

Job creation and job types – New evidence from Danish entrepreneurs

We extend earlier analyses of the job creation of start-ups versus established firms by considering the educational content of the jobs created and destroyed. We define education-specific measures of job creation and job destruction at the firm level, and we use these measures to construct a measure of “surplus job creation”, defined as jobs created on top of any simultaneous destruction of similar jobs in incumbent firms in the same region and industry. Using Danish employer-employee data from 2002–2007 that identify the start-ups and that cover almost the entire private sector, these measures allow us to provide a more nuanced assessment of the role of entrepreneurial firms in the job-creation process than in previous studies. Our findings show that although start-ups are responsible for the entire overall net job creation, incumbents account for more than one-third of net job creation within high-skilled jobs. Moreover, start-ups “only” create approximately half of the surplus jobs and even less of the high-skilled surplus jobs. Finally, our approach allows us to characterise and identify differences across industries, educational groups and regions.     

Educational mismatch and promotions to managerial positions: a test of the career mobility theory

Career mobility theory suggests that given a certain occupation, schooling improves upward mobility in terms of promotion and wage growth. We are the first to test the implications of this theory for over- and undereducation by means of direct information about promotions to managerial positions. Using German administrative data entailing an employer-reported – and hence objective – measure of educational requirements, we show that overeducated workers are indeed more likely to be promoted and that this career mobility advantage is more pronounced in the early stages of their working lives. By contrast, undereducated workers are less likely to be promoted to managerial positions. Moreover, in terms of wage growth, while overeducated workers benefit more, undereducated workers benefit less from promotions than their well-matched educational peers. Altogether, these findings strongly support the career mobility theory. Furthermore, by differentiating between internal and external promotions, we provide evidence that promotions are more likely for overeducated workers within the establishment, whereas the opposite applies for undereducated workers. This finding indicates the relevance of both over- and undereducation as signals of true ability to other employers.     

JOB SEPARATION OUTCOMES OF WELFARE HIRES: INSIGHT FROM LINKED PERSONNEL AND STATE ADMINISTRATIVE DATA

This article makes use of a unique personnel data set and state administrative data to follow welfare and nonwelfare hires that separate from similar jobs with the same firm. Welfare hires are more likely to be on welfare after separation but are equally likely as similarly low–skilled nonwelfare hires to transition to another job after separation. Among those with a new job, welfare hires experience a significantly lower wage gain, suggesting that welfare hires would benefit (even more than nonwelfare hires) from focused assistance with job search and transition skills. ( JEL H53, J62, C35)     

The formal sector wage premium and firm size

We show theoretically that when larger firms pay higher wages and are more likely to be caught defaulting on labor taxes, then large-high wage firms will be in the formal and small-low wage firms will be in the informal sector. The formal sector wage premium is thus just a firm size wage differential. Using data from Ecuador we illustrate that firm size is indeed the key variable determining whether a formal sector premium exists.     

The Distribution of Earnings in an Equilibrium Search Model with State‐Dependent Offers and Counteroffers*

We construct an equilibrium job search model with on‐the‐job search in which firms implement optimal‐wage strategies under full information in the sense that they leave no rent to their employees and counter the offers received by their employees from competing firms. Productivity dispersion across firms results in wage mobility both within and across firms. Workers may accept wage cuts to move to firms offering higher future wage prospects. Equilibrium productivity dispersion across ex ante homogeneous firms can be endogenously generated. Productivity dispersion then generates a nontrivial wage distribution which is generically thin‐tailed, as typically observed in the data.     

A MATCHING MODEL WITH ENDOGENOUS SKILL REQUIREMENTS>*

We consider a labor market in which workers differ in their abilities and jobs differ in their skill requirements. The distribution of worker abilities is exogenous, but we model the choice of skill requirements by firms. High‐skill jobs produce more output than low‐skill jobs, but high‐skill jobs require high‐skill workers and thus are more difficult to fill. We use a matching model together with a Nash bargaining approach to wage setting to determine the equilibrium mix of job types, along with the equilibrium relationship between worker and job characteristics, wages, and unemployment.     

Increased sorting and wage inequality in the Czech Republic

This paper makes use of a linked employer–employee dataset to examine the evolution of wage inequality in the Czech Republic during 1998–2006. We find evidence of slightly increasing returns to human capital and diminishing gender inequality and document sharp increases in both within‐firm and between‐firm inequality. We investigate several hypotheses to explain these patterns: increased domestic and international competition, decentralized wage bargaining, skill‐biased technological change and a changing educational composition of the workforce. Domestic competition is found to lower within‐firm inequality whereas we find no evidence that increased international trade at the industry level is associated with higher between‐ or within‐firm wage inequality. The key factors driving the observed increase in wage inequality are increased educational sorting and the inflow of foreign firms to the Czech Republic.     

How former business owners fare in the labor market? Job assignment and earnings

This study uses detailed longitudinal matched employer–employee data to examine the impact of entrepreneurial experience on job assignments, careers, and wages. The results suggest that there are significant differences in career mobility between former business owners and workers who were always wage employees. Former business owners enter firms at higher job levels and progress faster up the hierarchy than wage employees without entrepreneurial experience. The majority of the former business owners find jobs in small firms. The return to business ownership experience is lower than the return to wage employee experience, thus suggesting that the labor market imposes a penalty for business ownership experience.     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Learning about match quality and the use of referrals

The firm?s decision to use referrals as a hiring method is studied in a theoretical model of the labor market. The labor market is characterized by search frictions and uncertain quality of the match between a worker and a job. Using referrals increases the arrival rate of applicants and provides more accurate signals regarding a worker?s suitability for the job. Consistent with the data, referred workers are predicted to have higher wage, higher productivity and lower separation rates and these differentials decline with tenure. The model is extended by introducing heterogeneity in firm productivity and allowing the endogenous determination of signal accuracy. High productivity firms are predicted to invest more in increasing signal accuracy and use referrals to a lesser extent.     

Wage posting: evidence from job ads

Abstract Recent studies of search theory examine how employers use a wage‐setting mechanism – either by bargaining or through the posting of a non‐negotiable wage offer in a job ad – to facilitate search. We contribute to this literature by examining wage posting in job ads in the US, the UK, and Slovenia. Despite considerable differences in the incidence of wage posting, employers in all three markets are less likely to post a wage offer when searching for skilled workers. The decision on whether or not to post a wage offer is only weakly related to the outcomes of employers’ search.