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.     

The labour market effects of financial crises

This paper examines how the 2008–2009 financial crisis affected labour markets in Europe, and how this impact depended on employment protection laws. Using a difference‐in‐differences approach, our estimates isolate the effect of the lack of credit on the labour market from that of the general decline in aggregate economic activity. We find large and negative impacts of the credit shock on total employment, particularly on temporary, unskilled and young workers. These impacts were significantly larger in countries with stronger legal protection of permanent workers from dismissal. This suggests that the differential impact of the crisis across countries was not entirely driven by the heterogeneity of the credit shock, but also by labour regulations. Given regulatory inflexibility in adjusting the permanent workforce, firms responded to tightening financial constraints by disproportionately laying off temporary workers (who tend to be younger and less skilled than permanent workers).     

The Impact Of New Technologies On Wages: Lessons From Matching Panels On Employees And On Their Firms †

We study the impact on New Technologies (NT) on wages using a panel that matches data on individuals and on their firms. In his article on the same topic, Krueger (1993) did not give a definitive answer to the following question: if workers who use NT are better paid, is it because they are abler or because NT increases their productivity. We try to provide an answer to this question. Comparing cross-section estimates and individual fixed-effect estimates, we show that computer-based new technologies are used by abler workers. These workers learn and become more productive when they get more experienced with these NT. In terns of wage differentials, the introduction of computer-based NT contributes to a small increase. The use of firm-level data does not modify these conclusions.     

Education Signalling with Preemptive Offers

We analyse a version of Spence's job market signalling model in which firms can make job offers before workers complete their education. Workers cannot commit to turning down such offers. Offers are private, so that workers are unable to use one firm's offer in an attempt to elicit better offers from other firms. In the unique sequential equilibrium outcome of the model with unproductive education, there is no wasteful education. When education is productive, the standard model predicts that more able individuals become overeducated to separate themselves from less able workers. In our model, less able workers become overeducated to (partially) pool with more able workers. The pooling mutes the incentives of high ability workers, who in consequence actually choose to become undereducated. We examine the robustness of our result to modifications to the basic model.     

Globalization,Worker Mobility and Wage Inequality

In the present paper, I integrate frictional labor markets with on‐the‐job search into an otherwise standard heterogeneous firm model of intra‐industry trade. Most importantly, I show that the returns to workers' inter‐firm mobility are higher in a trade equilibrium than in autarky. Intuitively, by favoring large and productive firms, international trade amplifies the disparities in profitability between small and large firms. Hence, the returns to labor reallocation across firms rise. In view of the empirically observed higher inter‐firm mobility among high‐skill workers, this suggests a skill‐biased impact of trade liberalization.     

Earnings mobility in Spain: the role of job mobility and contractual arrangements

This paper analyses the relationship between earnings mobility, job mobility and changes in the contractual arrangement in Spain using a sample of Spanish workers aged 16–60 years extracted from the European Community Household Panel Survey (ECHP 1995–2001). Overall, earnings mobility remains mostly unchanged over time, although clear differences, both in terms of levels and trends, can be perceived among different types of workers. Results show that, in general, job mobility contributes to increase earnings mobility. Switching into permanent contract are associated with the highest probability of upgrading among those workers who remain with the same employer. In contrast, the highest risk of downgrading among stayers appears when changing from permanent to temporary. An analysis on low pay/no low pay transitions reveals that job mobility always increases the probability of moving from low pay to better-paid jobs among females. For males, in contrast, this occurs only when they were initially employed on a temporary basis. Furthermore, for females it is found that either switching into permanent contract while staying with the same employer, or changing employer while being employed on a permanent basis yield a higher chance of upgrading than staying with the same employer with a permanent contract.      

Egalitarian Wage Policies and Long-Term Unemployment

How does a centrally imposed egalitarian wage policy affect unemployment, when workers differ with respect to productivity? The effect on total unemployment is found to be ambiguous. Egalitarian wages encourage job creation because increased profits derived from the most productive workers more than outweigh reduced profits derived from the least productive workers. Short-term unemployment is reduced. On the other hand, firms respond by raising their reservation productivity. Some workers are left almost completely unemployable. Long-term unemployment rises. Less inequality in the wage distribution is obtained at the expense of more inequality in the distribution of unemployment.     

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.     

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.     

Innovation and job creation in a dual labor market: evidence from Spain

This paper studies the effect of product and process innovations on job creation in the Spanish manufacturing sector over the period 1991–2005. We use a change in the employment protection legislation (EPL) in 1997 to study the effect of innovations on permanent and temporary workers before and after that change. We find that (i) product and process innovation created jobs, (ii) before the change in the EPL in 1997 innovations did not affect the number of permanent workers and all the increase in employment was explained by the increase in the number of temporary workers, (iii) after the change in the EPL, innovations increased both the number of temporary and permanent employees, and (iv) while the increase in temporary workers takes place after one year of the innovations, the increase in permanent workers occurs mainly two years after the innovations.     

Temporary and Permanent Immigration under Unionization

This paper investigates permanent and temporary immigration and remittance under the coexistence of unionized and non‐unionized manufacturing firms in a two‐sector economy. The impacts of immigration and remittance on respectively wages, employment, the union–non‐union wage gap and national welfare are analyzed. It is found that both permanent immigration (economy‐wide) and temporary immigration in agriculture bring positive effects on most variables (except the competitive wage), but widens the wage gap and causes income redistribution in the host country. However, if temporary immigrants work in manufacturing only, then all wages and the union–non‐union wage gap fall. That is, workers become more equally paid but poorer. In addition, remittance and globalization cause negative effects on union workers and employers. It is perhaps such consequences and the income redistribution effect of immigration that cause the media to paint a negative image of immigration.     

The effects of employment protection: Learning from variable enforcement

Employment protection legislation (EPL) is not enforced uniformly across the board. There are a number of exemptions to the coverage of these provisions: firms below a given threshold scale and workers with temporary contracts are not subject to the most restrictive provisions. This within-country variation in enforcement allows us to make inferences on the impact of EPL which go beyond the usual cross-country approach. In this paper we develop a simple model which explains why these exemptions are in place to start with. Then we empirically assess the effects of EPL on dismissal probabilities and on the equilibrium size distribution of firms. Our results are in line with the predictions of the theoretical model. Workers under permanent contracts in firms with less restrictive EPL are more likely to be dismissed. However, there is no effect of the exemption threshold on the growth of firms.     

The Productivity Effects of Worker Mobility Between Heterogeneous Firms

We analyze the effect of worker inflows on establishments’ productivity, using German data. Previous studies for other countries have found positive effects of hiring workers from superior (more productive or higher paying) firms. Ranking establishments by their median wage, we find that inflows from inferior establishments seem to increase hiring establishments’ productivity. Further empirical analyses suggest our findings are due to a positive selection of such inflows from their sending establishments. These workers might have to find a better job match in order to advance their careers, an interpretation supported by the finding that the effect is driven by workers with short tenure at their previous employer. Our findings reflect the increasingly assortative pattern of worker mobility in Germany found in a related strand of literature.     

Testing and the Composition of the Labor Pool

We consider a continuous‐time labor matching model with endogenous separation. Firms initially lack information about the quality of workers with whom they are matched. They acquire information both from pre‐employment testing and, in the case in which a labor relationship is established, on‐the‐job performance. Testing provides a signal of a worker's quality. A firm can pick the accuracy level of its test, but it pays a cost that increases in the accuracy. Workers who perform poorly on the test are not offered employment; those who perform poorly on the job are eventually fired (after some delay). Worker quality is not match‐specific; low‐quality workers are less productive with all firms. We show that, in equilibrium, there is an inverse and complementary relation between the level of testing that firms optimally perform and the overall quality of the workers in the matching pool. We consider the properties of a steady‐state, stable equilibrium in such an environment. The complementarity between testing and the composition of the unemployed pool introduces the possibility of multiple equilibria.     

Optimal policy and the role of social contacts in a search model with heterogeneous workers

This paper develops a search model with heterogeneous workers and social networks. High‐ability workers are more productive and have a larger number of professional contacts. Firms can choose between a vacancy in the regular market and a job opening in the referral market. The model predicts that a larger number of social contacts is associated with a larger wage gap between high‐ and low‐ability workers and a larger difference in the unemployment rates. The net welfare gain of referrals is estimated at 1.2%. There are three reasons for the inefficiency of the decentralized equilibrium. First is the traditional search externality described by Hosios. Second, firms share their profits with workers, whereas the social optimum implies that full surplus should be given to firms in the referral market. This inefficiency can be internalized by means of referral subsidies. Third, there is the “pooling inefficiency” in the regular market. If high‐ability workers are sufficiently more productive they impose a positive externality on low‐ability workers and should be rewarded by positive transfers. On the contrary, if productivity differences are small, high‐ability workers achieve unreasonably high wages by referring each other and reduce employment chances of low‐ability workers. In this latter case, high‐ability workers should be penalized. If optimal policy is implemented the net welfare gain of referrals rises up to 1.8%.     

Starting Your Career With a Fixed-Term Job: Stepping-Stone or “Dead End”?

This paper uses panel data from the UK and Germany to investigate the difference in the learning effect between workers who enter the labour market with a fixed term and a permanent job. Our results verify the existence of a wage penalty for entering the labour market with a fixed-term contract for the British males (7.1%) and especially for the British females (21.2%). British females also have a very strong learning effect that is especially large for temporary starters. In Germany, the initial wage penalty for temporary starters is smaller than in the UK—4.5% for the males and 3% for the females—and is persistent only for the males. Although initial wage differences are mitigated through the accumulation of skills on the job, this process differs between temporary and permanent starters. This suggests that the type of the starting contract may be a feature of labour market segmentation.     

Earnings Instability and Tenure

We study the effect of tenure on earnings instability in Italy using the reforms of temporary employment contracts, which affected the average tenure of workers differentially across cohorts. We develop a model of earnings dynamics, and we exploit the variation of tenure and instability over time and across birth cohorts to estimate policy‐relevant parameters. Our results indicate that each year of tenure on the job reduces earnings instability by 11 percent; the drop is faster in the first three years of the match. Workers on a temporary contract have an earnings instability up to 100 percent higher than workers on a permanent contract.     

Directed search with heterogeneous firms: an experimental study

Directed search models labor markets where workers observe wages before deciding where they will apply. This paper tests this model for the case of heterogeneous firms in a laboratory experiment. The theory predicts that more productive firms offer higher wages and workers apply more often to these higher wages. In consequence, more productive firms are more likely to match and the market is more efficient than the prediction of an alternative model where search is random. The main results of the experiment are that average firms offer wages that are close to or a little lower than the theoretical predictions but highly variable and workers apply more often to high offers but not to the extent predicted. The markets are no more efficient than random search predicts, because of the variation in wage offers.     

Does apprenticeship improve job opportunities? A regression discontinuity approach

In Italy the main difference between apprentices and other types of temporary workers is that apprentices must receive firm-provided training. The firm incentive in hiring apprentices consists in paying lower wages and labour taxes. Using an Italian administrative dataset containing information on the jobs started between January 2009 and June 2012, we estimate the effect of apprenticeship on the hazard function to a permanent job. Identification is based on a regression discontinuity design. We find that, for 29-year-old workers, apprenticeships are “long entrance halls” towards permanent contracts, especially within the firm where the apprenticeship is performed.

     

Temporary employment,work quality,and job satisfaction

Using European Working Conditions Survey, this paper shows that being employed on a temporary, rather than an open-ended, contract has a negative bearing for job satisfaction. While this effect has been established previously, the novelty of this paper is to show that the effect propagates both directly and indirectly, through working conditions and work quality. Accounting for this indirect effect allows to obtain the effect of the contractual status on job satisfaction that is substantially larger in magnitude as compared to simple direct effects, confirming the importance of accounting for unobservable individual, company-specific, and job-specific heterogeneity when addressing this relationship. Moreover, the extent of co-determination of poorer working conditions and temporary contractual status, as well as the resulting bias in estimating only a direct effect of temporary employment on job satisfaction without accounting for such co-determination, vary depending on a country setting. It is shown that in transition economies, this co-determination is larger than in non-transition economies, possibly because of the workers’ weaker bargaining power, strategic use of temporary employment to circumvent labor regulations, the absence of regulations prescribing equal treatment of workers with different contractual arrangements, or lack of compliance with such regulations.