Employers and Wages

1. Employers and Wages

2. 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

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

4. 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

5. 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 • This is what Gibbons-Katz QJE 92 do • Effect is weaker but is still there so correlation of wages with employer characteristics seems a true phenomenon.

6. 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.

7. 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: wi=ui+ei • If jobs require more effort (so have higher productivity) than must pay higher wages) • But can be applied to other working conditions

8. 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 ui • Looking at separations gives more sensible estimates

9. An example: Night-WorkingUK LFS

10. 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

11. 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

12. 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

13. 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

14. A Simple Picture

15. 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