Employers and Wages

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Employers and Wages
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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

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Explanations

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

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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

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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.

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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.

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Simple Model of Compensating Differentials

• Utility is given by uw-e
• e is effort
• Perfect competition equalizes u so that wages for
  individual i can be written as
• wiuiei
• If jobs require more effort (so have higher
  productivity) than must pay higher wages)
• But can be applied to other working conditions

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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

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An example Night-WorkingUK LFS
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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

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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 productivityAPL which
  is correlated with MPLw under perfect competition

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• 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

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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

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A Simple Picture
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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