Education,Mobility and Employers’ Monopsony Power: A Search‐theoretic Analysis

Abstract. We analyse the efficiency of schooling choices in a wage‐posting search equilibrium model with on‐the‐job search. The workers have multidimensional skills and the search market is segmented by technology. Education determines the scope — or adaptability— of individual skills. Individuals obtain schooling to leave unemployment more quickly and to climb the wage ladder rapidly through job‐to‐job mobility — that is, to speed up job shopping. Education reduces firms’ monopsony power in the wage determination by improving workers’ mobility. As a result, the wage distribution shifts rightward with aggregate schooling. However, the ratio of vacant jobs to job seekers also falls in each sector. Either one or the other externality may dominate, implying, respectively, under‐ or over‐education. A combination of minimum wage and schooling fee can decentralize the efficient allocation.     

Firing Costs,Efficiency Wages and Unemployment

This paper uses a Shapiro–Stiglitz efficiency wage model to analyse the effects of firing costs on wages, employment, expected utility and profits. It considers that the probability of a non–shirker being fired depends on an exogenous shock which follows a two–state Markov process. It finds that higher severance payments give rise to lower wages, a lower unemployment rate, an increase in firms’ profits and a decrease in the utility of both workers and the unemployed. These conclusions derive from the finding that a greater probability of keeping one’s job, because of higher firing costs, raises the value of the job and reduces the worker’s incentives to behave opportunistically; this enables firms to reduce wages. Hence, if firms pay efficiency wages, a higher degree of labour market flexibility increases unemployment.     

The Male–Female Wage Gap and the Firm Effect: The Case of Young Italian Workers

Abstract. The idea that wages are determined by firm and individual characteristics suggests that there is a firm effect that influences wage differentials. This paper presents the results of an empirical analysis of gender wage differentials — based on INPS data for people between the ages of 20 and 25 employed in the private sector in 1996 — which takes into account the characteristics of workers and firms using a two‐level random‐effects model. Firm variables proved to be significant, and the proportion of females in the firm showed a negative effect on the wages of both men and women.     

Preference Change and Increasing Wage Inequality

Abstract. This paper argues that preference change could explain, in part, the growth of within‐group wage inequality in the USA and the UK in the 1980s. The absence of such preference change in continental European countries might also help explain why their wage inequality did not rise in the same way. The argument relies on evidence from the World Values Surveys and uses an efficiency wage model of within‐group wage inequality where there are differences in the degree of discretion at work across firms and workers value not just the wage but also the degree of discretion on the job.     

DISENTANGLING THE MINIMUM WAGE PUZZLE: AN ANALYSIS OF WORKER ACCESSIONS AND SEPARATIONS

Changes in the legislation in the mid‐1980s in Portugal provide remarkably good conditions for analysis of the employment effects of mandatory minimum wages, as the minimum wage increased sharply for a very specific group of workers. Relying on a matched employer‐employee panel data set, we model gross worker flows—accessions and separations—in continuing firms, as well as in new firms and those going out of business, using a count regression model applied to proportions. Employment trends for teenagers, the affected group, are contrasted to those of older workers before and after the raise in the youth minimum wage. The major effect on teenagers of a rising minimum wage has been the reduction of separations from the employer, which, during the period under analysis, has compensated for the reduction of accessions to new and continuing firms. In this sense, our results can reconcile some of the previous evidence in the empirical literature when analyzing the aggregate impact of the minimum wage on youth employment without decomposing it by type of worker flow. (JEL: D21, J23, J38)     

Higher Education Levels,Firms’ Outside Options and the Wage Structure

Abstract. We analyze the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash bargaining. A key insight is that an increase in the average education level exerts a negative externality on wages through its positive externality on the firms’ outside option. As a consequence, the real wage of all workers decreases in the short run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long‐run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the US experience in the 1970s and 1980s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.     

Standard of Living as a Right,Not a Privilege: Is It Time to Change the Dialogue from Minimum Wage to Living Wage?

Dating back to the 1930s, President Franklin D. Roosevelt argued that workers were entitled to a wage that allowed them to enjoy a decent standard of living—a conviction that led the president to propose the first federally‐mandated minimum wage. Mr. Roosevelt’s proposal was met with highly partisan resistance in congress and the courts—reactions not different in kind from the highly partisan resistance former President Obama experienced in his proposal to increase the federal minimum wage from its current level of $7.25 per hour. Reflecting President Roosevelt’s convictions, it is clear that many low wage workers today are not, and cannot, enjoying a decent standard of living at current minimum wage levels. Further, many of the economic arguments raised in opposition to increasing the minimum wage have been thoroughly discredited: empirical evidence suggests that increased minimum wages would not lead to dramatic spikes in unemployment, massive substitutions of capital for labor, business closings, and significantly increased consumer prices. However, as compelling as arguments for increasing the minimum wage may be, the reality is that this may not be sufficient to alleviate the plight of low income workers, particularly given the political nature of minimum wage adjustments. Indeed, it may be time to shift the national focus away from the minimum wage to an emphasis on viable living wage legislation, a proposition consistent with the social justice perspective of contemporary ethicists.     

How Selective Are Real Wage Cuts? A Micro‐analysis Using Linked Employer–Employee Data

Using linked employer–employee panel data for Germany, we investigate whether firms implement real wage reductions in a selective manner. In line with insider–outsider and several strands of efficiency wage theory, we find strong evidence for selective wage cuts with high‐productivity workers being spared even when controlling for permanent differences in firms' wage policies. In contrast to some recent contributions stressing fairness considerations, we also find that wage cuts increase wage dispersion among peers rather than narrowing it. Notably, the same selectivity pattern shows up when restricting our analysis to firms covered by collective agreements or having a works council.     

Equilibrium Wage‐Tenure Contracts

In this study we consider a labor market matching model where firms post wage‐tenure contracts and workers, both employed and unemployed, search for new job opportunities. Given workers are risk averse, we establish there is a unique equilibrium in the environment considered. Although firms in the market make different offers in equilibrium, all post a wage‐tenure contract that implies a worker's wage increases smoothly with tenure at the firm. As firms make different offers, there is job turnover, as employed workers move jobs as the opportunity arises. This implies the increase in a worker's wage can be due to job‐to‐job movements as well as wage‐tenure effects. Further, there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage. We also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters.     

What Survey Data Reveal about Price and Wage Rigidity in Portugal

This paper exploits the information collected from a survey conducted on a sample of Portuguese firms to study the patterns of firms’ price and wage adjustments and the extent of nominal price and wage rigidities. The evidence shows that the frequency of price changes varies substantially across sectors and depends on the intensity of competition, the share of labor costs and firms’ price reviewing behavior. The results also suggest that the constraint imposed by the presence of downward nominal wage rigidity is less important in firms where the fraction of permanent and high‐skilled workers is lower and the share of flexible pay components is higher.     

Collective Wage Agreements and Firms’ Employment Policies

This paper provides evidence on the way collective wage agreements affect the adjustment of employment, working hours and other production factors when service‐sector firms are faced with demand shocks. The estimation results indicate that collective wage agreements significantly influence firms’ employment policies. It is shown that recruitment is a widespread instrument for service firms to cope with demand fluctuations which are negatively affected by collective wage agreements. The employment of freelance workers is also negatively affected by collective wage agreements, while their effect on using short‐term employment contracts as a reaction to demand shocks is positive.     

A Note on Job Tenure and Collective Contracts

Abstract. This paper analyses the relationship between individual tenure and the application of collective contracts at the firm level under the specific institutional settings in Germany. The empirical approach is based on a multilevel model and a linked employer–employee data set for the years 1990, 1995, and 2001. The main result is that elapsed tenure is longer in firms applying collective contracts than in companies with individual wage setting: workers in firms with collective contracts benefit not only from higher wages, but also from higher job stability. Furthermore, we find no significant changes in mean tenure during the 1990s as well as stable differences across wage‐setting regimes.     

Does Rent‐sharing Profit Female and Male Workers? Evidence from Israeli Matched Employer–Employee Data

This paper analyses the impact of workplace characteristics on individual wages based on a unique cross‐section matched employer–employee data set for the Israeli private manufacturing sector in 1995. Specifically, we examine the effects of the interaction between profit‐sharing and wages on the gender wage gap. The empirical findings show that individual compensation is significantly and positively correlated with firms’ profits‐per‐employee, even when controlling for all of the following: group effects in the residuals, individual and firms’ characteristics, industry wage differentials and endogeneity of profits. Wage–profit elasticity is found to be 11 per cent and it does not significantly differ between genders. With respect to the overall gender wage gap (on average women earn 28 per cent less than men), the results show that within firms there is no gender discrimination and that 12 per cent of this gap can be explained by the wage–profits profile and by the fact that women are more likely to be employed in less profitable firms than men.     

All or nothing: International coalitions responding to competing pressures in challenges to IP rights

Foreign subsidiaries face ‘institutional duality’ from competing parent-firm and host-country conformity pressures. However, international coalitions of firms experience pressures to conform from multiple parents, resulting in ‘institutional multiplicity.’ We argue that coalition members bargain and satisfice to agree upon goals and responses to external pressures. As institutional multiplicity increases, coalition responses are increasingly framed around simple threshold-type goals all members can agree upon. We test this idea in the context of international coalitions challenging biotechnology and organic chemistry patents of competitors in the United States Patent and Trademark Office's Patent Trial and Appeals Board. Our analysis includes 946 observations, and finds that larger coalitions with greater variance in member home-country patent enforcement institutions are more likely to pursue strategies that have a simple performance goal all members can agree upon: having a competitor's patent invalidated instead of a settlement. This relationship is further enhanced when coalition members have diverse levels of strategic interest, captured by variance in portions of coalition members' overall patent portfolios belonging to the same patent family as the disputed patent.     

Efficiency Wage,Fixed Employment Costs,and Dual Labour Markets

The standard efficiency wage‐based explanation of labour market dualism hinges on the existence of differences in monitoring across sectors. The paper proposes fixed employment costs as an alternative source of wage differentials for homogeneous workers. It shows that firms with larger fixed costs pay higher wages in order to elicit more effort from their workers, and tend to have higher capital/labour ratio and labour productivity. The model generates both involuntary unemployment and involuntary confinement in the secondary sector: high effort–high wage jobs are preferred to low effort–low wage jobs and either are preferred to unemployment. The proposed framework can also account for the various types of treatment of marginal jobs in primary sector firms envisaged by Doeringer and Piore (Internal Labour Markets and Manpower Analysis, 1971). In particular, an increase in fixed costs beyond a certain level may induce primary sector firms to restructure, segment production, and enter the secondary sector, thus converting their jobs into secondary jobs. From a welfare point of view, we cannot state in general the desirability of subsidizing fixed employment costs; however, we show that an employment subsidy financed by a wage tax is able to increase employment with no loss in terms of production.     

Directed Search for Equilibrium Wage–Tenure Contracts

I construct a theoretical framework in which firms offer wage–tenure contracts to direct the search by risk‐averse workers. All workers can search, on or off the job. I characterize an equilibrium and prove its existence. The equilibrium generates a nondegenerate, continuous distribution of employed workers over the values of contracts, despite that all matches are identical and workers observe all offers. A striking property is that the equilibrium is block recursive; that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers. This property makes the equilibrium analysis tractable. Consistent with stylized facts, the equilibrium predicts that (i) wages increase with tenure, (ii) job‐to‐job transitions decrease with tenure and wages, and (iii) wage mobility is limited in the sense that the lower the worker's wage, the lower the future wage a worker will move to in the next job transition. Moreover, block recursivity implies that changes in the unemployment benefit and the minimum wage have no effect on an employed worker's job‐to‐job transitions and contracts.     

THE RETURN OF THE WAGE PHILLIPS CURVE

The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical wage equations—starting from Phillips’ (1958) original work—and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the US economy, even under the strong assumption of a constant natural rate of unemployment.     

The Skilled Wage Premium and the Growth of Small Firms in UK Manufacturing

We document the role of small firms in explaining the growth of the skilled/unskilled wage premium in UK manufacturing over the 1980s. Our major findings are (i) the share of manufacturing employment in small firms' (0–99) employees has risen by 35 percent over this period; (ii) small firms pay more unequal wages than do large firms: the non-manual/manual wage premium is 1.53 in small firms and 1.50 in firms of over 1,500 workers; (iii) the growth in small firms over the period explains about 20 percent of the rise in the skilled/unskilled wage premium.     

Evaluating the Introduction of a National Minimum Wage: Evidence from a New Survey of Firms in Ireland

Abstract. In April 2000 the Irish government introduced a national minimum wage of IR£4.40 (€5.58) an hour. We use data from a specifically designed survey of firms to estimate the employment effects of this change. Employment growth among firms with low‐wage workers prior to the legislation was no different from that of firms not affected by the legislation. A more refined measure of the minimum wage, however, suggests that the legislation may have had a negative effect on employment for the small number of firms most severely affected by the legislation. However, the size of these effects is relatively modest.