Sorting, Wages, Productivity: Increasing Dispersion?

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Swissotel Chicago, Zurich C
Hosted By: American Economic Association
  • Chair: Richard B. Freeman, Harvard University

The Divergence of Establishment Wage Premia

Johannes F. Schmieder
,
Boston University
Stefanie Wolter
,
Institute for Employment Research (IAB)

Abstract

Wages vary wildly for seemingly identical workers across different employers. That some employers seem to systematically pay their workers higher wages than others has been well documented using large administrative datasets and empirical models that decompose wages into individual and employer components. However little is known as to why the employer wage component - often interpreted as a wage premium - varies across firms, with explanations ranging from compensating differentials, union wage premia, profit sharing, to efficiency wages. In this paper we shed light on these competing explanations, by exploring systematically what employer characteristics are correlated with measured wage premia. For this, we first estimate employer wage premia using the universe of workers and establishments in Germany over a 20 year time period. We then combine this administrative dataset with a large survey of establishments that collects detailed establishment characteristics, following them over many years. We use this setting to test between alternative explanations of employer wage premia. Finally we decompose the increase in the variance of estimated employer wage premia into observable and unobservable establishment characteristics.

The Great Divergence(s)

Giuseppe Berlingieri
,
ESSEC Business School, OECD, and CEP
Patrick Blanchenay
,
University of Toronto
Chiara Criscuolo
,
OECD

Abstract

This report provides new evidence on the increasing dispersion in wages and productivity using novel micro-aggregated firm-level data from 16 countries.
First, the report documents an increase in wage and productivity dispersions in a large set of countries, for both manufacturing and non-financial business services.
Second, it shows that these trends are driven by differences within rather than across sectors.
Third, it suggests that wage divergence is linked to increasing differences between high and low productivity firms.
Fourth, the increase in wage inequality is driven by a pull from the bottom (i.e. from the low-wage firms), while divergence at the top only occurs in the service sector, and only after 2005.
Fifth, it suggests that both globalisation and digitalisation imply higher wage divergence, but strengthen the link between productivity and wage dispersion. Finally, it offers preliminary analysis of the role of minimum wage, employment protection legislation, trade union density, and coordination in wage setting on wage dispersion and its link to productivity dispersion.

Management Practices, Workforce Selection and Productivity

Stefan Bender
,
Deutsche Bundesbank
Nicholas Bloom
,
Stanford University
David Card
,
University of California-Berkeley
John Van Reenen
,
Massachusetts Institute of Technology
Stefanie Wolter
,
Institute for Employment Research (IAB)

Abstract

Recent research suggests that much of the cross-firm variation in measured productivity is due to differences in use of advanced management practices. Many of these practices – including monitoring, goal setting, and the use of incentives – are mediated through employee decision-making and effort. To the extent that these practices are complementary with workers’ skills, better-managed firms will tend to recruit higher-ability workers and adopt pay practices to retain these employees. We use a unique data set that combines detailed survey data on the management practices of German manufacturing firms with longitudinal earnings records for their employees to study the relationship between productivity, management, worker ability, and pay. As documented by Bloom and Van Reenen (2007) there is a strong partial correlation between management practice scores and firm-level productivity in Germany. In our preferred TFP estimates only a small fraction of this correlation is explained by the higher human capital of the average employee at better-managed firms. A larger share (about 13%) is attributable to the human capital of the highest-paid workers, a group we interpret as representing the managers of the firm. And a similar amount is mediated through the pay premiums offered by better-managed firms. Looking at employee inflows and outflows, we confirm that better-managed firms systematically recruit and retain workers with higher average human capital. Overall, we conclude that workforce Selection and positive pay premiums explain just under 30% of the measured impact of management practices on productivity in German manufacturing.

Assortative Matching in Skill: Evidence from Sweden

Christina Hakanson
,
Sveriges Riksbank
Erik Lindqvist
,
Stockholm School of Economics
Jonas Vlachos
,
Stockholm University

Abstract

We decompose the between-firm variance in worker skills to test which mechanisms explain sorting of workers by skill to firms. Our Swedish data allows us to test whether firm skill differences are due to occupational structure, assortative matching within and between occupational groups or a covariance term which is positive if firms with a high fraction of high-skilled occupations also employ the most skilled workers in each occupation. All three components contribute to sorting, but occupational structure is the most important and also accounts for 70% of the between-firm variance. A more detailed analysis shows assortative matching is positive within and between managers and workers in high- and middle-skilled occupations, but close zero for workers in low-skilled occupations.

Sorting Between and Within Industries: A Testable Model of Assortative Matching

John M. Abowd
,
U.S. Census Bureau and Cornell University
Francis Kramarz
,
CREST-INSEE
Sebastien Perez-Duarte
,
European Central Bank
Ian M. Schmutte
,
University of Georgia

Abstract

We test for sorting of workers between and within industrial sectors in a directed search model with coordination frictions. We fit the model to sector-specific vacancy and output data along with publicly-available statistics that characterize the distribution of worker and employer wage heterogeneity across sectors. Our empirical method is general and can be applied to a broad class of assignment models. The results indicate that industries are the loci of sorting–more productive workers are employed in more productive industries. The evidence confirms assortative matching can be present even when worker and employer components of wage heterogeneity are weakly correlated.
JEL Classifications
  • D2 - Production and Organizations
  • J3 - Wages, Compensation, and Labor Costs