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Edward P. Lazear1 The Structure of Wages, Raises and Mobility in Europe (Based on Introduction to International Differences in Productivity and Personnel.

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Presentation on theme: "Edward P. Lazear1 The Structure of Wages, Raises and Mobility in Europe (Based on Introduction to International Differences in Productivity and Personnel."— Presentation transcript:

1 Edward P. Lazear1 The Structure of Wages, Raises and Mobility in Europe (Based on Introduction to International Differences in Productivity and Personnel Practices, by Edward P. Lazear and Kathryn L. Shaw) London LEED Conference September, 2005

2 Edward P. Lazear2 Employer-employee matched data are now available for many countries First opportunity to look at the structure of wages within firms Why differ and how? Effects of differences

3 Edward P. Lazear3 Additional Contributors to the Book and to this Chapter Denmark: Aagaard, Eriksson, and Westergaard- Nielsen Sweden:Edin, Holmlund and Skans; Oyer Finland: Uusitalo and Vartainen Norway: Hunnes, Mqen, and Salvanes Germany: Bellman and Alda Italy: Contini, Leombruni, Pacelli, and Villosio France: Kramarz and Perez-Duarte Belgium: Lallemand, Plasman, and Rycx U.S. to come: Abowd, Haltiwanger, and Lane

4 Edward P. Lazear4 Data 9 countries (Belgium, Denmark, Finland, France, Germany, Italy, Norway, Sweden, United States) Ideal: All workers in all firms for many years Denmark, Norway, Finland, Sweden (1) Sub-sets Sweden (2), US, Belgium Samples from all firms France, Italy

5 Edward P. Lazear5 Four Questions Are all firms alike? - Yes Does a rising tide lifts all boats (firm raise is individual raise) – no Do compressed wage firms lose their best workers? – no Are countries similar or different? - Similar

6 Edward P. Lazear6 Are All Firms Alike? Examples of wage distributions within and across firms (within country)

7 Edward P. Lazear7 Decomposition of the Variance of Wages Decompose the variance into the contribution of firms: σ 2 = Σp j σ j 2 + Σp j (meanW.j – meanW.. ) 2 where p j is the share of workers located in firm j

8 Edward P. Lazear8 Decomposition of the Variance of Wages Components of overall country wage variance Weighted average of within-firm variance Weighted sum of squared deviations of firm means from country means The questions What theories might contribute to the determinants of wage variance? Which are consistent with the data?

9 Edward P. Lazear9 Why Care? If little within-firm wage variation then Mobility only way to advance If mobility limited then First job affects lifetime wealth If much within-firm wage variation, high mobility costs have less impact on worker well-being

10 Edward P. Lazear10 Models of wage setting that would produce Figures 1A and 1B Figure 1A: All firms alike, but within firm wages differ Figure 1B: All workers paid same within firm; firms differ Wage setting based on occupation (human capital) All firms have same distribution of occupations One occupation per firm; firms differ in occupations Wage setting for incentives (e.g. tournaments) Workers ex ante identical; tournament to motivate. Or workers differ in ambition but distribution of types identical in every firm Inconsistent with tournaments. Consistent with ex post settling up, piece rates where workers sort across firms by ambition Institutional wage settingFirms all have same job titles on which wages are based or same seniority structure on which wages are based E.g., Workers divide pie evenly. Pay varies with firm profit (wage change: rising tide lifts all boats)

11 Edward P. Lazear11 Country-specific within and across firm wage distributions (simulating Figures 1A and 1B) There is much within firm wage variation. France has more within-firm and country variation than Norway.

12 Edward P. Lazear12 Denmark: Much within firm variance but considerable across firm variance

13 Edward P. Lazear13 Within-Firm S.D. of Wages is a High Percent of the Country-Level S.D. of Wages France has relatively tight firm wage distributions

14 Edward P. Lazear14 Small, but positive, between-firm wage variation in all countries Denmark’s Firms Have Largest Differences

15 Edward P. Lazear15 Are All Firms Alike? Examples of wage distributions within and across firms (within country)

16 Edward P. Lazear16 Models of wage setting that would produce Figures 1A and 1B Figure 1A: All firms alike, but within firm wages differ Closest to truth Figure 1B: All workers paid same within firm; firms differ Definitely not Wage setting based on occupation (human capital) All firms have same distribution of occupations One occupation per firm; firms differ in occupations. Unlikely. Wage setting for incentives (e.g. tournaments) Workers ex ante identical; tournament to motivate. Or workers differ in ambition but distribution of types identical in every firm Inconsistent with tournaments. Not equal pay for all within firm (incentive pay or sorting possible). Institutional wage settingFirms all have same job titles on which wages are based or same seniority structure on which wages are based E.g., Workers divide pie evenly. Pay varies with firm profit Not equal pay for all within firm.

17 Edward P. Lazear17 Implications for Mobility Two points: If there were no within-firm wage variation, must change firms to achieve wage increases If no chance for promotion, luck on first job dramatically affects lifetime income  In principle, people can achieve wage increases and greater lifetime income within firms

18 Edward P. Lazear18 Pay Compression: Heterogeneity in Skills or Wage Policy? Wage Policy: lack of incentives  compressed firms lose top workers Skill homogeneity  no pattern in worker exits as a function of wage compression Results: wage compression and exits are if anything, negatively correlated  heterogeneity

19 Edward P. Lazear19 Compression and Loss of Top Workers Result: Wage compression and exits are if anything, negatively correlated  heterogeneity

20 Edward P. Lazear20 Wage Increases Figures 1a and 1b relevant models Does a rising tide lift all boats? Everyone gains in successful firms and everyone loses in failing firms Do firms adopt a lockstep wage increase policy within the firm? Answer: Much variation in wage growth rates within firms More variance within firms than between Standard deviation of wage growth much larger than average wage growth within firm.

21 Edward P. Lazear21 Large Within-firm standard deviation of wage growth Sweden is typical. S.D wage growth about 12%

22 Edward P. Lazear22 No strong rising tide effect Wages are highly variable within firms Implications: Wage increases tend to reflect differences in worker ability or performance, not differences in the performance of firms Wages are tied to the market Lazear and Oyer (2004) Occupation effects far dominate firm effects Why care? If lockstep, workers’ fate affected by factors beyond their control Effort less important Incentives less important Firm selection is very important

23 Edward P. Lazear23 Are All Firms Alike Wage Growth? More alike than different France has very high variation in raises within and overall compared with Norway (as with levels) Norway is closer to “lockstep” at country and firm level.

24 Edward P. Lazear24 More on Mobility Large differences between countries in mobility rates Entry and exit rates are correlated across countries High wage firms have lower mobility rates Entry rates are higher in low wage firms

25 Edward P. Lazear25 Entry and Exit Rates

26 Edward P. Lazear26 Mobility Patterns Entry and exit rates are correlated at the country level (equilibrium) Most countries are growing (entry>exit) Countries differ Germany (manufacturing) declining

27 Edward P. Lazear27 Mobility Lower in High Wage Firms

28 Edward P. Lazear28 Entry Rates by Wage Level Higher in Low Wage Firms

29 Edward P. Lazear29 Why a difference between mobility in high and low wage firms? Possibilities: High wage workers are more stable Workers do not leave high wage firms Low wage firms are newer and have evolving labor needs More turnover Higher entry rates

30 Edward P. Lazear30 Conclusions Do all firms have the same wage structure? No, but all firms have much within-firm wage variation, mimicking the country distribution This reflects worker heterogeneity more than policy Mobility of high wage workers not higher in compressed wage firms High variation in raises within firms  firms are microcosms of the economy

31 Edward P. Lazear31 Conclusions, continued Raises: Rising tide lift all boats? No. Standard deviation of within firm raises is 10% to 15%, even though average raises are 0 to 5% Evidence suggests raises are not determined by firm How do countries differ? More alike than different – much within firm wage variation, raise variation, mobility patterns consistent by firm size But differences. France is more variable than Scandinavia Norway less variable than Denmark

32 Edward P. Lazear32 Four Answers Are all firms alike? - Yes Does a rising tide lifts all boats (firm raise is individual raise) – no Do compressed wage firms lose their best workers? – no Are countries similar or different? - Similar

33 Edward P. Lazear33 Questions for the Future To the extent there are country differences, why do countries differ in wage dispersion and raise dispersion (France>Norway) Institutional factors Different industry mix More heterogeneity within country and firms Wage policy How is productivity affected by wage policy – compression, raises, mobility


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