The Structure of Wages, Raises and Mobility in Europe

1. 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 Edward P. Lazear

2. 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 Edward P. Lazear

3. 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 Edward P. Lazear

4. 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 Edward P. Lazear

5. 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 Edward P. Lazear

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

7. Decomposition of the Variance of Wages • Decompose the variance into the contribution of firms: σ2 = Σpj σj2 + Σpj(meanW.j– meanW..)2 where pj is the share of workers located in firm j Edward P. Lazear

8. 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? Edward P. Lazear

9. 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 Edward P. Lazear

10. Models of wage setting that would produce Figures 1A and 1B Edward P. Lazear

11. 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. Edward P. Lazear

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

13. 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 Edward P. Lazear

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

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

16. Models of wage setting that would produce Figures 1A and 1B Edward P. Lazear

17. 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 Edward P. Lazear

18. 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 Edward P. Lazear

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

20. 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. Edward P. Lazear

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

22. 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 Edward P. Lazear

23. 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. Edward P. Lazear

24. 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 Edward P. Lazear

25. Entry and Exit Rates Edward P. Lazear

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

27. Mobility Lower in High Wage Firms Edward P. Lazear

28. Entry Rates by Wage LevelHigher in Low Wage Firms Edward P. Lazear

29. 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 Edward P. Lazear

30. 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 Edward P. Lazear

31. 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 Edward P. Lazear

32. 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 Edward P. Lazear

33. 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 Edward P. Lazear