Sunday, October 23, 2016

More on twin workers at different firms and wage rate dispersion

" What does the empirical evidence tell us? Two stylised facts have been corroborated by empirical studies in a multitude of countries and economic conditions. The first is that larger firms pay higher wages (Oi and Idson 1999). The second is that more profitable firms share some of these profits with their workers in the form of higher wages (see Card et al. 2014 and references therein). The two set of facts are obviously interconnected, as it is often the case that larger firms make higher profits. The empirical evidence is very robust and shows that larger and more profitable firms pay higher wages, not only because they attract more skilled workers. Identical workers are paid better if they work for these firms. A question that has proven much more difficult to answer is what’s behind these facts. Is it that larger firms or more profitable firms pay higher wages because they are more productive? Or is it instead that they have an advantage because consumers have a preference for their products, and the extra profits generated by this demand are shared with workers?""But while firms’ productivity matters for wages, they matter less than one might have initially thought. From one year to the next, a typical change in firm level productivity explains some 25% of the observed change in workers’ wages. If you allow for a longer time span, the response increases, and TFP changes or ‘shocks’ can explain up to 50% of the observed wage changes. These results suggest that there is a lot of space for other shocks to affect wages. New consumer tastes and other demand shocks for each firm’s products are primary candidates. Recent evidence suggests that firms’ demand shocks matters more than firms’ TFP shocks for other firm-level outcomes, including firms’ closure (Foster et al. 2008), firms’ growth (Foster et al. 2016, Pozzi and Schivardi forthcoming) and hiring and firing policies (Carlsson et al. 2014)."