Economics of wage premia and wage rigidity

Abstract

The focus of this dissertation is on the effects of specific employer characteristics on wages and wage rigidity and how these characteristics enter the wage-setting process. The dissertation includes an introductory chapter and five separate essays. The introduction provides motivation, background on the main keywords and an overview of the thesis. Chapters two and three study how internal references affect wages and wage rigidity from a theoretical perspective. The fourth chapter estimates the effect of firm size on wages in the Finnish labor market. Chapter five develops on the preceding and analyses how profit sharing schemes affect the firm size premium. Chapter six studies how internal references can induce profit sharing and wage rigidity from an empirical perspective. Chapter two analyses how fairness considerations of workers affect the union wagesetting process and ultimately on wages, employment and wage rigidity. Fairness is modeled as internal reference where workers compare wages to firm productivity respectively profitability. If the internal reference is high relative to the outside option, wage pressure results through a productivity/profitability premium as well as real wage rigidity. The third chapter reviews the core research on internal references and wage rigidity. With one exception it suggests that internal references unambiguously increase wage rigidity. In contrast, this chapter provides analytical proofs, calibration results and impulse response functions which show that the effect is ambiguous. The effect of the internal reference relative to the external reference determines whether wage rigidity increases or decreases. Chapter four explores the relationship between wages and firm size in the Finnish labor market. Using a large register data set the effect of firm size is found to be negligible after controlling for a large set of worker and firm characteristics and across different identification strategies. Chapter five analyzes the interaction of the firm size wage premium and profit sharing schemes. A simple theoretical analysis shows that the firm-size wage premium decreases in the presence of profit sharing. Using a rich linked employer-employee data set the empirical analysis shows that besides profit sharing, assortative matching and monopsony behavior decrease the firm size premium. The sixth chapter analyses the connection between profit sharing and wage rigidity where profits per worker are measured directly through the balance sheet panel. Profit endogeneity is accounted for by instrumentation as well as the self-selection of firms in different categories of profitability. Profits are shared if positive or increasing while there is no downward adjustment of wages if profits are negative or decreasing. This finding suggests that profits per worker function as internal reference.