Which Wage Dispersion Matters to Firms' Performance?

Research on wage dispersion and firm performance focuses on intra-firm and inter firm effects irrespective of workers’ profession. We extend the analysis by considering dispersion within professions, within and across firms and within professions economy-wide. We find that the intra-firm dispersion of wages, which research so far has focused on, has limited effects on productivity compared to the economy-wide wage dispersion within the professions. As Swedish firms have differentiated wages among employees during the last 10-15 years also the economy-wide dispersion within professions has increased thus contributing considerably to the strong performance of the Swedish economy in the late 1990's.-

Individual Wage Setting, Efficiency Wages and Productivity in Sweden

Swedish wage setting has undergone drastic changes during the last 10-15 years. While Sweden was known for its narrow wage distribution, wage differentiation and wage bargaining at the individual level has become leading principles among white-collar workers’ unions. The purpose of the present paper is to analyse the consequences of this wage policy shift. Wage differences have increased drastically among white-collar workers while remained constant or even decreased among blue collar workers. We show that wage differentiation has had a strong effect on white collar workers’ average wage, and caused a major increase in the wage gap between the aggregates of whitecollar and blue-collar workers. We also show that increases in the coefficient of variation of wages raise productivity in firms with many workers in that worker category. Last and foremost, we show that the transition to individual wage setting raises the scope for firms to set efficiency wages and we find support for the fair wage version of efficiency wage setting. The effects of higher wage/fair wage rates were stronger in the late 1990s, when wage differentiation increased more, than in the early 2000s.Efficiency wages; productivity; wage differentials

Wage Fairness, Growth and the Utilization of R&D Workers

In 1999, only one of three US scientists and engineers was employed to do R&D and, in several countries over the last forty to fifty years, employment of skilled workers for R&D purposes appears not to have kept pace with the overall increase in the supply of skilled workers. Low utilization of R&D personnel implies low growth per human capital endowments. To analyze the low R&D utilization/low growth equilibria, we set up an endogenous growth model in which firms set fair wages and which allows for an analysis of changes in the utilization rate of R&D workers. We find that the rise in under utilization and the fall in growth per human capital to be consistent with the increase in the demand for higher education. This could be interpreted as the “consumption” element in higher education has received an increased importance yielding a low growth effect of higher education. The results also point at problems of correctly measuring actual human capital inputs in firms.Efficiency wages; fairness; growth

EU enlargement, migration and labour market institutions

"This paper discusses free immigration to regulated labour markets (as in Europe) and to unregulated labour markets (as in the US), and explores the implications for migration flows of collective agreements, employment protection laws, product market regulations etc. It is argued that the European type of labour market institutions prevent wage dumping and restrict major immigration flows to periods of business peaks in the immigration country. Based on the empirical evidence on the differences in institutions, it is argued for instance that the UK and Ireland are likely to be exposed to larger wage effects than for instance Germany and Austria. Labour market institutions are likely to grow more similar across countries and stricter as a consequence of free mobility." (Author's abstract, IAB-Doku) ((en))EU-Erweiterung, internationale Wanderung, Einwanderung - Auswirkungen, Arbeitsmigration, Arbeitsmarktentwicklung, institutionelle Faktoren, Regulierung, Tarifvertrag, Lohnpolitik, Gütermarkt, Wettbewerb, Arbeitsmarkt, Kündigungsschutz, Kündigungsrecht, Arbeitsrecht, europäische Integration, Konvergenz, Konjunkturaufschwung, Konjunkturabhängigkeit, Europäische Union

Distributional Effects of Wage Leadership: Evidence from Sweden

This paper represents the first analysis of the consequences of a formal wage leadership, the Swedish Industry Agreement. We show that leadership in general has implied a lowered wage level for occupational groups having signed the agreement compared to groups that have not signed it. This is as expected as wage leadership should stabilize wage increases. However, the effects differ widely across occupations and skilled groups that signed the agreement have raised their wage level compared to otherwise similar workers outside the agreement. The agreement seems to have had a less binding effect on skilled workers. A possible explanation is that local wage formation is more common among the skilled groups. The agreement has increased the wage level among high educated compared to low educated and thus raised the education premium. Difference-in-differences models are applied using register data 1990-2005.Wage leadership; Differences-in-differences.

Survey Evidence on Wage Rigidity and Unemployment: Sweden in the 1990s

This study reports the results from a repeat survey among managers in Swedish manufacturing, designed to explore how a severe and prolonged macroeconomic shock affects wage rigidity and unemployment. Our second survey was conducted in 1998, when the unemployment rate was much higher, and the inflation rate much lower, than when we conducted the first survey in 1991. We find no evidence that the increase in unemployment has softened the mechanisms generating wage rigidity. On the contrary, we conclude that – because of severe downward nominal wage rigidity – real wages have become more rigid during Sweden’s move to a low-inflation environment. We also report a range of new evidence on underbidding, efficiency wage mechanisms, job security legislation, workers’ wage norms, and to what extent the long-term unemployed are subject to statistical discrimination.Unemployment; wage rigidity; repeat survey; recession

Is There a Long Run Unemployment-Inflation Trade-off in Sweden?

We present a small open economy version of Akerlof, Dickens and Perry (2000) and, based on Swedish data, we show that there exists a negatively sloped long run Phillips curve. Regressions on quarterly data 1963-2000 and estimated inflation expectations show that this Phillips curve is relatively robust and that an unemployment rate of close to two percent is consistent with an inflation target slightly above its present level of two percent. However, estimations based on survey data suggest that a considerably higher inflation rate, of around four percent, is necessary to yield a lowest sustainable unemployment rate. These latter estimates seem better adjusted to the recent Swedish macroeconomic experiences. If Sweden enters the EMU, and if the ECB targets inflation at a lower level than the Riksbank, employment as well as output will be lower than today. Moreover, if the inflation-unemployment trade-off differs widely across the member states of the EMU, then a single inflation rate in the EMU-area implies that long run unemployment rates will also differ across the member countries.Phillips curve; Efficiency wages; Near-rationality

Survey evidence on wage rigidity and unemployment: Sweden in the 1990s

This study reports the results from a repeat survey among managers in Swedish manufacturing, designed to explore how a severe and prolonged macroeconomic shock affects wage rigidity and unemployment. Our second survey was conducted in 1998, when the unemployment rate was much higher, and the inflation rate much lower, than when we conducted the first survey in 1991. We find no evidence that the increase in unemployment has softened the mechanisms generating wage rigidity. On the contrary, we conclude that - because of severe downward nominal wage rigidity - real wages have become more rigid during Sweden's move to a low-inflation environment. We also report a range of new evidence on underbidding, efficiency wage mechanisms, job security legislation, workers' wage norms, and to what extent the long-term unemployed are subject to statistical discriminationUnemployment; Wage rigidity; Repeat survey; Recession

Low-Inflation Targeting and Unemployment Persistence

A recent model by Akerlof, Dickens and Perry (2000) (ADP) predicts that low inflation may cause unemployment to persist at high levels. This finding should be of major interest to European countries where inflation is targeted at low levels. We specify a small open economy version of the ADP model and apply it to Swedish data. The results indicate that raising the Swedish inflation target from 2 to 4% would bring long-run unemployment down by two percentage points, to 2.0-2.5%. EMU membership, with inflation at the average of the present 0-2% band, would raise unemployment to around 6%. Membership thus implies a rejection of a national inflation target that could maximize employment. Given that long run unemployment-inflation trade-offs can be found in other countries as well, there is nothing to suggest that these trade-offs are identical across countries. A single inflation rate in the EMU may then cause unemployment to widely exceed the lowest sustainable rate in individual countries. We also extend the ADP model by showing theoretically that the unemployment minimizing inflation rate could lead to too low output. However, empirically we find, both for Sweden and the U.S., that minimum unemployment and maximum output occur at roughly the same rate of inflation.Phillips curve; Efficiency wages; Near-rationality

Will Transition Countries Benefit or Lose from the Brain Drain?

We analyze the theoretical effects on growth and welfare in transition economies of emigration of educated and uneducated labor, of higher emigration probability, etc. Using a Grossman-Helpman growth model, we show that the prospects of labor market integration with the EU raises the expected returns to education, stimulate human capital formation and thus raise the growth rate in the candidate countries. However, given this expected returns, emigration of educated workers tends to lower growth and welfare of those remaining. Thus, while the brain drain reduces welfare, the effects of labor market integration could nevertheless be positive. Emigration of low skilled workers also reduces growth via adverse effects on education. Higher tuition fees, common in transition countries, counteract positive growth effects of market determined wages.Migration; Growth; Welfare