Labor Market Institutions, Wages, and Investment

Labor market institutions, via their effect on the wage structure, affect the investment decisions of firms in labor markets with frictions. This observation helps explain rising wage inequality in the US, but a relatively stable wage structure in Europe in the 1980s. These different trends are the result of different investment decisions by firms for the jobs typically held by less skilled workers. Firms in Europe have more incentives to invest in less skilled workers, because minimum wages or union contracts mandate that relatively high wages have to be paid to these workers. I report some empirical evidence for investments in training and physical capital across the Atlantic, which is roughly in line with this theoretical reasoning.

Money and happiness: evidence from the industry wage structure

There is a well-established positive correlation between life-satisfaction measures and income in individual level cross-sectional data. This paper attempts to provide some evidence on whether this correlation reflects causality running from money to happiness. I use industry wage differentials as instruments for income. This is based on the idea that at least part of these differentials is due to rents, and part of the pattern of industry affiliations of individuals is random. To probe the validity of these assumptions, I compare estimates for life satisfaction with those for job satisfaction, present fixed effects estimates, and present estimates for married women using their husbands’ industry as the instrument. All these specifications paint a fairly uniform picture across three different data sets. IV estimates are similar to the OLS estimates suggesting that most of the association of income and well-being is causal

Peer effects in European primary schools: evidence from PIRLS.

We estimate peer effects for fourth graders in six European countries. The identification relies on variation across classes within schools, which we argue are formed roughly randomly. The estimates are much reduced within schools compared to the standard ordinary least squares (OLS) results. This could be explained either by selection into schools or by measurement error in the peer variable. Correcting for measurement error, we find within-school estimates close to the original OLS estimates. Our results suggest that the peer effect is modestly large, measurement error is important in our survey data, and selection plays little role in biasing peer effects estimates

Why Do Firms Train? Theory and Evidence

This paper offers and tests a theory of training whereby workers do not pay for general training they receive. The crucial ingredient in our model is that the current employer has superior information about the worker's ability relative to other firms. This informational advantage gives the employer an ex post monopsony power over the worker which encourages the firm to provide training. We show that the model can lead to multiple equilibria. In one equilibrium quits are endogenously high, and as a result employers have limited monopsony power and are willing to supply only little training, while in another equilibrium quits are low and training high. We also derive predictions from our model not shared by other explanations of firm sponsored training. Using microdata from Germany, we show that the predictions of the specific human capital model are rejected, while our model receives support from the data.

Minimum Wages and On-the-job Training

Becker's theory of human capital predicts that minimum wages should reduce training investments for affected workers, because they prevent these workers from taking wage cuts necessary to finance training. We show that when the assumption of perfectly competitive labor markets underlying this theory is relaxed, minimum wages can increase training of affected workers, by inducing firms to train their unskilled employees. More generally, a minimum wage increases training for constrained workers, while reducing it for those taking wage cuts to finance their training. We provide new estimates on the impact of the state and federal increases in the minimum wage between 1987 and 1992 of the training of low wage workers. We find no evidence that minimum wages reduce training. These results are consistent with our model, but difficult to reconcile with the standard theory of human capital.

The Impact of Length of the School Year on Student Performance and Earnings: Evidence from the German Short School Year

This paper investigates how changing the length of the school year, leaving the basic curriculum unchanged, affects learning and subsequent earnings. I use variation introduced by the West-German short school years in 1966-67, which exposed some students to a total of about two thirds of a year less of schooling while enrolled. I show that the short school years led indeed to shorter schooling for affected students. Using comparisons across cohorts, states, and secondary school tracks, I find that the short school years increased grade repetition in primary school, but had no adverse effect on the number of students attending the highest secondary school track or earnings later in life.

The Returns to Computer Use Revisited: Have Pencils Changed the Wage Structure Too?

Are the large measured wage differentials associated with on-the-job computer use productivity gains or the result of unobserved heterogeneity? We examine this issue with three large cross-sectional surveys from Germany. First, we confirm that the estimated wage differentials associated with computer use in Germany are very similar to the U.S. differential. Second, using the same techniques we also measure large differentials for on-the-job use of calculators, telephones, pens or pencils, or for those who work while sitting down. Along with our reanalysis of the U.S. data these findings cast some doubt on the interpretation of the computer-use wage differential as reflecting productivity effects arising from the introduction of computers in the workplace.

Zero Returns to Compulsory Schooling In Germany: Evidence and Interpretation

We estimate the impact of compulsory schooling on earnings using the changes in compulsory schooling laws for secondary schools in West German states during the period from 1948 to 1970. While our research design is very similar to studies for various other countries, we find very different estimates of the returns. Most estimates in the literature indicate returns in the range of 10 to 15 percent. We find no return to compulsory schooling in Germany in terms of higher wages. We investigate whether this is due to labor market institutions or the existence of the apprenticeship training system in Germany, but find no evidence for these explanations. We conjecture that the result might be due to the fact that the basic skills most relevant for the labor market are learned earlier in Germany than in other countries.

Unions and Managerial Pay

Unions compress the wage distribution among workers covered by union contracts. We ask whether unions also have an effect on the managers of unionized firms. To this end we collected and assembled data on unionization and managerial pay within firms and industries in the U.S. and across countries. Generally, we find a negative correlation between executive compensation and unionization in our cross-section data, but no relationship of changes in unionization on the growth of compensation of executives over time. Using NLRB elections data, we find that a loss of union members due to decertification elections is associated with higher CEO pay, although our estimates are imprecise. With CPS data we consistently find that where unions are stronger, fewer managers are employed