Lachowska, Marta

Mas, Alexandre

Saggio, Raffaele D.

Woodbury, Stephen A

English

Saggio, Raffaele

Upjohn Research

Upjohn Institute Policy and Research Briefs Upjohn Research home page 1-18-2022 Wage Posting or Wage Bargaining? A Test Using Dual Jobholders Marta Lachowska W.E. Upjohn Institute for Employment Research, marta@upjohn.org Alexandre Mas Princeton University and NBER Raffaele D. Saggio University of British Columbia and NBER Stephen A. Woodbury Michigan State University and W.E. Upjohn Institute for Employment Research,, woodbury@upjohn.org Upjohn Author(s) ORCID Identifier: https://orcid.org/0000-0001-9158-2592 https://orcid.org/0000-0002-4474-2415 Follow this and additional works at: https://research.upjohn.org/up_policybriefs  Part of the Labor Economics Commons Citation Lachowska, Marta, Alexandre Mas, Raffaele D. Saggio, and Stephen A. Woodbury. 2022. "Wage Posting or Wage Bargaining? A Test Using Dual Jobholders." Policy and Research Brief. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/pb2022-41 This title is brought to you by the Upjohn Institute. For more information, please contact repository@upjohn.org. JANUARY 2022 W.E.UPJOHN INSTITUTE FOR EMPLOYMENT RESEARCH RESEARCH BRIEF Wage Posting or Wage Bargaining? A Test Using Dual Jobholders Marta Lachowska, Alexandre Mas, Rafaele Saggio, and Stephen A. Woodbury BRIEF HIGHLIGHTS  n  We propose a test to distinguish between wage posting and wage bargaining. n  Using dual jobholders in Washington State, we estimate the sensitivity of wages and separation rates to wage shocks in a secondary job, our measure of outside option.  n  In lower parts of the wage distribution, improved outside options lead to higher separations rates but not to higher wages, consistent with wage posting. n  In the highest wage quartile, improved outside options lead to higher wages, but not higher separation rates, consistent with bargaining. For additional details, see the full working paper at https://research.upjohn.org/up_workingpapers/359. How wages are set is a central question for research on unemployment, business cycles, and wage inequality. Two main frameworks for wage setting are wage bargaining and wage posting. Models of wage bargaining assume that workers have the ability to negotiate compensation with their employer, and that wages incorporate information about an individual worker’s outside option. Te alternative to bargaining is wage posting, whereby an employer ofers a package of compensation that the worker must take or leave. Under wage posting, wages only respond to outside options measured at the market level—changes in an individual worker’s outside option have no infuence. Hall and Krueger (2010, 2012) obtained direct evidence by surveying a representative sample of newly hired workers in the United States and found that one-third reported bargaining over pay before accepting their position. Hall and Krueger’s work stimulated several studies using observational data: Faberman et al. (2017) found that workers who could have stayed in their jobs before accepting another position reported obtaining a higher wage, and Lachowska (2017) found that workers’ subjective assessments of how easy it would be to fnd an alternative job or to be replaced in their current jobs are highly correlated with the wage received in their current jobs. Tis early research suggests a signifcant role for workers’ outside options and bargaining in determining wages. In this brief, we summarize a diferent approach to understanding the relative importance of wage bargaining and wage posting. Te approach is based on the experience of dual jobholders observed in linked employer-employee wage records from Washington State. We measure the change in a dual jobholder’s outside option at the primary job as the change in the average wage of the worker’s coworkers in the secondary job.1 By using this worker-specifc measure of the outside option, we can estimate how primary-job wages react to wage changes in secondary jobs while controlling other changes afecting all workers at the primary employer. Finding that primary-job wages respond to wage changes in the secondary job suggests wage bargaining; absence of a wage response suggests wage posting. To more clearly distinguish wage posting from wage bargaining, we also examine whether separations from the primary job are related to wage changes in the secondary job. In a job where wages are posted and not negotiable, we expect workers to respond to a better outside option by leaving the job for that option. In our setting, the job ofering the better outside option is the dual jobholder’s secondary job. Who Leaves and Who Bargains? Figure 1 shows how the distribution of dual jobholding by industry in the sample we analyze compares to the industry distribution of single jobholders. Dual jobholding 1 We describe our approach in greater detail in the accompanying W.E. Upjohn Institute working paper (Lachowska et al. 2022). Our approach is related to work by Caldwell and Harmon (2019), who examine how wages are afected by changes in the wages of former coworkers.     RESEARCH BRIEF | JANUARY 2022 W.E. UPJOHN INSTITUTE Wage Posting or Wage Bargaining? Individual wage bargaining occurs only in the top one-fourth of the wage distribution. For other workers, wage setting is characterized by wage posting, or take-it-or-leave-it ofers by employers. Figure 1  Where Do Dual Jobholders Work? 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Single jobholders Dual jobholders: Primary job Dual jobholders: Secondary job NOTE: The fgure shows the proportion of single jobholders (black bars), of the primary job of dual jobholders (red bars), and of the secondary job of dual jobholders (blue bars), by industry. Observations of single jobholders and of dual jobholders’ primary jobs in educational services and public administration are omitted. SOURCE: Authors’ calculations from Washington State wage records. is concentrated in service sectors—health care, accommodation and food services, and retail trade—with these industries roughly equally represented among primary and secondary jobs. Workers in manufacturing, information, and fnance and insurance are less likely to be dual jobholders. Using this sample of dual jobholders, the analysis points to two main fndings. First, changes in a worker’s wage in the primary job are only weakly relative to changes in the wages of coworkers in the secondary job. Overall, then, bargaining plays a quite limited role in wage setting. Rather, when wages on the secondary job improve, workers tend to leave the primary job for the secondary job. Specifcally, a 10 percent increase in the outside option leads to a 4 percentage point increase in the probability of transitioning to the job ofering the better outside option. Given the low baseline separation rates in our sample, this estimate represents a large increase. Second, we fnd substantial diferences in the prevalence of bargaining and posting among diferent groups of workers. Specifcally, bargaining is more prevalent among workers in the top 25 percent of the wage distribution. For these high-wage workers, better outside options tend to result in higher wages on the primary job rather than separation and movement to the secondary job. But for workers in the lowest 25 percent of the wage distribution, we see no evidence of pay increases on the primary job from improved outside options. Instead, we see separation from the primary job, consistent with wage posting and an absence of bargaining. Figure 2 elaborates on this point, showing that sectors of the economy where improved outside options lead to wage increases tend to be those where improved outside options lead to fewer separations. Specifcally, the horizontal axis shows the estimated efect of a 1 percent improvement in the outside option on the primary-job wages, while the vertical axis shows the estimated efect of a 1 percent improvement in the outside option on the likelihood of separating from the primary job and moving to the secondary job. As indicated by the dashed, best-ft line, there is an inverse 2                      RESEARCH BRIEF | JANUARY 2022 W.E. UPJOHN INSTITUTE Consistent with previous research, we fnd that employers limit work Figure 2  How a 1 Percent Improvement in the Outside Option Afects Wages in the Primary Job  and the Likelihood of the Secondary Job Becoming the Primary Job, by Industry Agriculture, Forestry, Fishing Mining, Quarrying, Gas Utilities Construction Manufacturing Wholesale Trade Retail Trade Transportation and Warehousing Information Finance and Insurance Real Estate and Rental Professional, ScientificServices Management ofCompanies Admin. Support and Waste Mgt Health Care, SocialAssistance Arts, Entertainment, Recreation Accommodation and Food Services Other Services -0.02 -0.01 0.00 0.01 0.02 0.03 0.04 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 Effect on Secondary Job Becoming Primary Job Effect on Change in Primary Job Log Wage for Stayers hours on primary jobs, creating a motive to moonlight for workers who want additional income. NOTE: This scatterplot shows the efect, by industry, of a 1 percent higher coworker average wage on the secondary job on the log wage of the primary job among stayers (horizontal axis) and on the likelihood of the secondary job becoming the primary job (vertical axis). The slope of the dashed, best-ft line is negative, indicating that sectors in which primary job wages rise are less likely to result in separations. SOURCE: Authors’ calculations from Washington State wage records. relationship: following an improvement in workers’ outside options, employers either negotiate with them for better pay or the workers leave the employer for the job ofering the better outside option. For example, in fnance and insurance, employers tend to respond to improved outside options by negotiating a higher wage. In contrast, in health care and accommodation and food services, improved outside options tend to lead to a separation. Efects of Changes in Hours on the Primary Job Te data also allow us to study how wage changes in one job afect hours worked in the other jobs. Tis feature helps us understand why workers choose to moonlight. Tere are two results. First, we fnd that work hours with the primary jobs are insensitive to the changes in the worker’s outside option. Tis is consistent with a simple model, outlined in the working paper, where workaholics face limits on the hours they can work in their primary jobs and take a second job for extra income. In other words, people moonlight because they want extra income and their main jobs do not let them add hours. Second, we fnd moderate, but signifcant, efects of wage changes in a worker’s primary job and the hours worked on the secondary job. Because hours on the primary job are essentially fxed, a change in the primary-job wage results in additional earnings without a change in work efort—what economists call an income efect. We fnd that this income efect is similar to those found in studies of individuals winning lotteries. Conclusions Our fndings show that wage posting is a common feature of the labor market, and that separation is the main response to improved outside options, particularly for low-3 RESEARCH BRIEF | JANUARY 2022 Wage Posting or Wage Bargaining? In the aggregate, bargaining appears to be a limited determinant of wage setting. wage workers. On the other hand, wage bargaining is not as prevalent in the data, except perhaps when considering higher-wage workers. Our approach to measuring the outside options of individual workers can be applied to any setting with linked employer-employee data and multiple jobholders. However, the results may not generalize to groups of dual jobholders working in nonstandard work arrangements. Tese nonstandard arrangements include electronically mediated “gig” jobs and other independent contractor positions that are not currently covered by administrative wage records. Future research may answer whether these workers have little power to negotiate wages or whether they bargain over wages. References Caldwell, Sydnee, and Nikolaj Harmon. 2019. “Outside Options, Bargaining, and Wages: Evidence from Coworker Networks.” Unpublished manuscript, University of Copenhagen. Faberman, R. Jason, Andreas I. Mueller, Ayşegül Şahin and Giorgio Topa. 2017. “Job Search Behavior among the Employed and Non-employed.” National Bureau of Economic Research Working Paper No. 23731. Cambridge, MA: National Bureau of Economic Research. Hall, Robert E., and Alan B. Krueger. 2010. “Evidence on the Determinants of the Choice between Wage Posting and Wage Bargaining.” National Bureau of Economic Research Working Paper No. 16033. Cambridge, MA: National Bureau of Economic Research. ———. 2012. “Evidence on the Incidence of Wage Posting, Wage Bargaining, and On-the-job Search.” American Economic Journal: Macroeconomics 4(4): 56–67. Lachowska, Marta. 2017. “Outside Options and Wages: What Can We Learn from Subjective Assessments?” Empirical Economics 52(1): 79–121. Lachowska, Marta, Alexandre Mas, Rafaele Saggio, and Stephen A. Woodbury. 2022. “Wage Posting or Wage Bargaining? A Test Using Dual Jobholders.” Upjohn Institute Working Paper No. 22-359. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. WEBSITEW.E. Upjohn Institute for Employment Research @UpjohnInstitute upjohn.org  4 

Wage Posting or Wage Bargaining?: A Test Using Dual Jobholders

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Wage Posting or Wage Bargaining? A Test Using Dual Jobholders

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