Complexity, wages, and the O-ring production function: evidence from Finnish panel data

Abstract

This paper is an empirical study on the effect of complexity of the production porcess on individual hourly wages. According to a model—due to Kremer [Quarterly Journal of Economics 108 (1993) 551] and Dalmazzo [Dalmazzo, A., 2001. Technological complexity, wage differentials, and unemployment, mimeo, Department of Political Economy, University of Siena]—that combines the O-ring production function with efficiency wages, the workers employed in a firm with a more complex production process should earn higher wages than identical workers that work on identical tasks in firms with less complex production processes. We argue that the Finnish metal industry data are suitable for the empirical analysis of this implication since they provide quantified information on the complexity of the tasks. We estimate the effect of the complexity of the co-workers' tasks on individual hourly wages while controlling for the complexity of individual's own tasks. The complexity of the co-workers' tasks has a positive effect on hourly wages in all the estimated equations although with varying significance. We interpret the results as supporting the hypothesis that differences in the complexity of the production processes can give rise to inter-firm wage differentials.