Institutional Wage Setting, Distinctive Competencies and Wage Premia

Abstract

The institutional wage-setting mechanism is aimed at establishing minimum contractual wages but firms can then add supplementary wage premia according to specific circumstances. This paper focuses on whether firms, in addition to the minimum wage, reward distinctive competencies, and if so, which competencies. To answer this question, we first distinguish between skills and competencies, and then separate competencies into the threshold level and the distinctive level. Second, we decompose competencies into two cluster groups, respectively soft and technical competencies, and then classify the latter into two domains relating to digital and non-digital technical competencies. The digital domain consists of two components, namely, technologies based on rules and algorithm execution, and technologies for pattern recognition and complex communication. Drawing on over 3600 interviews with a stratified sample of Italian employees and controlling for a wide array of covariates, we estimate a five simultaneous equation system via 3SLS in conjunction with the bootstrap method. The results show that a positive relationship between wage premia and distinctive competencies emerges only in 3 out of the 4 competency components, precisely, soft competencies, non-digital technical competencies and the digital technologies component for pattern recognition and complex communication.