Initial Wage Research Articles

Early career consequences of temporary employment in Germany and the UK

This article investigates the effects of temporary employment at labour market entry on subsequent individual careers, drawing on data from the British Household Panel Study (BHPS) and the German Socio-Economic Panel (GSOEP) from the period 1991 to 2007. The results show that German temporarily employed entrants suffer from higher initial wage penalties and risks of temporary employment cycles but that all differences compared to entrants with permanent contracts diminish after five years. The integration scenario works more effectively in the UK, where disadvantages are less pronounced and employment losses are primarily related to further education. Moreover, these tendencies vary by education groups and gender. Disadvantages of initial temporary employment are weaker for women in Germany, while gender differences in the UK apparently have less impact. Across borders, temporary contracts are associated with greater initial but vanishing wage penalties and temporary employment cycles for tertiary graduates.

The Elusive Quest for Normalcy: The German Economy since Unification

This article investigates the progress that the eastern German economy has made since unification in two areas: unemployment and output. It finds that unemployment has remained persistently higher in eastern than in western Germany and output levels have remained extremely uniform across the eastern states. Keynesian and neoclassical economists have proposed differing explanations for the endurance of high unemployment in the East. The latter have the more convincing argument, which blames high initial wages in eastern Germany for producing a labor "trap," but this account is not without flaws. The best explanation for output uniformity is the content and volume of public investment in eastern Germany since unification. Public policy in the years immediately following unification is in large part responsible for both outcomes. Economic modeling indicates that wage subsidies targeted at low-income employment would be the most effective means to break the current high-unemployment equilibrium in eastern Germany, but the political barriers to adopting such a policy are just as formidable as they were a decade ago, when such a policy was briefly considered.

ARE INITIAL WAGE LOSSES OF INTERSECTORAL MOVERS COMPENSATED FOR BY THEIR SUBSEQUENT WAGE GAINS?

This paper presents an equilibrium explanation of the inter- and intrasectoral mobility of workers. Analyses of our samples from the Panel Study of Income Dynamics and the National Longitudinal Survey of Youth show that, other things being equal, the initial wage decline is greater for intersectoral movers than for intrasectoral movers. Intersectoral movers, however, enjoy higher wage growth in subsequent years on postunemployment jobs than intrasectoral movers do, and hence are compensated for their initial wage decline. Our estimates suggest that, other things being constant, the additional short-term wage loss associated with sector shifts is overturned in no more than four years by the greater wage growth of intersectoral movers in subsequent years. The findings in the current study clearly show that the true economic costs of intersector mobility tend to be overstated in existing studies and are significantly lowered in the long-term perspective. Calibration of a simple lifetime utility model demonstrates that inter- and intrasectoral movements of workers are quantitatively consistent with an equilibrium framework, at least for a major group of workers who move with longer term perspectives. Evidence also shows that job seekers consider not only the initial wage rate but also the subsequent wages received from the postunemployment job when deciding whether to recommence employment or switch sectors.

The Impact of Labor Market Entry Conditions on Initial Job Assignment, Human Capital Accumulation, and Wages

We estimate the effects of labor market entry conditions on wages for male individuals first entering the Austrian labor market between 1978 and 2000. We find a large negative effect of unfavorable entry conditions on starting wages as well as a sizeable negative long-run effect. Specifically, we estimate that a one percentage point increase in the initial local unemployment rate is associated with an approximate shortfall in lifetime earnings of 6.5%. We also show that bad entry conditions are associated with lower quality of a worker's first job and that initial wage shortfalls associated with bad entry conditions only partially evaporate upon involuntary job change. These and additional findings support the view that initial job assignment, in combination with accumulation of occupation or industry-specific human capital while on this first job, plays a key role in generating the observed wage persistencies.

Initial offers and outcomes in wage bargaining: who wins?

The initial works council’s wage claim, and the initial firm’s (counter)offer, as well as the fraction of the disputed wages the works council is able to capture conditional on initial disagreement, are analyzed using Spanish data on wage settlements. After a given initial wage claim, the rules of the system force the firm either to accept it or to make a counteroffer prior to a fixed and short deadline. In this context, signaling models predict that the wage claim should try to screen the firm’s level of profitability, while the (most likely forced) offer is expected to reveal little information. Both hypotheses are tested and neither one is rejected. The analysis of the fraction of the disputed wages the workers get after initial disagreement, as well as the length of the negotiation period, provide further evidence in favor of signaling models, since we find they are related to both observed and private information. Moreover, conditional on covariates, for a number of sectors, we cannot reject that the parties “split the difference” between both initial offers. This solution coincides with Rubinstein’s (Econometrica 50:97–109, 1982) wage, the solution for the complete information game.

Auctioning Immigration Visas

Abstract Freeman (2006) suggested that auctioning immigration visas and redistributing the revenue to native residents in the host country would increase migration from low‐income to high‐income countries. The effect of the auctioning of immigration visas, in the Ricardian model from Findlay (1982), on the optimal level of immigration for the host country is considered. It is shown that auctioning immigration visas will lead to a positive level of immigration only if the initial wage difference between the host country and the source country is substantial. The cost of the immigration visa is more than half the earnings of the immigrant worker.

EARNINGS DIFFERENCES BETWEEN CHINESE AND INDIAN WAGE EARNERS, 1987–2004

This paper is one of the first comprehensive attempts to compare earnings in urban China and India over the recent period. While both economies have grown considerably, we illustrate significant cross‐country differences in wage growth since the late 1980s. For this purpose, we make use of comparable datasets, estimate Mincer equations and perform Oaxaca–Blinder decompositions at the mean and at different points of the wage distribution. The initial wage differential in favor of Indian workers, observed in the middle and upper part of the distribution, partly disappears over time. While the 1980s Indian premium is mainly due to higher returns to education and experience, a combination of price and endowment effects explains why Chinese wages have caught up, especially since the mid‐1990s. The price effect is only partly explained by the observed convergence in returns to education; the endowment effect is driven by faster increase in education levels in China and significantly accentuates the reversal of the wage gap in favor of this country for the first half of the wage distribution.

Why Pay Seniority Wages?

This paper characterises establishments that pay higher seniority wages than their competitors. It tests whether seniority wages are paid on the basis of agency, human capital or efficiency wage considerations. A representative linked employeremployee panel and an innovative two-step estimation strategy are used to first calculate individual seniority wages taking into account that match quality biases tenure effects on wages. Then individual seniority wages are aggregated to the establishment level. Finally, the seniority wage indicator is explained by establishment characteristics. This contribution shows that large, profitable and establishments with a highly qualified workforce pay high seniority wages. Also collective bargaining coverage and works councils have a positive impact and the share of foreigners, training intensity and initial wage levels have a negative correlation with seniority wages. The results support an agency based motivation for seniority wages.

Fixed-Term Contracts at Labour Market Entry in West Germany: Implications for Job Search and First Job Quality

Fixed-term contracts have become very relevant in the transition from school to work. Using data from the German Socio-Economic Panel (GSOEP) for the period 1984–2006, this article analyses differences in the timing of receiving a fixed-term contract or a permanent contract throughout the duration of first-job search and whether fixed-term contracts are associated with lower initial wages. Competing risk duration models reveal that school leavers initially receive more often permanent contracts but that a certain proportion also accepts temporary jobs. For transitions to both fixed-term and permanent contracts, we find that the longer the time spent searching for a job, the lower the transition probability to a job. The negative duration dependence effect is even more pronounced for fixed-term employment. Comparing labour market entrants with similar individual and job characteristics using propensity score matching techniques show that entrants earn significantly less in fixed-term jobs compared to permanent employment. Wage penalties are slightly larger for those who actually choose fixed-term contracts in their first job, whereas randomly allocated job entrants would suffer lower wage losses. Especially graduates from tertiary education suffer high initial wage losses in fixed-term contracts.

Assimilation of Immigrants in Spain: A Longitudinal Analysis

In this paper we use the Continuous Sample of Working Histories 2005 (MCVL2005) to analyze the earnings assimilation of migrants from outside the EU-15 in Spain. Using our panel dataset we show that immigrants reduce around the half of the initial wage gap respect to natives the first 5 to 6 years after arrival. However, no further reductions of the remaining wage gap are estimated. We also show that results based on cross-section data are downward biased since an important increase in the quality of migrants has taken place over the recent years. This skill upgrading of new immigrant cohorts is evident in the Spanish case as well as the depreciation of the value of most of the experience that is brought from abroad. We can associate the improvement in the skill of immigrants to a change in the composition of new entrants. An important mechanism underlying the assimilation is the higher likelihood of recent immigrants in changing jobs among different sectors and firms, but also improving their situation within the same firm. Finally, some caveats should be taken into account when interpreting our results given that immigration phenomenon is quite recent in the Spanish labour market and it has taken place in an especially positive economic environment.

The Dissipation of Minimum Wage Gains for Workers through Labor‐Labor Substitution: Evidence from the Los Angeles Living Wage Ordinance

This paper utilizes worker‐firm matched data on city contract establishments affected by the Los Angeles Living Wage Ordinance to explore the extent of labor‐labor substitution following establishment of a minimum wage. We are able to test for substitution on observable and unobservable skill and demographic features and to measure the extent to which such substitution dissipates the benefits of a wage minimum for workers in affected firms. The results suggest substitution toward male, Latino, and black workers and workers possessing prior formal training. All are characteristics that generate a wage premium in this segment of the low‐wage labor market in Los Angeles. Evidence for substitution based on unobservables is presented as well. The latter is revealed by the finding that the “before” wages of workers who are new to city contract work following the ordinance are significantly higher, conditional on observable characteristics, than the “before” wages of city contract workers who were hired preceding the ordinance. We estimate that the initial wage gain for workers is dissipated by roughly 27% through labor‐labor substitution.

The Wage Earnings Impact of Historically Black Colleges and Universities

The impact on wages from blacks' attendance of historically black colleges and universities (HBCUs) versus other colleges is examined using geo‐coded National Longitudinal Survey of Youth 1979 data. The paper reconciles seemingly conflicting findings in previous studies by estimating wage profiles over time, rather than by estimating wages at a single point in time. Estimates indicate that black males show no initial wage advantage as a result of HBCU attendance, but their wages increase 1.4–1.5% faster per year after attending HBCUs compared to other colleges. This faster growth generates discounted career earnings from HBCU attendance that are 9.6% higher for HBCU attendees and 8.9% higher for the average four‐year college black student. For black females, HBCU attendance has no significant impact on initial wages or on subsequent wage growth.

Wage Cuts as Investment in Future Wage Growth

Abstract. Wage cuts are often presumed to reflect an adverse change in economic constraints. However, several theoretical models have shown they can be a form of investment in future wage growth. This paper provides empirical evidence of the latter by explicitly modeling the worker's job choice when the job offer consists of both a starting wage and expected future wage growth. We use our analytical model to estimate the distribution of job offers faced by workers who are searching across jobs differing in both initial wage and expected wage growth. For females, roughly one‐third of job changes that result in immediate wage cuts are transitions to jobs that have a higher value function than the existing job. For males, the corresponding value is one‐fifth.

Earnings Differences between Chinese and Indian Wage Earners, 1987–2004

This paper is one of the first comprehensive attempts to compare earnings in urban China and India over the recent period. While both economies have grown considerably, we illustrate significant cross-country differences in wage growth since the late 1980s. For this purpose, we make use of comparable datasets, estimate Mincer equations and perform Oaxaca-Blinder decompositions at the mean and quantile decompositions at different points of the wage distribution. The initial wage differential in favour of Indian workers, observed in the middle and upper part of the distribution, partly disappears over time. While the 1980s Indian premium is mainly due to higher returns to education and experience, a combination of price and endowment effects explains why Chinese wages have caught up, especially since the mid-1990s. The price effect is only partly explained by the observed convergence in returns to education; the endowment effect is driven by faster increase in education levels in China and significantly accentuates the reversal of the wage gap in favour of this country for the first half of the wage distribution.

Economic Assimilation of North Korean Refugees in South Korea: Survey Evidence

This paper studies the economic assimilation of North Korean refugees settled in the South. Do the North Korean refugees get assimilated into the labor market in the South at all? If yes, how fast is the assimilation? More specifically, what is the initial wage gap at the entry between refugees and native workers with identical observable characteristics? How does the gap change as time passes? For the purpose, we analyze the unique survey data set constructed for this study. The cross section survey has detailed retrospective information not just on labor market activities of the refugees, but also on their economic life while still in the North. The survey covers about 700 adult refugees. For the comparison of the refugee workers with the natives, the survey data set are combined with the 2002 wave of the Korea Labor Institute Panel Study (KLIPS). In comparison to the assimilation of immigrant workers in the US, initial wage gap seems much larger for the North Korean refugee workers, but also closes at a higher rate than is the case in the US. The disconcerting finding is that the gap in employment probabilities is also large in the Korean context, and takes a long time to close, especially for female refugee workers.

Can a raise in your wage make you worse off? A public goods perspective

We show that a seemingly paradoxical result is possible—an increase in one's wage can reduce one's welfare. Such outcome can occur in an economy populated by agents who value a private good bought using labor income and a public good produced by voluntary time contributions. A raise in the wage (in general, opportunity cost of time) makes each agent substitute away from contributing to the public good, failing to internalize the negative externality imposed on others. The result is a decrease in public good provision. Under quite general conditions, the implied cumulative negative effect on agents' welfare can more than offset the positive effect of the wage raise from increased private good consumption and lead to an equilibrium in which all agents are worse off. Our result is particularly relevant for developing economy settings as it holds for relatively low initial wage levels. We discuss the applicability of our findings to a number of important problems in development, such as market integration, cooperation in common pool resource conservation and social capital.

Knowledge and Innovation for New Zealand:

Policy makers in New Zealand advocate investments in training and Research and Development (R&D) as effective policy options to increase the country's level of productivity. However, uncertainty remains about the strategic prioritisation of these policy options. The article examines the impact of public investment in training and R&D on productivity, technological advancement and innovation. Based on an international survey of empirical findings, the article rejects calls for substantial government funded training programmes and highlights the limitations of public investment in business R&D. Instead, the article wishes to advance knowledge by developing a two-stage wage strategy in support of a process of ‘creative destruction’, first through initial wage growth, subsequently through wage restraint and, ultimately, in pursuit of a sustainable platform for investment in technological advancement, skills, innovation and economic growth. It concludes with an assessment of political pressures and respective reasons why this strategy, although capable of meeting multiple policy objectives, is unlikely to be favoured by policy makers and political interest groups.

Future‐Oriented Gang Members?

Abstract Two prominent theories of crime (Wilson and Herrnstein 1985; Gottfredson and Hirshi 1990) rely heavily on the notion that criminals are impatient or “present‐oriented.” In brief, the theories posit that present‐oriented individuals will be predisposed to crime because the “costs” of crime (e.g., prison time) lag behind crime's benefits. While the theory has intuitive appeal, it remains controversial. This study considers a data set first presented by Levitt and Venkatesh (2000) that details a drug‐selling gang's activities. In this gang, low‐ranking criminals accept low initial wages in the hope of receiving high future remunerations. As demonstrated in the note, this wage structure is exceedingly difficult to reconcile (both theoretically and empirically) with the notion of present‐oriented criminals. In sum, the study suggests that present orientation is at best an incomplete and idiosyncratic explanation of the causes of crime.

The short term effect of educational debt on job decisions

This paper studies the effect of educational debt on a college attendee's future wage and wage growth. I hypothesize that those who took larger loans to pay for college are subject to higher borrowing interest rates and thus prefer income profiles with higher initial earnings, sacrificing future income growth, relative to those who did not take on large educational debt. Using data for men in the 1987 National Postsecondary Student Aid Survey, I find that higher educational debt is associated with higher initial wage rate the year after finishing school and lower wage growth over the next 4 years.

Equilibrium Wage-Tenure Contracts

In this study we consider a labor market matching model where firms post wage-tenure contracts and workers, both employed and unemployed, search for new job opportunities. Given workers are risk averse, we establish there is a unique equilibrium in the environment considered. Although firms in the market make different offers in equilibrium, all post a wage-tenure contract that implies a worker's wage increases smoothly with tenure at the firm. As firms make different offers, there is job turnover, as employed workers move jobs as the opportunity arises. This implies the increase in a worker's wage can be due to job-to-job movements as well as wage-tenure effects. Further, there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage. We also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters.