Relative Wage Structure Research Articles

Public‐private wage gaps and skill levels: evidence from French, British and Italian micro data

PurposeThe authors aim to investigate public‐private pay determination using French, British and Italian micro data from the 2001 ECHP (European Community Household Panel) and estimate public/private wage differentials by country. By focussing on different countries, they exploit institutional differences to gain insights on the process of pay formation.Design/methodology/approachThe authors use regression techniques to compute the pay premium both at the average and at different education/skill levels. They then decompose the observed differences into a part due to characteristics and another part due to different returns between sectors, also at different quantiles of the wage distributions within skills.FindingsEven after controlling for observable characteristics, the authors find an overall positive wage differential for public sector workers in each of the three countries. As expected, the differential varies by skill. In general, the present findings do not fully support the view that the public (private) sector pays more (less) among the low skilled than the private (public) sector, and that the opposite is true for the highly skilled. The authors also document that the public pay premium varies as one moves up or down in the skill distribution.Practical implicationsOn the one hand, the authors’ results confirm that the public sector acts in general as a “fair employer”, compressing pay dispersion with respect to the private sector. On the other hand, the interactions of public and private labour market institutional arrangements play a crucial role in shaping the structure of relative wages across sectors. For example, when the monopsony power in wage bargaining is relevant in both sectors as, for example, in Britain, the private sector pays in absolute value proportionally less, and also the public wage premium is smaller.Originality/valueThis is the first attempt to use comparable data for three countries to analyse public/private wage differences by skill levels and to link the evidence with differences in public/private wage setting regimes.

Does bad pay cause occupations to feminize, Does feminization reduce pay, and How can we tell with longitudinal data?

Predominantly female occupations pay less than “male” occupations, even after adjusting for skill demands. The devaluation perspective says that this is because gender bias influences employers’ decisions about the relative pay of occupations. The longitudinal implication of the devaluation perspective is that when occupations feminize, their relative pay should go down. In the queueing or relative-attractiveness view, occupations’ reward levels affect their sex composition, with less attractive occupations going to women because employers prefer men and can get them in occupations that pay well. To test these views about change over time, we use a fixed-effects model with lagged independent variables and data from the 1983–2001 Current Population Surveys. There is only slight evidence that the feminization of occupations lowers their wages, and no evidence that a fall in occupations’ relative wages leads to feminization. But percent female is associated with lower wages in every year. We speculate that in the early history of new occupations and organizations, there was a causal relationship between gender composition and wages, and it has been frozen in by institutional inertia in relative wage structures.

Wage mobility in Austria 1986–1996

We examine wage mobility of Austrians using data from administrative sources. For the evaluation of wage mobility we calculate measures based on transitions between quintiles in the wage distribution. A second group of indices measures wage mobility by the extent to which averaging wages over a longer period decreases cross-sectional inequality. We find that in the case of Austria the equalising effect of wage mobility for male workers is only two-thirds of that in other OECD countries. Mobility is high for young workers and for workers who changed their employer during the observation period. Our results are in line with other evidence showing rigid relative wage structures in Austria.

Technology, Employment and Wages

This paper provides a critical review of the impact of technical change on the structure of relative wages and employment, and considers some alternative explanations for the immiseration of low skilled workers. In the absence of any clear and distinguishing policy blueprint, the paper also seeks to clarify the major issues raised by our discussion for employment policy.

Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.

International competition and wage differentials - the case of Taiwan

This paper documents and investigates the structure of relative wages among skill groups (distinguished by gender, education and potential experience) in Taiwan over the period 1978 to 1990. To account for these changes, I construct a model of wage determination in which demographic groups are treated as separate inputs into the production process. Thus, the changes in relative wages are determined by (i) changes in the relative supply of input factors; (ii) changes in the product composition; and (iii) biased technical changes that shift the relative demand for inputs. Analysis of OECD trade statistics shows that manufacturing imports from Taiwan to OECD, the main source of derived demand for the unskilled labour, exhibited a time pattern that matches the overall relative demand shifts.

Inertia and Discrimination in the California State Civil Service

Analysis of the California State Civil Service indicates that its occupational wage structure is very stable. Salaries established in 1931 continue to influence current wages, over 60 years later, even while controlling for market wages. This results from the California Civil Service's policy of maintaining the relative wage structure that was established initially in 1931 despite conflicting market wages. Because the California Civil Service explicitly lowered salaries for female‐dominated jobs when it established its initial salary structure, these jobs remained underpaid by $1.6 billion from 1973 to 1993. These findings support notions of wage rigidity and fairness in efficiency wage and institutional labor market theories.

Sectoral shifts and structural change in the Japanese economy: Evidence and interpretation

This paper documents long-term trends in the sectoral composition of employment and output in the Japanese economy over the last four decades. The share of the manufacturing sector in total employment has declined steadily while the share of service sector employment has trended upward. In real terms, however, the share of the manufacturing sector in the total output has remained stable over the last two decades, reflecting relatively rapid productivity growth in this sector. Various measures of productivity and changes in the inter-industry relative wage structure are examined in order to interpret these and other long-term trends. This paper also computes measures of inter-sectoral labor reallocation at different levels of disaggregation and finds no evidence of a recent increase in the pace of structural change in the Japanese economy.

Evidence on the Causes of the Rising Dispersion of Relative Wages

In this paper, a neoclassical model of interindustry wage dispersion is derived and used to examine explicitly the fundamental role of microeconomic variables in determining relative wage movements. The empirical results demonstrate that the variance of labor quality and capital intensities across sectors are the primary determinants of the movement of the dispersion of relative wages within the manufacturing sector in the postwar period. Although the relative wage structure exhibits some response to unemployment, it is not sensitive to changes in inflation. The macro variables were also of limited quantitative importance in explaining changes in the relative wage structure.

Reason, Force or Compromise: Egalitarian Wage Structures under Bargaining and Arbitration

It would appear that there is widespread acceptance, at face value, of the view that the Australian arbitration framework produces a more egalitarian wage structure than would exist in its absence. Further, this egalitarian role, which it is said must exist in compulsory arbitration, is to be contrasted with collective bargaining where power struggles are said to be the order of the day and the weak (in terms of bargaining power) fall by the wayside. The aim of this paper is to seek to establish whether this particular view of Australia's industrial relations system is a fact or a myth. Previous studies, the new evidence presented and the explanation of the forces at work in wage determination all combine to suggest that the Australian relative wage structure would not be very different under collective bargaining in times of either full employment or high unemployment. The widely held view of the compulsory arbitration system being more egalitarian than collective bargaining is contradicted. Support for a continuation of the present system in Australia should have to rely on other advantages offered or believed to be offered by Australia's centralised compulsory arbitration system.

Minimum Wages, Wage Inflation, and the Relative Wage Structure

This paper reports an analysis of the effect of changes in legislated minimum wages on negotiated wage increases, using micro data on Canadian labor contracts between 1966 and 1975. The analysis departs from previous studies in that it divides the sample data base into high- and low-wage sectors. The results indicate that union negotiated wage settlements reflect at least partially legislated minimum wage changes over the past contract period. However, this minimum wage effect is restricted to the low-wage sector. In addition, the sectoral results suggest that the relative wage structure should tend to narrow in the long run.

Labour Unions and the Wage Structure: A General Equilibrium Approach

In recent years a number of studies have been published which tend to show that wage differentials (in particular the college/high school wage differential) are greater than justified by the corresponding differences in productivity (see for example Eckaus (1964), Berg (1971), Taubman and Wales (1973) and Thurow (1975)). The evidence is tenuous, and has been vigorously controverted (e.g. Scoville (1966)). However the major resistance seems so have been on theoretical grounds. These studies directly contradict the predictions of Marshall's (1931, Bk. 6, Chs. 3-6) model of relative wages in a competitive economy based on comparative advantage, and this is taken as a-priori grounds for rejecting them (e.g. Layard and Psacharopoulos (1974)). This article is an attempt to explain the above-cited observations by a theoretical analysis of the long-run impact of labour unions on the structure of relative wages. It is generally agreed that in the short run labour unions can affect the real wages of their members. But in the long run, when the labour market has come into equilibrium, a worker of given characteristics should make the same amount whether or not he is employed on a unionized job. All the employees who originally helped organize the union (and who benefited therefrom by getting more than their market wage) will have retired, and the new employees will be the best the employer can hire for the wage offered.' But it does not follow that unions as a whole have not affected the wage structure (the relationship between the quality of a worker and his relative wage). Rather I shall show that in the long run unions increase the relative wages earned by all high quality workers (whether or not union members), and decrease the relative wages earned by low quality workers. However I shall not consider the impact of unionism on labour's share of national income, and will therefore not advance any opinion concerning the impact of unions on the real (as opposed to relative) wages of any quality of labour. The mechanism is that in the long run an employer, faced with having to pay a higher wage than he would voluntarily, will (ceteris paribus) upgrade his employment standards and attempt to hire the highest quality labour he can get for that wage (at least in the United States where most employers control the quality of labour they hire). Aggregated over many employers and unions, this represents a substantial shift in demand towards higher-quality labour. But (ignoring education, etc. for now) there are no more highquality workers for them to hire. One's natural economic intuition is that the wages of high quality labour will be bid up relative to the wages of low quality labour until the demand for high quality labour is back in balance with the supply. A good analogy is the effect of sulphur emission controls on the premium paid for lowsulphur oils. In response to the emission controls, each user attempts to buy lower-sulphur oil than previously. Of course in aggregate they can't upgrade the quality of the oils used

LABOR INCOME DIFFERENTIALS WITHIN THE LATIN AMERICAN FREE TRADE AREA (LAFTA)

This article considers the major results of a study of relative wage structures in the LAFTA region. It first discusses the nature and methodology of the study, which was undertaken for ECIEL. Data on the size of labor income differences are introduced, and an attempt is made to determine the causes of such differences, and to relate them to various wage differentials. The main findings of the study are then summarized, with discussions of inter‐country, intra‐country, and occupational labor income differentials and their causes. Finally, the results of the study are updated to the end of 1970, and some conclusions are derived regarding the inter‐temporal behavior of wages in LAFTA.

EXTERNAL AND INTERNAL CONSTRAINTS ON WAGE POLICY: THE CASE OF MUNICIPALITY.

Few of the functions of personnel administration, apart from collective bar bargaining, pose as much difficulty for municipal managers as the design, implementation, and maintenance of a compensation plan for city employees. The manager responsible for such activities must reconcile external wage pressures from a variety of labor markets with internal demands for equity in relative wage structures while operating within a system bound by civil service or merit system rules. In addition, final decisions concerning the pay program often rest with elected officials of the community. The purpose of this paper is to explore some of the problems a municipality faces in establishing a comprehensive pay plan. The difficulties encountered by one community in devising and implementing a pay plan will be used to illustrate problems other municipalities might easily experience. While some of the problems are common to most organizations establishing pay plans, others appear relatively unique to municipal administration.

Distortions in Relative Wages and Shifts in the Phillips Curve

T HE micro-economic foundation for most analyses of price and wage decisions is based on the optimizing behavior of familiar objective functions; employers maximizing profit and workers optimizing utility. The functions typically contain variables that measure opportunity cost (the unemployment rate), real income, and price-deflated wages. But neither objective function contains any variable that measures the situation of other actors in the economic system. Behavior in the real world, however, frequently depends on relative wages, profit margins, and so forth. There is a body of literature on the relationship between relative wages and the macro-economic variables of inflation and unemployment. Wachter (1970), finds that low wage workers tend to get relatively larger wage increases in periods of low unemployment, and thus, the interindustry spread among manufacturing wage-rates diminishes with low unemployment and increases with inflation. Wachter deals with the influence of the macro-economic variables on the relative wage structure. number of studies (1962, 1967, 1968, 1969) have been directed to the effect of relative wages on the general wage or price level.1 It is the latter subject that is the primary focus of this paper. Our micro-economic hypothesis is that wage and price behavior is influenced by both general and relative factors. Therefore, we added a measure of the relative wage structure to the typical Phillips curve relationship. This formulation will reflect the idea that under a given set of overall demand conditions, an individual will attempt to obtain a larger wage increase if he feels relatively underpaid. Our second hypothesis is that rapid inflation is unanticipated and leads to the distortions in the relative wage structure. These two hypotheses lead to the following dynamics. given Phillips curve exists at any point in time. If the economy operates at a point of low unemployment and high inflation rates, then distortions are created which move the Phillips curve to the northeast, i.e., the tradeoff is worsened. If the economy operates at a point of high unemployment and low inflation rates then the distortions tend to diminish and the trade-off improves.2 Thus, while a Phillips curve exists, there is only one point on it (i.e., one unemployment and inflation rate) that is stable; moreover, the stable point is determined by the previous historical experience which has created the distortions in the economy. This series of stable points defines a long-run trade-off that is steeper than the shortrun curve but is still less steep than the vertical line hypothesized by the accelerationists. These dynamics suggest that the absence of unanticipated inflation in the early 1960's brought about the stable wage structure of the 1963-1965 period and, with it, the favorable trade-off. The unanticipated inflation of the late sixties, however, again distorted relative wages and produced the worsened trade-off of 1969-1971. The short-term relationships will then take the general form: DP = f (1/U, DST) T ( ) Received for publication May 12, 1972. Revision accepted for publication August 17, 1972. * This work was performed as part of the CED project entitled A Reconsideration of Policies for Economic Stabilization. The authors thank Frank Schiff for his suggestions in the initiation of this work and George Perry, Charles Schultze, Arthur Okun, William Branson, Gary Fromm and the referee for their comments on preliminary drafts. The errors and omissions remain the responsibility of the authors. The views expressed are our own and not necessarily those of the officers, trustees or other members of the Committee for Economic Development. ' See Eckstein and Wilson (1962), Perry (1967, 1968) and Throop (1968). 2 One of the factors that gives an inflationary bias to our economy is the asymmetrical nature of the distortion process; that is, larger than average wage increases cause the distortion and the return to the normal structure is also achieved by larger than average increases.

Wage Inflation and the Structure of Regional Unemployment: Comment

Frank Brechling's paper could well serve as a model for other authors. It is both imaginative and clear in its development of formal theory, and follows through with relevant econometric testing and estimation. Such basic work on the underpinnings of the Phillips relation is badly needed. Taking off from the work by Lipsey and Archibald that stresses the importance of the geographic segmentation of the labor market, Brechling considers two hypotheses for relating sectoral imbalances to the wage inflation-unemployment trade-off of the American economy. The first is the familiar aggregation of nonlinear local Phillips curves. The second provides for spillover effects through expectations from tight sectors to looser ones. One minor slip in the theoretical derivation should be avoided in the future. The aggregation of wage rates in equation (2) should use the fraction of earnings for sectoral weighting while in equation (6) the fraction of labor force should be used for sectoral weighting instead. In the theory development for the nonlinear aggregation hypothesis, the assumption is used that all sectoral Phillips relations are identical. However, empirical evidence indicates that this is not likely to be true, particularly because of different turnover rates in different sectors.l Since it is the nonlinearity of the local curves that causes the aggregate inflation rate to be increased by the dispersion of unemployment, Brechling only needs to assume identical slopes for local curves. Their levels may differ. Uniform sectoral unemployment rates would still give the minimum aggregate wage inflation rate, but the wage inflation rates would differ systematically by sector and his second deftnition of long run which leads to equation (11) would be suspect, i.e., that the expected inflation rate in each sector was equal to the aggregate inflation rate. Clearly, if inflation rates differ by sector, the relative wage structure will drift and this would induce the movement of demand and supply between sectors. Thus we need to develop the theory of the intersectoral adjustment process on a much more basic level than simply through the expectation formation process. One may question the label of dynamic market interdependence which Brech-