Wage Premium Research Articles

Does monetary policy favor the skilled? − Distributional role of monetary policy

This paper examines whether the impact of monetary policy on welfare is altered when labor skill heterogeneity is incorporated in a limited participation framework. By endogenizing labor-leisure decisions and including labor heterogeneity, we find that not only is there a risky component to the income of financial market participants, but the wage income of non-participants is also subject to risk. This generates a diminished impact of monetary policy on welfare along with a stronger redistributive impact. The redistributive effect is further strengthened for higher levels of non-interest bearing savings among non-participants of financial market. In particular, expansionary monetary policy redistributes consumption and leisure from low to high skilled workers via an increased wage premium along with direct gains accrued from monetary transfers by high skilled agents who are connected to financial markets. Thus, welfare gains attributed to monetary expansion are far less when considering skill heterogeneity. Further, such gains are subject to the share of high skilled labor in the production of goods - increasing that share above a threshold renders a welfare-improving role for monetary tightening. To explore the implications of these results, we also analyze the impact of monetary policy in a crisis scenario.

Marriage wage premium with contract type heterogeneity

We present a model of interlinked labour and marriage markets, both characterised by sequential search, where men are seen as breadwinners in the family. Two types of jobs exist – temporary and permanent. Men’s reservation strategy in their labour market search results in two reservation wages - one for each type of job. Women’s reservation strategy in their marriage market search results in two distinct reservation wages: for men on temporary jobs and for men on permanent jobs, where the former is higher. This reflects a trade-off between husband’s wage and type of contract. This generates equilibria with a positive marriage wage premium for all workers, but higher for temporary workers. We successfully test our results using Spanish data. Linked to this, we also find that permanent employment is linked to higher wages among never married workers, but to lower wages among married employees. We argue that the traditional arguments of specialisation and selection for a marriage wage premium predict the opposite results.

Assortative labor matching, city size, and the education level of workers

We investigate the heterogeneity of assortative labor matching with respect to geography, skills, and tasks. Our contribution is to separate plant quality by education level and occupation tasks using the AKM-model. We introduce a geology-related instrument to analyze the city effect and address limited mobility bias. Using rich administrative worker-plant dataset for Norway, we show that matching of the college educated have a strong city effect. The IV estimates indicate that a doubling of city size increases the correlation between worker and plant quality by 9 percentage points. A wage decomposition shows that matching accounts for 22% of the urban wage premium adjusted for sorting. In terms of occupations, better matching in cities is observed only for non-routine abstract tasks.

Shortage of Skilled Labor, Unions and the Wage Premium: A Regression Analysis with Establishment Panel Data for Germany

The author investigates the different influences of labor shortage on wages in firms with or without collective bargaining agreements. In addition to training, technological solutions, and organizational flexibility, employers can also offer higher wages at a constant employment level to fill vacancies if the current payments are lower than the marginal revenue of the workers. Firms with collective bargaining agreements probably already pay wages according to marginal revenue or, in the case of rent sharing, above it, and the remuneration is probably also not adjusted. Using wage regressions with panel data for German establishments, this paper shows that collective bargaining and a lack of skilled workers can lead to higher wages. However, the latter only applies to firms that are not bound by collective agreements. Hence, wage differentials between these firms decrease, providing further explanation for a countercyclical development of the wage premium from the collective bargaining agreement.

The wage impact of being a works council representative in Germany: A case of strategic discrimination?

AbstractWorks councils provide an essential mechanism for worker participation in decision‐making. While the literature has extensively explored their impact on worker and establishment outcomes, the negotiation process between works council representatives and their employer has remained largely unexplored. This article contributes to filling this gap by investigating wage discrimination towards works councilors in Germany. Fixed effects models leveraging panel data show that councilors receive a wage premium that positively correlates with the sectoral coverage of collective bargaining. In the manufacturing sector, where the tradition of bargaining is heavily entrenched, employers positively discriminate councilors. In contrast, in the service sector, where the culture of bargaining is weak, employers penalize works councilors. In both sectors, partisan and unionized works councilors are the most affected. The most likely hypothesis to explain these results is that employers strategically discriminate these councilors in order to bypass the traditional constraints of establishment‐level participation. This article therefore questions the quality of industrial democracy in Germany.

Pay and employee intrapreneurialism in Russia, 1994–2015: A longitudinal study

AbstractWe examine whether a high wage–high employee intrapreneurial inputs model remains a significant feature of the Russian economy. We do so by estimating the evolution of employee ‘intrapreneurial’ contributions to companies in Russia, 1994–2015, using Akerlof's theory of ‘partial gift exchange’. Akerlof (1982) suggests that employee discretionary contributions to organizational capacities rise when pay exceeds employee perceptions of ‘fair’ pay in comparable employment. Using the extensive Russian Longitudinal Monitoring Survey (RLMS), we find that overall employee intrapreneurial contributions significantly declined, 1994–2015, mirroring the declining Akerlof wage premium. Intrapreneurialism in highly informalized sectors was associated with labour market pressures. We extend Akerlof's theory to recognize intrapreneurial activity associated with coercive labour market pressures in the secondary labour market.

Early Careers of Graduates from Private and Public Universities in Germany: A Comparison of Income Differences Regarding the First Employment

Research estimating the outcomes of higher education in Germany has widely ignored the private educational sector. This study focuses on labour market returns in terms of the income of graduates from private higher education institutions in Germany. Using data from the National Education Panel Study (NEPS) the results of the Bayesian regression analysis indicate a moderate wage premium for private students compared to students who are enrolled in public higher education institutions regarding the first employment. Despite the predominant role of public universities in Germany, graduates of private higher education institutions receive similar advantages on the labour market as their counterparts in other countries, although private education in other countries is more prestigious.

Relative wage premium as a result of residence relocation of university graduates

Changing the place of residence after obtaining a university degree is one of the components of a broader issue of internal migration. The migration of people with higher education is a popular object of research, but until recently there were no data on migration immediately following graduation. The aim of the article is to demonstrate the occurrence of a relative wage premium related to this migration within a year after graduating, i.e. an increase in earnings resulting from moving to a different city. The study focused on groups of people who obtained their diploma in 2018 in the most popular fields of study within economics and technical sciences. An appropriate aggregation of data was made from the Polish Graduate Tracking System using the Social Insurance Institution (ZUS) data. It has been shown that the values of the relative earnings index for the analysed fields of study determined in this system were always higher for people who after obtaining their diploma in 2018 lived in 2019 in a voivodship other than their place of study, compared to those who remained in the powiat of their alma mater. This indicates the economic determinants of migration, i.e. the wage premium, related to the relocation of residence after obtaining a diploma.

Endogenous local labour markets, regional aggregation and agglomeration economies

ABSTRACT We examine the role of spatial unit size in measuring the urban wage premium. Using Dutch administrative data, we define local labour markets (LLMs) based on employees’ commuting outcomes, gender and educational attainment. We show that high-educated employees and male employees have a relatively large LLM. Using a continuum of regional aggregations, we find that urban wage premium estimates increase over the level of aggregation, also for different subgroups of employees. We show that the modifiable areal unit problem (MAUP) does not explain this pattern, consistent with stronger agglomeration externalities at higher regional aggregation levels.

Britain and BrExit: Is the UK more attractive to supervisors? An analysis of the wage premium to supervision across the EU

AbstractWe studied which European Union (EU) economy was more attractive prior to Brexit for employees in supervisory positions. We estimate the extra wage that supervisors earn relative to their subordinates—the wage premium to supervision (WPS)—at different quantiles of distribution of wages for 26 European economies. We find that the UK rewards supervisors more than other EU economies. Moreover, the WPS increases with wage and so increases wage inequality. Over 10% of the WPS depends on the national economic context. We discuss the implications for immigration and policymakers in relation to the post‐Brexit process.

Technical change and wage premiums amongst skilled labour: Evidence from the economic transition

I present reduced-form and structural evidence that the reorganization of the Russian economy in the post-transitional period increased the demand on law and business graduates. This demand shock provides a novel unified explanation of the Russian wage structure for 1985–2015. I then show that this shock is a common feature of all transitional economies, and it contributed to the transformational recession. The demand behaviour is identified with a new skill-biased technical change model of demand for skills with three production inputs (high school graduates and bachelor-level educations with two majors), showing that a technology shift that favours a particular skill might emerge within the skilled group rather than between skilled and unskilled. This is relevant because similar shifts (e.g., data scientists vs. liberal arts) emerge today in the frontier economies that adopt new general-purpose technologies (e.g., machine learning). Thus, this paper informs policymakers today on tools to counteract a potential drop in economic equality and performance that result from this adoption. Lastly, because of similarities between the mechanics of the transition and the 2022 sanctions to discourage Russia's war effort, my results highlight the importance of additional sanctions against the education system to prevent the regime's structural adaptation and preservation.

The urban wage premium is disappearing in U.S. micropolitan areas.

A key driver of urbanization is the pursuit of economic opportunities in cities. One such opportunity is the promise of higher wages in larger cities, a phenomenon known as the urban wage premium. While an urban wage premium has been well-documented among U.S. metropolitan areas, little is known about its existence in micropolitan areas, which represent an important link between rural and dense urban areas. Here we measure the power law scaling coefficient of annual wages versus employment for both U.S. metropolitan and micropolitan areas over a 37-year period. We take this coefficient to be a quantification of the urban wage premium for each type of urban area and find the relationship is superlinear in all years for both area types. Though both area types once had wage premiums of similar magnitude, the wage premium in micropolitan areas has steadily declined since the late 1980s while in metropolitan areas it has generally increased. This growing gap between micropolitan and metropolitan wage premiums is ongoing in parallel to other diverging characteristics, such as inequality and voting behavior, suggesting that our result is part of a broader social, cultural, and political divergence between small and large cities. Finally, we speculate that if urban residents respond to the COVID-19 crisis by migrating, the trends we describe may change significantly.

Values and Inequality: Prosocial Jobs and the College Wage Premium

Employers often recruit workers by invoking corporate social responsibility, organizational purpose, or other claims to a prosocial mission. In an era of substantial labor market inequality, commentators typically dismiss these claims as hypocritical: prosocial employers often turn out to be no more generous with low-wage workers than are other employers. In this article, we argue that prosocial commitments in fact inadvertently reduce earnings inequality, but through a different channel than generosity. Building on research on job values, we hypothesize that college graduates are more willing than nongraduates to sacrifice pay for prosocial impact. When employers appeal to prosocial values, they can thus disproportionately reduce pay for higher-educated workers. We test this theory with data on online U.S. job postings. We find that prosocial jobs requiring a college degree post lower pay than do standard postings with exactly the same job requirements; prosocial jobs that do not require a college degree, however, pay no differently from other low-education jobs. This gap reduces the aggregate college wage premium by around 5 percent. We present a variety of supplementary evidence using labor market data, worker survey responses, and a vignette experiment with hiring managers. The findings reveal an unintended consequence of employers’ embrace of prosocial values: it offsets macro-level inequality.

The supply of foreign talent: how skill-biased technology drives the location choice and skills of new immigrants

An important goal of immigration policy is facilitating the entry of foreign-born workers whose skills are in short supply in destination labor markets. In recent decades, information and communication technology (ICT) has fueled the demand for highly educated workers at the expense of less-educated groups. Exploiting the fact that regions in Switzerland have been differentially exposed to ICT due to their pre-ICT industrial composition, we present evidence suggesting that more exposed regions experienced stronger ICT adoption, accompanied by considerably stronger growth in relative employment and wage premia for college-educated workers. Following this change in the landscape of relative economic opportunities, we find robust evidence that these regions experienced a much larger influx of highly educated immigrants in absolute terms as well as relative to lower educated groups. Our results suggest that immigrants’ location decisions respond strongly to these long-run, technology-driven changes in their economic opportunities.

Wage premium for soft skills in IT sector

PurposeThis study aims to investigate the relationship between the demand on “soft” skills and suggested salaries for IT specializations in Russia.Design/methodology/approachBased on the database of vacancies, econometric modeling and cluster analysis of job occupations are implemented.FindingsThe results show positive association between demand for “soft” skills and wage if the model is controlled for the working experience and narrow professional occupations. Findings provide evidence that there is significant wage premium for “soft” skills in cases when job positions either imply no experience or require specialists with at least three years of tenure.Originality/valueThis research provides new evidence on the relationship between “soft” skills and wage using job postings data from Russia. This paper identifies the presence of wage premium for “soft” skills among IT specialists if controlling for sub-specializations, year, region and working experience. The robustness checks indicate no significant changes in the obtained results.

Wage Flexibility under Sectoral Bargaining

Abstract Sectoral contracts in many European countries set wage floors for different occupation groups. In addition, employers often pay a wage premium (or wage cushion) to individual workers. We use administrative data from Portugal, linked to collective bargaining agreements, to study the interactions between wage floors and wage cushions and quantify the impact of sectoral wage floors. Although wages exhibit a “spike” at the wage floor, a typical worker receives a 20% premium over the floor, with larger cushions for older- and better-educated workers and at higher-productivity firms. Cushions also allow wages to covary with firm-specific productivity, even within sectoral agreements. Contract negotiations tend to raise all wage floors proportionally, with increases that reflect average productivity growth among covered firms. As floors rise, however, cushions are compressed, leading to an average passthrough rate of about 50%. Finally, we use a series of counterfactual simulations to show that real wage reductions during the recent financial crisis arose through reductions in real wage floors, reductions in real cushions, and a re-allocation of workers to lower wage floors. Offsetting these effects was a rapid rise in education of new cohorts, which in the absence of other factors would have led to rising real wages.

Parenthood and the gender wage gap in urban China

Using data from the Chinese Household Income Project survey and decomposition methods, this study explored the influence of parenthood on the gender wage gap in urban China in 2002 and 2018. Our findings showed that the employment rate is lower for women than men in both childless and with child groups, and the gender gap expanded from 2002 to 2018. The data revealed a parenthood wage penalty in 2002 and a parenthood wage premium in 2018. Moreover, the parenthood wage penalty was greater for women than for men and contributed to the formation of the gender wage gap. We also found that three components: motherhood wage penalty, fatherhood wage premium, and gender wage gap in the childless group contributed to the formation of the gender wage gap. From 2002–2018, the motherhood wage penalty decreased, whereas the fatherhood wage premium increased.

Minimum Wages, Wages, and Price Pass-Through: The Case of McDonald’s Restaurants

Based on 2016–20 hourly wage rates of McDonald’s basic crew and Big Mac prices collected simultaneously from almost all US McDonald’s, we find that in 25% of instances of minimum wage increases, restaurants keep constant their wage premium above the increasing minimum wage. Higher minimum wages are not associated with faster adoption of touch-screen ordering, and there is near-full price pass-through of minimum wages. Minimum wage hikes lead to increases in real wages (expressed as how many Big Macs 1 hour of basic crew work can buy) that are one-fifth lower than the corresponding increases in nominal wages.

Urban wage premia, cost of living, and collective bargaining

Abstract In this article, we estimate urban wage premia (UWPs) in Italy, with its economy characterized by the interplay between collective wage bargaining and spatial heterogeneity in the cost of living. Our dataset for the 2005–2015 period exploits detailed information on the universe of workers in the private sector and price measures disaggregated at a fine spatial level. For employees under collective bargaining, we find a zero UWP in nominal terms and a negative UWP in real terms. When we turn to consider various groups of self-employed workers, who are not covered by national labor agreements, we instead find a positive nominal UWP and no real wage penalties.

Highly Skilled International Migration, STEM Workers, and Innovation

Abstract This article studies the implications of highly skilled labor international migration in a two-country dynamic stochastic general equilibrium model. The model considers three types of workers: Science, Technology, Engineering, or Mathematics (STEM) workers, non-STEM college educated workers, and non-college educated workers. Aggregate productivity in each economy is a function of innovations, which can be produced only by STEM workers. The model predicts (i) the existence of a wage premium of STEM workers relative to non-STEM college educated workers, (ii) the skill wage premium is higher in the destination country and increases with positive technological shocks, (iii) a reduction in migration costs increases output, wages, and total labor in the destination country, with opposite effects in the country of origin, and (iv) high skilled immigrants reduce skilled native labor and do not affect unskilled labor. Finally, a migration policy designed to attract STEM workers generates similar effects to a positive aggregate productivity shock.