Wage Setting Behavior Research Articles

Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab

Macroeconomic research has mostly been focused on investigating micro foundations of the theory and transmission channels of policy ever since rational expectations have found place in the literature. It was in the 1990s that macroeconomists started working on models incorporating the assumption of nominal rigidity in the optimal behaviour of individuals and firms. These models have gained empirical support from both aggregate as well as firm-level data. The evidence for developing countries on the issue is limited and Pakistan is no exception. This study aims at investigating the price setting behaviour of Pakistani firms. Besides this, the potential effects of changes in financial cost on the overall pricing and production decisions have also been investigated. Pakistani firms perceive themselves to be operating in a competitive environment though most of their clientele is regular. The majority of the firms use current information while reviewing prices. Around 70 percent of the firms use either a state-dependent pricing rule or a combination of both time and state-dependent rules. Pakistani firms revise and change their prices usually in the months of June and July. The main determinants of change in the price level are the cost of raw material, energy and inflation. The competitors’ price generally figures in price decrease. Among the causes of price stickiness, implicit contract with the customers is at the top; the fixed term contract comes next. Most of the firms change their wage structure annually. About half of the firms index their workers’ wages to inflation and for the purpose refer to the earlier inflation rate. On the whole labour productivity and changes in inflation rate are observed as the main determinants of wage change. 1. INTRODUCTION Ever since rational expectations nave found place in the literature much of the research in the area of macroeconomics has been focused on investigating micro foundations of macroeconomic theory and transmission channels of policy. Macroeconomists started working on macro models in the 1990s incorporating the assumption of nominal rigidity with explicit modelling of optimal behaviour of individuals and firms, [see for instance, Rotemberg and Woodford (1997); McCallum and Nelson (1999); Woodford (2003)]. These models incorporate various forms of price and wage rigidities making monetary policy effective, though only in the short run. More recently these models have gained empirical support1 from both aggregate as well as firm-level data. In this regard micro-level evidence is more convincing since aggregated data may depend on the assumptions used and methodology employed, whereas micro level research offers direct evidence. For instance, micro level data directly investigates the price-setting behaviour of firms. Some studies in the literature on the price setting behaviour of the firms investigate the issue by collecting data from a particular sector of the economy or a group of firms [e.g. Kashyap (1995); Dutta, et al. (1999); Copaciu (2004)]. Another strand of literature, with the pioneer work of Blinder (1991), uses a survey-based approach to investigate various aspects of price stickiness. These studies have an added advantage as they allow additional insights and permit a clear ranking of the causes and patterns of price stickiness. Hall, et al. (1997) extended Blinder’s work for UK firms. Similarly Apel, et al. (2005) investigated the price setting behaviour of Swedish firms and Fabiani, et al. (2004) did the same for Italian firms. A number of survey-based studies conducted within the Eurosystem’s Inflation Persistence Network used this approach. A limited number of studies are also available that focus on developing countries. Studies in Pakistan have little micro level focus which this study as the first attempt to deal with the firms’ price setting behaviour aims to do. Besides this, the potential effects of changes in financial cost on the overall pricing and production decisions have also been investigated. Moreover this study is different from others in that data has been collected through enumerators and field investigators instead of mailing questionnaires to respondents. The study mainly focuses on four issues. First, the type of pricing rule; whether it is state-dependent or time-dependent? Second, what type of information (past, current or future forecast) is used for price calculations and, what is the frequency and size of the average price change. Third, it deals with different theories of price stickiness by investigating the determinants. The wage setting behaviour, which has certain implications for the effectiveness of monetary policy, is the fourth area the study deals with. The study proceeds as follows: Section 2 highlights the methodological issues. Section 3 outlines the main characteristics of the market. Section 4 deals with the price setting behaviour while Section 5 highlights determinants of price change and causes of price stickiness. The wage setting behaviour is investigated in Section 6 and Section 7 concludes the study.

Who benefits from tax incentives? The heterogeneous wage incidence of a tax credit

Do workers gain from lower business taxes, and why? We estimate how a large corporate income tax credit in France is passed on to wages and explore the firm- and employee-level underlying mechanisms. The amount of tax credit firms get depends on their payroll share of workers paid less than a wage threshold. Exposure to the policy thus varies both across workers depending on their wage and across firms depending on their wage structure. Using exhaustive employer-employee data, we find that half of the surplus generated by the reform falls onto workers. Wage gains load on incumbents in high-skill occupations. The wage earnings of low-skill workers—nearly all individually eligible—do not change. This heterogeneous wage incidence is unlikely to be driven by scale effects or skill complementarities. We find that the groups of workers benefiting from wage gains are also more likely to continue working for the same firm. Further, we show that firms do not change their wage-setting behavior in response to the individual eligibility status of workers. Overall, our results suggest that the wage incidence of the tax credit operated collectively through rent-sharing and benefited workers most costly to replace.

Who Benefits from Tax Incentives? The Heterogeneous Wage Incidence of a Tax Credit

Do workers gain from lower business taxes, and why? We estimate how a large French corporate income tax credit is passed on to wages and explore the firm- and employee-level underlying mechanisms. The amount of tax credit firms get depends on their payroll share of workers paid less than a wage threshold. Exposure to the policy thus varies both across workers depending on their wage and across firms depending on their wage structure. Using exhaustive employer-employee data, we find that half of the surplus generated by the reform falls onto workers. Wage gains load on incumbents in high-skill occupations. The wage earnings of low-skill workers -- nearly all individually eligible -- do not change. This heterogeneous wage incidence is unlikely to be driven by scale effects or skill complementarities. We find that the groups of workers benefiting from wage gains are also more likely to continue working for the same firm. Further, we show that firms do not change their wage-setting behavior in response to the individual eligibility status of workers as there is no bunching in the distribution of entrants' wages. Overall, our results suggest that the wage incidence of firm taxation operates collectively through rent-sharing and benefits workers most costly to replace.

Wage Setting Behaviour of Firms in Industrial Estates of Khyber Pakhtunkhwa, Pakistan

The objective of the study is to analyze the wage setting behaviour of firms. For this study four major industrial estates of Khyber Pakhtunkhwa. Using stratified random sampling, data is collected from 342 firms. Multinomial logistic model is used to estimate the effects of determinants on wage change. Most of the firms change wage rate once in a year. Majority of the firms follow time-dependent wage policy. Half of the firms, which are following time-dependent wage policy, change the wage rate at the end or start of the fiscal year. Most of the firms are not found to index wages. Moreover, the percentage of firms not involved in wage indexation is higher for daily workers than for permanent worker. Labor productivity, employment level in the economy, government regulations, taxes, demand for the product, and inflation are important factors of wage change, but the most important factor is the labour productivity and least important is pressure from the labour union. Imperfect competition and size of the firms are the important determinants of wage flexibility, while wage indexation, information set of expected inflation and fringe benefits provided to workers are the important determinants of wage rigidity. It is important for Pakistan to avoid wage cuts at the times of recession and disinflationary policies be carefully designed as sacrifice ratio, albeit moderate, is not zero.

Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?

We analyze the effect of local-level labor market concentration on wages. Using Census data over the period 1977–2009, we find that: (1) local-level employer concentration exhibits substantial cross-sectional and time-series variation and increases over time; (2) consistent with labor market monopsony power, there is a negative relation between local-level employer concentration and wages that is more pronounced at high levels of concentration and increases over time; (3) the negative relation between labor market concentration and wages is stronger when unionization rates are low; (4) the link between productivity growth and wage growth is stronger when labor markets are less concentrated; and (5) exposure to greater import competition from China (the “China Shock”) is associated with more concentrated labor markets. These five results emphasize the role of local-level labor market monopsonies in influencing firm wage-setting behavior and can potentially explain some of the stagnation of wages in the United States over the past several decades.

The Impact of Minimum Wages in the Environment and Culture Sector of the Expanded Public Works Programme

The Public Works Programme initiated during the Great Depression in the United States was known for its ability to stimulate economic activity through employment creation. Its aim of alleviating poverty and reducing inequality finds an echo in one of the primary objectives of South Africa’s Expanded Public Works Programme (EPWP). This programme focuses on reducing unemployment through work-based programmes, in that way providing income relief to many households through job creation. The very high levels of unemployment and the associated poverty and inequality are considered to be among some of the most daunting challenges that the South African economy faces. The environment and culture sector has experienced many challenges relating to wage determination and wage-setting behaviour. The aim of this article is to investigate the impact of setting minimum wages in the environment and culture sector as an appropriate wage strategy intervention policy under the EPWP. The EPWP is a nationwide programme comprising projects that are aimed at job development. After analysing data from over 3,500 individual projects, the author found that there was a negative relationship between wage-setting behaviour and job creation as far as many individuals were concerned, especially women and youths. The author established that investment in skills development and training had a positive impact on outcomes in the Environment and Culture Sector of the EPWP.

HETEROGENEITY IN WAGE SETTING BEHAVIOR IN A NEW-KEYNESIAN MODEL

In this paper we estimate a New-Keynesian dynamic stochastic general equilibrium (NK DSGE) model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule-of-thumb, or flexible prices. We enrich Coibion and Gorodnichenko framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the US economy from 1955 to 2008. The estimation results show the relevance of heterogeneity in wage setting among households. More importantly, we identify qualitative and quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and wage inflation, which a standard NK model with only Calvo-type wage rigidity fails to achieve. We also show that modeling wage-rigidity heterogeneity—as opposed to standard Calvo wages—amplifies the macroeconomic output fluctuations resulting from a technology shock while it mitigates the output fluctuations following a monetary tightening.

The effects of interbank networks on efficiency and stability in a macroeconomic agent-based model

We develop a macroeconomic agent-based model that consists of firms, banks, unions and households who interact on labour, goods, credit and interbank markets. The model endogenises pricing decisions by firms, wage setting by unions and interest rate setting by banks on both firm and interbank lending. Banks also set leverage targets and precautionary liquidity buffers on the basis of internal risk models. Our model produces endogenous fluctuations driven by the pricing behaviour of firms and the wage setting behaviour of unions. Fluctuations lead to loan defaults which are exacerbated as lenders reduce lending and charge higher interest rates, inducing a credit crunch. We also study how making the inter-banking network more connected affects the key outcomes of the economy and find that while the flow of funds from surplus banks to firms can be increased, the latter effect is soon dominated by increasing instability in the real sector as firms default at higher rates. While the banking sector experiences fewer defaults as a whole, losses on the interbank market increase as a source of bank defaults.

An Open Economy DSGE Model with Search-and-Matching Frictions: The Case of Hungary

ABSTRACTThis article builds and estimates a medium scale, small open economy DSGE model augmented with search-and-matching frictions in the labor market, and different wage setting behavior in new and existing jobs. The model is estimated using Hungarian data between 2001–2008. We find that: (i) the inclusion of matching frictions significantly improves the model’s empirical fit; (ii) the extent of new hires wage rigidity is quantitatively important for key macro variables; (iii) labor market shocks do not play an important role in inflation dynamics, but the structure of the labor market influences the monetary transmission mechanism.

Sectoral Differences in Wage Freezes and Wage Cuts: Evidence from a New Firm Survey

The paper provides evidence concerning incidence and sources of nominal wage rigidity in services and manufacturing, using a new and large employer survey on wage and price setting behaviour for Germany. We observe that wage freezes are more frequent in services than in manufacturing, whereas wage cuts are less frequent. The significant sector gaps do not vanish after controlling for relevant firm characteristics influencing the incidence of wage freezes and wage cuts, notably coverage by collective agreements and the degree of price competition on the product market. An analysis of firms’ view on the reasons preventing wage cuts suggests that specific fear of excess worker turnover could explain distinct wage setting behaviour in services.

Why are unemployed aged fifty and over less likely to find a job? A decomposition analysis

Reemployment chances for unemployed aged fifty and over are low compared to those of younger persons. To explain the different chances, the job search literature has largely focused on the job search behavior of unemployed individuals. Based on job search models, we propose that not only job search behavior, but also wage setting behavior, attitudinal variables and personal variables impact the difference in reemployment opportunities. Besides gaining insight into which variables explain the difference in reemployment opportunities, we also test how much of the difference each of these variables explains. We do this by drawing on a decomposition analysis. Using data from 647 recently unemployed, we find that about one third of the reemployment gap can be explained by the variables suggested by job search models, mostly in terms of age differences in search behavior, educational levels and reservation wage. Hence, about 70 % can be ascribed to other factors, such as employer preferences for those aged between 18 and 49. Implications of these results for theory, policy and practice are discussed.

Heterogeneity in Wage Setting Behavior in a New-Keynesian Model

In this paper we estimate a New-Keynesian DSGE model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko (2011) develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule of thumb, or flexible prices. We enrich Coibion and Gorodnichenko (2011) framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the United States economy for the period of 1955-2014. Our results confirm the previous findings in the literature regarding the importance of nominal rigidity in wages to better match the macroeconomic data. More importantly, we identify qualitative as well as quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and the wage inflation, which a standard New Keynesian model with only Calvo-type wage rigidity fails to achieve. We also show that modelling wage rigidity heterogeneity - as oppose to standard-Calvo-wages - amplifies the macroeconomic output fluctuations resulting from a technology shock whereas it mitigates the output fluctuations following a monetary tightening.

Executive Greed and a Powerful Cause for More Pay: An Empirical Investigation into Human Wage Setting Behaviour and a Better Alternative to Minimum Wages

There is widespread assumption that executives are greedy and that it is executive greed that has led to widespread spiralling executive pay. This paper offers an alternative explanation for today’s extraordinary high levels of executive pay: Pay transparency. Pay transparency increases executive pay by as much as 23.0% compared to only 6.9% when wages are not transparent based on over 308 treatments in 7 behavioural experiments. We call this wage increase the Wage Anchor Effect. Men are 40% more affected by the Wage Anchor Effect than women. While lower for lower paid jobs, the wage increasing Wage Anchor Effect exists even there (we used babysitters and cleaning staff as job examples). Therefore, pay transparency could help lower-paid workers with higher wages which may not have the negative side effects of minimum wages.

It's Not You, it's Me: An Experimental Study of Employers' Wage Setting Behavior

Using an intergenerational trilateral laboratory gift-exchange game, we investigate how employers' own performance in a real effort task impacts on the wage setting behavior of younger and older employers. We find that the employers' own performance strongly affects wage setting behavior, though we do not find significant differences concerning the employers' or employees' age.

Worker Signals Among New College Graduates: The Role of Selectivity and GPA

Recent studies have found a large earnings premium to attending a more selective college, but the mechanisms underlying this premium have received little attention and remain unclear. In order to shed light on this question, I develop a multidimensional signaling model relying on college grades and selectivity that rationalizes students’ choices of effort and firms’ wage-setting behavior. The model is then used to produce predictions of how the interaction of the signals should be related to wages, namely that the return on college GPA should fall the more selective the institution attended. Using five data sets that span the early 1960s through the late 2000s, I show that the data support the predictions of the signaling model, with support growing stronger over time as college sorting by ability has increased. The findings imply that return to college selectivity depends on GPA, something previously not recognized in the literature, and they can rationalize why employers learn more quickly about college graduates’ productivity than less educated workers’.

How Wages Respond to Shocks: Asymmetry in the Speed of Adjustment

The time series of various economic variables often exhibit asymmetry: decreases in the values tend to be sharp and fast, whereas increases usually occur slowly and gradually. We detect signs of an analogous asymmetry in firms’ wage setting behaviour on the basis of managerial surveys, with employers tending to react faster to negative than to positive shocks in the same variables. As well as describing the presence of asymmetry in the speed of wage adjustment, we investigate which companies are more likely to demonstrate it in their behaviour. For this purpose, we apply the Heckman selection model and develop a methodology that improves identification by exploiting heteroscedasticity in the selection equation. The estimation results imply that companies operating in a more competitive environment have a higher propensity to react asymmetrically. We also find that businesses relying on labour-intensive production technology are more likely to react faster to negative shocks. Both of these findings support the hypothesis that this behaviour results from companies’ attempts to protect profit margins.

Equilibrium Wage and Employment Dynamics in a Model of Wage Posting Without Commitment

A rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles (2001), is assumed. In addition, firm recruiting decisions, firm entry and exit, and transitory firm productivity shocks are incorporated into the model. Given that the cost of recruiting workers is proportional to firm employment, we establish the existence of an equilibrium solution to the model in which wages are not contingent on firm size but more productive employers always pay higher wages. Although the state space, the distribution of workers over firms, is large in the general case, it reduces to a scalar that can be interpreted as the unemployment rate in the special case of homogenous firms. Furthermore, the equilibrium is unique. As the dimension of the state space is equal to the number of firms types in general, an (approximate) equilibrium is computable.

The Impact of Age on the Reservation Wage: The Role of Employability

In an aging society, it is important to gain insight in the factors explaining why the transition from unemployment to employment gets harder as people move from mid to late career. This study focuses on one related aspect: individuals’ wage setting behaviour. The study explores the relationship between age and the reservation wage for people in their mid and late career. We moreover investigate whether two employability factors, ‘willingness to move’ and ‘ease of movement’, mediate this relationship. Higher wage claims would not necessarily be problematic if they result from a stronger labour market position (ease of movement) and therefore a higher ‘market value.’ It would be more problematic if higher wage claims are a way to price oneself out of the labour market because of a low willingness to move. Path analysis on a sample of 8,113 Belgian workers aged 40 to 60 years reveals that age positively affects the reservation wage via willingness to move. Yet, this effect is neutralized by the negative influence via ease of movement. Our analyses moreover reveal a direct, positive effect of age on the reservation wage, if employability factors are controlled for. This finding suggests that wage claims are increasing if people move from mid to late career irrespective of their employability. We discuss implications for theory, practice and future research.

Wage-Setting Behavior in France: Additional Evidence from an Ad-Hoc Survey

We investigate the wage-setting behavior of French companies using an ad-hoc survey conducted specifically for this study. Our main results are the following. i) Wages are changed infrequently. The mean duration of wage contracts is one year. Wage changes occur at regular intervals during the year and are concentrated in January and July. ii) We find a lower degree of downward real wage rigidity and nominal wage rigidity in France compared to the European average. iii) About one third of companies have an internal policy to grant wage increases according to inflation. iv) When companies are faced adverse shocks, only a partial response is transmitted into prices. Companies also adopt cost-cutting strategies. The wage of newly hired employees plays an important role in this adjustment.

Wage Setting and Wage Flexibility in Ireland: Results from a Firm-Level Survey

This paper investigates the wage-setting behaviour of Irish firms. We place particular emphasis on the use of flexible pay components and examine how these allow firms to deal with shocks requiring a reduction in costs without having to cut base wages. The results presented in this paper are based on a survey of Irish firms undertaken as part of the Wage Dynamics Network (WDN), which is a Euro-system research network. Our main findings are that almost two-thirds of firms applied at least some elements of the national wage agreement in place at the time of the survey (Towards 2016). Wage cuts or freezes were reported by a very small percentage of firms but changes in bonuses and other flexible pay components were relatively common if the firm needed to reduce labour costs. When asked about the relevance of different explanations for avoiding cuts in base wages, worker morale and loss of experienced workers were the main concerns. Regulatory or collective bargaining obstacles to wage cuts were the lowest ranked.