Edward P. Lazear 1

The Structure of Wages, Raises and Mobility in Europe

(Based on Introduction to International Differences in Productivity and Personnel Practices,

by Edward P. Lazear and Kathryn L. Shaw)

London LEED ConferenceSeptember, 2005

Edward P. Lazear 2

Employer-employee matched data are now available for many countries

First opportunity to look at the structure of wages within firms

Why differ and how?

Effects of differences

Edward P. Lazear 3

Additional Contributors to the Book and to this Chapter

Denmark: Aagaard, Eriksson, and Westergaard-Nielsen

Sweden:Edin, Holmlund and Skans; Oyer Finland: Uusitalo and Vartainen Norway: Hunnes, Mqen, and Salvanes Germany: Bellman and Alda Italy: Contini, Leombruni, Pacelli, and Villosio France: Kramarz and Perez-Duarte Belgium: Lallemand, Plasman, and Rycx

U.S. to come: Abowd, Haltiwanger, and Lane

Edward P. Lazear 4

Data 9 countries (Belgium, Denmark, Finland,

France, Germany, Italy, Norway, Sweden, United States)

Ideal: All workers in all firms for many years Denmark, Norway, Finland, Sweden (1)

Sub-sets Sweden (2), US, Belgium

Samples from all firms France, Italy

Edward P. Lazear 5

Four Questions Are all firms alike? - Yes Does a rising tide lifts all boats (firm

raise is individual raise) – no Do compressed wage firms lose their

best workers? – no Are countries similar or different? -

Similar

Edward P. Lazear 6

Are All Firms Alike?Examples of wage distributions within and across firms (within country)

Figure 1aWithin firm variation; No between firm variation

PDF for country, PDF for median and extreme firms all identical

0.00E+00

5.00E-01

1.00E+00

1.50E+00

2.00E+00

2.50E+00

3.00E+00

-0.6

-0.5

2-0

.44

-0.3

6-0

.28

-0.2

-0.1

2-0

.04

0.04

0.12 0.

20.

280.

360.

440.

52 0.6

log wages

Figure 1bWithin-firm Similar; Between firms Different

0.00E+005.00E+001.00E+011.50E+012.00E+012.50E+013.00E+013.50E+014.00E+014.50E+01

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

1E-1

50.

10.

20.

30.

40.

50.

6

log wages

Below 10

Near 50

Above 90

All

Edward P. Lazear 7

Decomposition of the Variance of Wages Decompose the variance into the

contribution of firms: σ2 = Σpj σj

2 + Σpj(meanW.j– meanW..)2

where pj is the share of workers located in firm j

Edward P. Lazear 8

Decomposition of the Variance of Wages

Components of overall country wage variance Weighted average of within-firm variance Weighted sum of squared deviations of firm means from country

means

The questions What theories might contribute to the determinants of wage

variance? Which are consistent with the data?

Edward P. Lazear 9

Why Care? If little within-firm wage variation

then Mobility only way to advance

If mobility limited then First job affects lifetime wealth

If much within-firm wage variation, high mobility costs have less impact on worker well-being

Edward P. Lazear 10

Models of wage setting that would produce Figures 1A and 1B

Figure 1A: All firms alike, but within firm wages differ

Figure 1B: All workers paid same within firm; firms differ

Wage setting based on occupation (human capital)

All firms have same distribution of occupations

One occupation per firm; firms differ in occupations

Wage setting for incentives (e.g. tournaments)

Workers ex ante identical; tournament to motivate. Or workers differ in ambition but distribution of types identical in every firm

Inconsistent with tournaments. Consistent with ex post settling up, piece rates where workers sort across firms by ambition

Institutional wage setting Firms all have same job titles on which wages are based or same seniority structure on which wages are based

E.g., Workers divide pie evenly. Pay varies with firm profit (wage change: rising tide lifts all boats)

0; lwj ww ;,;0; lowww

llwwj

Edward P. Lazear 11

Country-specific within and across firm wage distributions (simulating Figures 1A and 1B)

F i g u r e 1 c : N o r w a y 1 9 9 7

0 . 0 0 E + 0 0

2 . 0 0 E - 0 1

4 . 0 0 E - 0 1

6 . 0 0 E - 0 1

8 . 0 0 E - 0 1

1 . 0 0 E + 0 0

1 . 2 0 E + 0 0

1 . 4 0 E + 0 0

1 . 6 0 E + 0 0

1 . 8 0 E + 0 0

2 . 0 0 E + 0 0

l o g w a g e s

B e lo w 1 0

N e a r 5 0

A b o v e 9 0

A l l

Figure 1d:France 1996

0.00E+00

2.00E-01

4.00E-01

6.00E-01

8.00E-01

1.00E+00

1.20E+00

1.40E+00

1.60E+00

1.80E+00

2.00E+00

log wages

Below 10

Near 50

Above 90

All

There is much within firm wage variation.France has more within-firm and country variation than Norway.

Edward P. Lazear 12

Denmark: Much within firm variance but considerable across firm variance

Figure 1eDenmark 2000

0.00E+00

2.00E-01

4.00E-01

6.00E-01

8.00E-01

1.00E+00

1.20E+00

1.40E+00

1.60E+00

1.80E+00

2.00E+00

8

8.2

5

8.5

8.7

5 9

9.2

5

9.5

9.7

5

10

10

.3

10

.5

10

.8 11

11

.3

11

.5

log wages

Below 10

Near 50

Above 90

All

Edward P. Lazear 13

Within-Firm S.D. of Wages is a High Percent of the Country-Level S.D. of Wages

France has relatively tight firm wage distributions Figure 1f Ratio of ave within firm s.d. to country s.d

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Edward P. Lazear 14

Small, but positive, between-firm wage variation in all countriesDenmark’s Firms Have Largest Differences

Std Dev of Firm Means / Country mean WAGE

0

0.05

0.1

0.15

0.2

0.25

Edward P. Lazear 15

Are All Firms Alike?Examples of wage distributions within and across firms (within country)

Figure 1aWithin firm variation; No between firm variation

PDF for country, PDF for median and extreme firms all identical

0.00E+00

5.00E-01

1.00E+00

1.50E+00

2.00E+00

2.50E+00

3.00E+00

-0.6

-0.5

2-0

.44

-0.3

6-0

.28

-0.2

-0.1

2-0

.04

0.04

0.12 0.

20.

280.

360.

440.

52 0.6

log wages

Figure 1bWithin-firm Similar; Between firms Different

0.00E+005.00E+001.00E+011.50E+012.00E+012.50E+013.00E+013.50E+014.00E+014.50E+01

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

1E-1

50.

10.

20.

30.

40.

50.

6

log wages

Below 10

Near 50

Above 90

All

Edward P. Lazear 16

Models of wage setting that would produce Figures 1A and 1B

Figure 1A: All firms alike, but within firm wages differ

Closest to truth

Figure 1B: All workers paid same within firm; firms differ

Definitely not

Wage setting based on occupation (human capital)

All firms have same distribution of occupations

One occupation per firm; firms differ in occupations. Unlikely.

Wage setting for incentives (e.g. tournaments)

Workers ex ante identical; tournament to motivate. Or workers differ in ambition but distribution of types identical in every firm

Inconsistent with tournaments.

Not equal pay for all within firm (incentive pay or sorting possible).

Institutional wage setting Firms all have same job titles on which wages are based or same seniority structure on which wages are based

E.g., Workers divide pie evenly. Pay varies with firm profit Not equal pay for all within firm.

0; lwj ww ;,;0; lowww

llwwj

Edward P. Lazear 17

Implications for MobilityTwo points: If there were no within-firm wage

variation, must change firms to achieve wage increases

If no chance for promotion, luck on first job dramatically affects lifetime income

In principle, people can achieve wage increases and greater lifetime income within firms

Edward P. Lazear 18

Pay Compression: Heterogeneity in Skills or Wage Policy?

Wage Policy: lack of incentives compressed firms lose top workers

Skill homogeneity no pattern in worker exits as a function of wage compression

Results: wage compression and exits are if anything, negatively correlated heterogeneity

Edward P. Lazear 19

Compression and Loss of Top Workers

Difference between Exit Rates of Top Workers Compressed minus Non-compressed

-0.22

-0.17

-0.12

-0.07

-0.02

0.03

Norw ay 1993 Norw ay 1997 Finland 1990 Finland 2000 Denmark 1990 Denmark 2000

Result: Wage compression and exits are if anything, negatively correlated heterogeneity

Edward P. Lazear 20

Wage Increases Figures 1a and 1b relevant models Does a rising tide lift all boats?

Everyone gains in successful firms and everyone loses in failing firms Do firms adopt a lockstep wage increase policy within the firm?

Answer: Much variation in wage growth rates within firms More variance within firms than between Standard deviation of wage growth much larger than average

wage growth within firm.

Edward P. Lazear 21

Large Within-firm standard deviation of wage growth

Within-firm Std Dev of d log wage

0

0.05

0.1

0.15

0.2

0.25

Den

mar

k-19

81

Den

mar

k-19

90

Den

mar

k-20

00

Fin

land

-198

1

Fin

land

-199

0

Fin

land

-200

0

Fra

nce-

1977

Fra

nce-

1979

Fra

nce-

1987

Fra

nce-

1989

Fra

nce-

1993

Fra

nce-

1996

Ger

man

y-19

93

Ger

man

y-19

95

Ger

man

y-20

00

Ital

y-19

90

Ital

y-19

93

Ital

y-19

98

Nor

way

-198

1

Nor

way

-198

6

Nor

way

-199

3

Nor

way

-199

7

Sw

eden

-Hol

-198

6

Sw

eden

-Hol

-199

0

Sw

eden

-Hol

-199

5

Sw

eden

-Hol

-200

0

Sweden is typical. S.D wage growth about 12%

Edward P. Lazear 22

No strong rising tide effect Wages are highly variable within firms

Implications: Wage increases tend to reflect differences in worker ability or

performance, not differences in the performance of firms Wages are tied to the market

• Lazear and Oyer (2004)• Occupation effects far dominate firm effects

Why care?• If lockstep, workers’ fate affected by factors beyond their control • Effort less important• Incentives less important• Firm selection is very important

Edward P. Lazear 23

Are All Firms Alike Wage Growth? More alike than different

France 1996

0.00E+00

1.00E+00

2.00E+00

3.00E+00

4.00E+00

5.00E+00

6.00E+00

7.00E+00

8.00E+00

-1.5

-1.3 -1

-0.7

-0.5

-0.3 0

0.2

0.5

0.7 1

1.2

1.5

change in log wages

Below 10

Near 50

Above 90

All

Norway 1997

0.00E+00

1.00E+00

2.00E+00

3.00E+00

4.00E+00

5.00E+00

6.00E+00

7.00E+00

8.00E+00

-0.3

-0.3

-0.2

-0.2

-0.1

-0.1 0

0.05 0.

1

0.15 0.

2

0.25 0.

3

change in log wages

Below 10

Near 50

Above 90

All

France has very high variation in raises withinand overall compared with Norway (as with levels)Norway is closer to “lockstep” at country and firm level.

Edward P. Lazear 24

More on Mobility Large differences between countries

in mobility rates Entry and exit rates are correlated

across countries High wage firms have lower mobility

rates Entry rates are higher in low wage

firms

Edward P. Lazear 25

Entry and Exit RatesEntry and exit rates

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

exitrate

entryrate

Edward P. Lazear 26

Mobility Patterns

Entry and exit rates are correlated at the country level (equilibrium)

Most countries are growing (entry>exit) Countries differ

Germany (manufacturing) declining

Edward P. Lazear 27

Mobility Lower in High Wage Firms

Correlation of entry and exit rates with wage

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

r-entryrate-wage

r-exitrate-wage

Edward P. Lazear 28

Entry Rates by Wage LevelHigher in Low Wage Firms

Entry rates by wage level

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Den

mar

k-19

81

Den

mar

k-19

90

Den

mar

k-20

00

Fin

land

-198

1

Fin

land

-199

0

Fin

land

-200

0

Ger

man

y-19

93

Ger

man

y-19

95

Ger

man

y-20

00

Ital

y-19

90

Ital

y-19

93

Ital

y-19

98

Nor

way

-198

6

Nor

way

-199

3

Nor

way

-199

7

Sw

eden

-Hol

-198

6

Sw

eden

-Hol

-199

0

Sw

eden

-Hol

-199

5

Sw

eden

-Hol

-200

0

Entry rate high wage firms

Entry rate low wage firms

Edward P. Lazear 29

Why a difference between mobility in high and low wage firms? Possibilities:

High wage workers are more stable Workers do not leave high wage

firms Low wage firms are newer and have

evolving labor needs More turnover Higher entry rates

Edward P. Lazear 30

Conclusions Do all firms have the same wage

structure? No, but all firms have much within-firm wage

variation, mimicking the country distribution This reflects worker heterogeneity more than

policy• Mobility of high wage workers not higher in

compressed wage firms• High variation in raises within firms

firms are microcosms of the economy

Edward P. Lazear 31

Conclusions, continued Raises: Rising tide lift all boats?

No. Standard deviation of within firm raises is 10% to 15%, even though average raises are 0 to 5%

Evidence suggests raises are not determined by firm How do countries differ?

More alike than different – • much within firm wage variation, raise variation, mobility

patterns consistent by firm size But differences.

• France is more variable than Scandinavia • Norway less variable than Denmark

Edward P. Lazear 32

Four Answers Are all firms alike? - Yes Does a rising tide lifts all boats (firm

raise is individual raise) – no Do compressed wage firms lose their

best workers? – no Are countries similar or different? -

Similar

Edward P. Lazear 33

Questions for the Future

To the extent there are country differences, why do countries differ in wage dispersion and raise dispersion (France>Norway) Institutional factors Different industry mix More heterogeneity within country and firms Wage policy

How is productivity affected by wage policy – compression, raises, mobility