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Productivity Results

IV. Productivity Results

Basic result can be summarized by a comparison of means


Frame of Reference 3 years
For firms whose relative wage declined or stayed constant for the past three
years, real output per worker grew by 2%
For firms whose relative wage increased in the past three years, real output
per worker grew by 12%
The problem with this basic analysis is that, the real output per worker might
change for a variety of reasons other than the change of relative wages
In the following slides we will observe and discuss whether this direction of
relation holds when we control non-labor inputs

IV. Productivity Results

Coefficients of the control variable are all statistically significant


Elasticity of the changes in output with respect to the firms relative wage is 0.46
This estimate is not statistically significantly different from labors total share in
manufacturing sales (about 0.27) the coefficient predicted by Efficiency Wage
Theories
A coefficient of 0.46 implies that increases in REL WAGE by one standard
deviation (3.4% over three years), productivity increases by 1.4%
Please note once again that all the variables are in logarithmic form and Relative
Wages described are not identical to opportunity cost, it is the wage paid by the
firm compared to its three largest competitors in the product market

IV. Productivity Results


If the firm had spent the same amount of money by hiring 3.4% more workers,
output would have risen by 3.4% times labors share of sales approximately
0.9%
These two strategies are of approximately equal value to the firm 1.4% and
0.9% are not statistically significantly different
The equality is consistent with the prediction of Efficiency Wage Theory
Note that, negative coefficient on employment (L) may be due to decreasing
returns to scale in the short run
Productivity measure (Q/L) deflates real output by employment there might
be spurious negative correlation between employment and output per worker if
there is measurement error in employment

IV. Productivity Results

Union Bargaining more than optimum wages diminishing productivity


returns
Lets get into some statistical estimates since after all reality doesn't exist
until it is measured
Coefficient on REL WAGE increases to 0.68 with no unions and falls to 0.23
with at least 50% unions
The above estimates clearly suggest the negative aspects of unions on
productivity
Comments on the specifications of the test is purely technical and will not be
discussed here. Anyone interested may refer to the paper on page 1109-10.

Explanation for Wage-Productivity


Relations

V. Explanation for Wage-Productivity


Relations
Efficiency Wages
Fundamental proposition of Efficiency Wage Theory: For a given level of
human capital and occupation, increase in relative wages lead to
increase in productivity
The theory is now supported by real-life data
Transitory Shocks
In the presence of costly mobility, temporary productivity shocks can
lead to a positive correlation between wages and productivity
Firms with productivity shocks temporarily increase wages in order to
attract new (best) workers
There is no evidence of this theory in the empirical study

V. Explanation for Wage-Productivity


Relations

Human Capital
Human Capital Theory: It implies that the differences in average level of wages
across enterprises are primarily due to differences in worker characteristics that
are linked to productivity
Firm Effects are the coefficients on the firm specific intercepts in a wage equation
If HCT is correct, firm effects estimated controlling for human capital should have
much lower dispersion than firm effects estimated without such controls
Results from (i) a survey of Indiana Manufacturing Plants and (ii) a longitudinal
wage survey of executives of large US Corporations both show that Human
Capital play only a very small role in explaining firm wage effects

V. Explanation for Wage-Productivity


Relations

Compensating Differentials
If compensating differences explain the results, high-wage firms should not
enjoy lower quit rates
Contradictions can be studied from Parsons 1978, Freeman 1980, Akerlof
et al. 1989
In the Indiana Dataset, it is observed that high wage employees had lower
quit rates, lower intention to quit and higher satisfaction with wages
Levine (1991)
Kreuger and Summers have found that controlling for fringe benefits and
working conditions made no contribution to explaining wage differences
across industries (1998)

V. Explanation for Wage-Productivity


Relations

Brown and Medoff found that controls for human capital and compensating
differences have little effect on estimated wage differences between
companies of different sizes
Rent Sharing Theories
A company that gains access to a new technology with higher productivity
may be forced to share some fraction of new rents with its current
workforce
Unlike the above three theories, a positive correlation between changes in
productivity and relative wages is consistent with Rent Sharing Theories
It is quite contrasting to note that RST suggest that workers at unionized
businesses will be more successful in capturing rents than in nonunionized setting

V. Explanation for Wage-Productivity


Relations

Rent Sharing Theory and Efficiency Wage Theory is difficult to distinguish


because of their substantial overlap
Rent Sharing Theory and Efficiency Wage Theory have identical implications if
workers perceive it fair that productivity improvements be shared as wage
gains and also in case of union-avoidance
The best of all monopoly profits is a quiet life John Hicks (1935)
RST and Efficiency Wage Theory are complementary because efficiency wage
effects reduce the cost of sharing rents