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Firms’ choices of wage-setting protocols

pdf link

There’s also this paper, which I think is a previous draft. (pdf link)

BibTeX 

@techreport{flinn2021firms,
  title={Firms’ choices of wage-setting protocols},
  author={Flinn, Christopher and Mullins, Joseph},
  year={2021},
  institution={Discussion paper, New York University}
}

Abstract

We study a labor market characterized by search frictions in which firms choose between posting non-negotiable wage offers and bargaining wages with individual workers. We use the model to study the positive and normative implications of heterogeneous wage-setting strategies in labor markets, as well as the potential effect of policies that seek to regulate wage-setting. We analytically derive - and empirically validate - a testable prediction from the model regarding the cross-sectional prevalence of bargaining and renegotiation of wages among workers. We then estimate the model and use it to evaluate counterfactuals in which either wage-setting procedure is mandated. We find that eliminating bargaining reduces the overall gender gap in wages by 6%, the education gap by 3%, and residual wage dispersion by 12%, while leading to welfare losses for workers. Similar numbers are observed when bargaining is mandated, with ensuing welfare gains for workers. Either policy raises output by 1-3% by eliminating inefficient job mobility, but accounting for firm responses in vacancy creation can overturn these effects.

Notes and Excerpts

Since bargaining creates a link between workers’ outside options and current wages (that may themselves be used as the outside option for setting future wages) one particular concern is that this creates a cascading cycle of disadvantage for workers who have traditionally faced discrimination in the labor market

Since the effective wage is scaled by each worker’s ability, a, the model preserves a wage decomposition that is typical in empirical search: log wages can be decomposed into a component that is attributable to worker ability (log(a)) and a residual component εit that is a function of the worker’s history of employment and job offers.