IDEAS home Printed from https://ideas.repec.org/p/bls/wpaper/ec060100.html
   My bibliography  Save this paper

Wage Compression and the Division of Returns to Productivity Growth: Evidence from EOPP

Author

Listed:
  • Harley Frazis

    () (U.S. Bureau of Labor Statistics)

  • Mark A Loewenstein

    () (U.S. Bureau of Labor Statistics)

Abstract

This paper analyzes the relationship between wages and productivity during the early years of an employment relationship. Data from the Employment Opportunity Pilot Project show that worker productivity grows substantially during the first two years on the job, with most of the growth in productivity occurring at the very start of the job. Correcting for measurement error and the fact that expected productivity beyond the start of the job may be folded into the starting wage if wage revisions are not instantaneous, one finds that variation in productivity is only partially reflected in wages. Not only is productivity growth stemming from human capital accumulation while on the job only partially reflected in wage growth, but starting productivity differences for workers in the same job – in large part driven by differences in relevant experience - are only partially reflected in starting wage differences. Our empirical findings can be explained by a simple model of employer – worker cost sharing in which (a) the cost to a worker of locating and moving to a new job increases with the worker's stock of human capital and (b) equity norms prevent employers from paying senior workers lower wages than junior workers who are no more productive.

Suggested Citation

  • Harley Frazis & Mark A Loewenstein, 2006. "Wage Compression and the Division of Returns to Productivity Growth: Evidence from EOPP," Working Papers 398, U.S. Bureau of Labor Statistics.
  • Handle: RePEc:bls:wpaper:ec060100
    as

    Download full text from publisher

    File URL: https://www.bls.gov/ore/pdf/ec060100.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Daron Acemoglu & Jörn-Steffen Pischke, 1998. "Why Do Firms Train? Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 79-119.
    2. Loewenstein, Mark A & Spletzer, James R, 1998. "Dividing the Costs and Returns to General Training," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 142-171, January.
    3. Angrist, J.D. & Imbens, G.W., 1992. "Average causal response with variable treatment intensity," Discussion Paper 1992-34, Tilburg University, Center for Economic Research.
    4. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1-9.
    5. Christopher R. Bollinger & Amitabh Chandra, 2005. "Iatrogenic Specification Error: A Cautionary Tale of Cleaning Data," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 235-258, April.
    6. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-571, September.
    7. Ann P. Bartel, 1992. "Training, Wage Growth and Job Performance: Evidence From a Company Database," NBER Working Papers 4027, National Bureau of Economic Research, Inc.
    8. Giorgio Brunello, 2002. "Is Training more Frequent when Wage Compression is Higher? Evidence from 11 European Countries," CESifo Working Paper Series 637, CESifo Group Munich.
    9. Daron Acemoglu & Jorn-Steffen Pischke, 1999. "The Structure of Wages and Investment in General Training," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 539-572, June.
    10. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
    11. David H. Autor, 2001. "Why Do Temporary Help Firms Provide Free General Skills Training?," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1409-1448.
    12. Gary Charness & Peter Kuhn, 2005. "Pay Inequality, Pay Secrecy, and Effort: Theory and Evidence," NBER Working Papers 11786, National Bureau of Economic Research, Inc.
    13. Bartel, Ann P, 1995. "Training, Wage Growth, and Job Performance: Evidence from a Company Database," Journal of Labor Economics, University of Chicago Press, vol. 13(3), pages 401-425, July.
    14. John M. Barron & Mark C. Berger & Dan A. Black, 1997. "On-the-Job Training," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number ojt, November.
    15. Booth, Alison L. & Bryan, Mark L., 2002. "Who Pays for General Training? New Evidence for British Men and Women," IZA Discussion Papers 486, Institute for the Study of Labor (IZA).
    16. Thomas J. Kane & Dietmar Harhoff, 1997. "Is the German apprenticeship system a panacea for the U.S. labor market?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 10(2), pages 171-196.
    17. Alison L. Booth & Gylfi Zoega, 2004. "Is wage compression a necessary condition for firm-financed general training?," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 88-97, January.
    18. Ericson, Thomas, 2004. "The effects of wage compression on training: Swedish empirical evidence," Working Paper Series 2004:15, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    19. Bishop, John, 1987. "The Recognition and Reward of Employee Performance," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 36-56, October.
    20. Harley Frazis & Mark A. Loewenstein, 2005. "Reexamining the Returns to Training: Functional Form, Magnitude, and Interpretation," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
    21. Dale T. Mortensen, 1978. "Specific Capital and Labor Turnover," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 572-586, Autumn.
    22. Chang, Chun & Wang, Yijiang, 1996. "Human Capital Investment under Asymmetric Information: The Pigovian Conjecture Revisited," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 505-519, July.
    23. Peraita, Carlos, 2001. "Testing the Acemoglu-Pischke model in Spain," Economics Letters, Elsevier, vol. 72(1), pages 107-115, July.
    24. John M. Barron & Mark C. Berger & Dan A. Black, 1999. "Do Workers Pay for On-The-Job Training?," Journal of Human Resources, University of Wisconsin Press, vol. 34(2), pages 235-252.
    25. J.D. Angrist & Guido W. Imbens & D.B. Rubin, 1993. "Identification of Causal Effects Using Instrumental Variables," NBER Technical Working Papers 0136, National Bureau of Economic Research, Inc.
    26. Katz, Eliakim & Ziderman, Adrian, 1990. "Investment in General Training: The Role of Information and Labour Mobility," Economic Journal, Royal Economic Society, vol. 100(403), pages 1147-1158, December.
    27. Alison L Booth & Gylfi Zoega, 2005. "Worker Heterogeneity, Intra-firm Externalities and Wage Compression," Birkbeck Working Papers in Economics and Finance 0515, Birkbeck, Department of Economics, Mathematics & Statistics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carla Haelermans & Lex Borghans, 2012. "Wage Effects of On-the-Job Training: A Meta-Analysis," British Journal of Industrial Relations, London School of Economics, vol. 50(3), pages 502-528, September.
    2. Schlicht, Ekkehart, 2007. "Wage Dispersion, Over-Qualification, and Reder Competition," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 1, pages 1-31.
    3. Schlicht, Ekkehart, 2008. "Lohnspreizung und Effizienz," Discussion Papers in Economics 2117, University of Munich, Department of Economics.
    4. Hanming Fang & Alessandro Gavazza, 2011. "Dynamic Inefficiencies in an Employment-Based Health Insurance System: Theory and Evidence," American Economic Review, American Economic Association, vol. 101(7), pages 3047-3077, December.

    More about this item

    Keywords

    Wages; Productivity; Compression;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bls:wpaper:ec060100. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gregory Kurtzon). General contact details of provider: http://edirc.repec.org/data/blsgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.