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Do firms share their success with workers? The response of wages to product market conditions

  • Marcello Estevao
  • Stacey Tevlin

We provide strong new evidence that industry financial conditions play an important role in wage determination in the U.S. manufacturing sector. Ordinary least squares estimates of the effect of rents per worker on wages are positive and significant, but quite small. However, using two standard bargaining models, we illustrate that this may stem from a variety of econometric difficulties that plague the OLS estimates. In this paper, we are able to overcome these issues and identify the effects of the industry financial situation on wages. We do this using the U.S. input-output tables to isolate exogenous variation in an industry's product market conditions. Our instrumental variable estimates reveal a substantial amount of rent sharing in U.S. manufacturing---much more than is consistent with a purely competitive labor market.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-17.

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Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedgfe:2000-17
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  1. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  2. John M. Abowd, 1990. "The NBER Immigration, Trade, and Labor Markets Data Files," NBER Working Papers 3351, National Bureau of Economic Research, Inc.
  3. Hilderth, A.K. & Oswald, A.J., 1993. "Rent-Sharing and Wages: Evidence form Company and Establishment Panels," Economics Series Working Papers 99154, University of Oxford, Department of Economics.
  4. Joshua D. Angrist & Alan B. Krueger, 1995. "Split Sample Instrumental Variables," NBER Technical Working Papers 0150, National Bureau of Economic Research, Inc.
  5. Nickell, Stephen & Kong, Paul, 1992. "An investigation into the power of insiders in wage determination," European Economic Review, Elsevier, vol. 36(8), pages 1573-1599, December.
  6. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, July.
  7. Assar Lindbeck & Dennis J. Snower, 1989. "The Insider-Outsider Theory of Employment and Unemployment," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262074x, June.
  8. Marcello Estevao & Stacey Tevlin, 1995. "The role of profits in wage determination: evidence from US manufacturing," Finance and Economics Discussion Series 95-48, Board of Governors of the Federal Reserve System (U.S.).
  9. repec:oup:qjecon:v:107:y:1992:i:3:p:985-1002 is not listed on IDEAS
  10. repec:oup:qjecon:v:111:y:1996:i:1:p:227-51 is not listed on IDEAS
  11. Angrist, Joshua D & Krueger, Alan B, 1995. "Split-Sample Instrumental Variables Estimates of the Return to Schooling," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(2), pages 225-35, April.
  12. Shea, John, 1993. "The Input-Output Approach to Instrument Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 145-55, April.
  13. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  14. Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May.
  15. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
  16. Alan B. Krueger & Lawrence H. Summers, 1986. "Reflections on the Inter-Industry Wage Structure," NBER Working Papers 1968, National Bureau of Economic Research, Inc.
  17. John M. Abowd & Henry S. Farber, 1990. "Product Market Competition, Union Organizing Activity, and Employer Resistence," NBER Working Papers 3353, National Bureau of Economic Research, Inc.
  18. Kevin Denny & Machin, S, 1991. "The role of profitability and industrial wages in firm level wage determination," Fiscal Studies, Institute for Fiscal Studies, vol. 12(2), pages 34-45, May.
  19. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  20. repec:oup:qjecon:v:111:y:1996:i:1:p:195-226 is not listed on IDEAS
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