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Wage Adjustment and Productivity Shocks

  • Carlsson, Mikael

    ()

    (Research Department, Central Bank of Sweden)

  • Messina, Julián

    ()

    (Office of the Chief Economist for Latin America and the Caribbean)

  • Nordström Skans, Oskar

    ()

    (Institute for Labour Market Policy Evaluation (IFAU), UCLS, and IZA)

We study how workers’ wages respond to TFP-driven innovations in firms’ labor productivity. Using unique data with highly reliable firm-level output prices and quantities in the manufacturing sector in Sweden, we are able to derive measures of physical (as opposed to revenue) TFP to instrument labor productivity in the wage equations. We find that the reaction of wages to sectoral labor productivity is almost three times larger than the response to pure idiosyncratic (firm-level) shocks, a result which crucially hinges on the use of physical TFP as an instrument. These results are all robust to a number of empirical specifications, including models accounting for selection on both the demand and supply side through worker-firm (match) fixed effects. Further results suggest that technological progress at the firm level has negligible effects on the firm-level composition of employees.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 253.

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Length: 62 pages
Date of creation: 01 May 2011
Date of revision:
Handle: RePEc:hhs:rbnkwp:0253
Contact details of provider: Postal:
Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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  1. Nickell, S. & Wadhwani, S., 1989. "Insider Forces And Wage Determination," Papers 334, London School of Economics - Centre for Labour Economics.
  2. Nordström Skans, Oskar & Edin, Per-Anders & Holmlund, Bertil, 2006. "Wage Dispersion Between and Within Plants: Sweden 1985-2000," Working Paper Series 2006:18, Uppsala University, Department of Economics.
  3. Mendes, Rute & van den Berg, Gerard J & Lindeboom, Maarten, 2007. "An empirical assessment of assortative matching in the labor market," Working Paper Series 2007:30, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  4. Carlsson, Mikael & Smedsaas, Jon, 2006. "Technology Shocks and the Labor-Input Response: Evidence from Firm-Level Data," Working Paper Series 198, Sveriges Riksbank (Central Bank of Sweden).
  5. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage bargaining with on-the-job search: Theory and evidence," Post-Print halshs-00754171, HAL.
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  7. Basu, S. & Fernald, J.G., 1993. "Are Apparent Productive Spillovers a Figment of Specification Error," Papers 93-22, Michigan - Center for Research on Economic & Social Theory.
  8. Hildreth, Andrew K G & Oswald, Andrew J, 1997. "Rent-Sharing and Wages: Evidence from Company and Establishment Panels," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 318-37, April.
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  11. Mahmood Arai & Fredrik Heyman, 2009. "Microdata evidence on rent-sharing," Applied Economics, Taylor & Francis Journals, vol. 41(23), pages 2965-2976.
  12. Richard Paap & Frank Kleibergen, 2004. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Econometric Society 2004 Australasian Meetings 195, Econometric Society.
  13. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
  14. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital utilization and returns to scale," Working Paper Series, Macroeconomic Issues 95-5, Federal Reserve Bank of Chicago.
  15. Pedro S. Martins, 2004. "Rent Sharing Before and After the Wage Bill," Discussion Paper Series, Department of Economics 200405, Department of Economics, University of St. Andrews.
  16. Ana Rute Cardoso & Miguel Portela, 2009. "Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(1), pages 29-50, 03.
  17. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 343-61, July-Aug..
  18. Card, David & Devicienti, Francesco & Maida, Agata, 2011. "Rent-Sharing, Hold-up, and Wages: Evidence from Matched Panel Data," IZA Discussion Papers 6086, Institute for the Study of Labor (IZA).
  19. Melander, Ola, 2009. "The Effect of Cash Flow on Investment: An Empirical Test of the Balance Sheet Channel," Working Paper Series 228, Sveriges Riksbank (Central Bank of Sweden).
  20. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
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  23. Magnus Gustavsson, 2006. "The evolution of the Swedish wage structure: new evidence for 1992-2001," Applied Economics Letters, Taylor & Francis Journals, vol. 13(5), pages 279-286.
  24. Jeremy T. Fox & Valérie Smeets, 2011. "Does Input Quality Drive Measured Differences In Firm Productivity?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 961-989, November.
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  27. repec:inr:wpaper:150201 is not listed on IDEAS
  28. John M. Abowd & Francis Kramarz & Sébastien Pérez-Duarte & Ian Schmutte, 2009. "A Formal Test of Assortative Matching in the Labor Market," NBER Working Papers 15546, National Bureau of Economic Research, Inc.
  29. Irarrazabal, Alfonso & Moxnes, Andreas & Ulltveit-Moe, Karen-Helene, 2009. "Heterogeneous firms or heterogeneous workers? Implications for the exporter premium and the impact of labor reallocation on productivity," CEPR Discussion Papers 7577, C.E.P.R. Discussion Papers.
  30. Daniel, Christophe & Sofer, Catherine, 1998. "Bargaining, Compensating Wage Differentials, and Dualism of the Labor Market: Theory and Evidence for France," Journal of Labor Economics, University of Chicago Press, vol. 16(3), pages 546-75, July.
  31. Mikael Carlsson, 2003. "Measures of Technology and the Short-run Response to Technology Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(4), pages 555-579, December.
  32. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  33. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
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