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Does a Flexible Industry Wage Structure Increase Employment?: The U.S. Experience

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  • Linda A. Bell
  • Richard B. Freeman

Abstract

This paper examines the flexibility of wages across industries inthe U.S. and seeks to determine the potential impact which changes in the industrial wage structure may have for employment. With regard to the flexibility of wages across industries, we find that the U.S., alone among the major OECD countries, has experienced substantial changes in the industry wage structure since 1970, with the variation of log wages among industries increasing dramatically, particularly in the 1970s. This represents a widening of the gap between wages in the high and low wage sectors. In order to evaluate these changes, we estimate equations linking changes in industry wages over an extended period of time to a variety of potential wage determining characteristics. We find that industrial wages are positively correlated with value productivity per worker, even after controlling for institutional and supply side factors which may have contributed to the increased dispersion of wages in the 1970s. Our results are not consistent with the standard competitive model of industry labor markets, in which wages and productivity are uncorrelated across sectors and wages depend on aggregate, rather than sectoral conditions.With regard to the impact of a flexible industry wage structure on employment, we evaluate the circumstances under which flexible wages among industries may be employment enhancing, and the set of circumstances under which flexible wages are likely to be employment reducing. For the U.S.economy in the 1970s we find that the data support the latter set of circumstances. The bottom line of the U.S. experience is that flexible wages by industry have not contributed to employment growth.

Suggested Citation

  • Linda A. Bell & Richard B. Freeman, 1985. "Does a Flexible Industry Wage Structure Increase Employment?: The U.S. Experience," NBER Working Papers 1604, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1604
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    References listed on IDEAS

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    1. Anonymous, 1965. "Organization for Economic Cooperation and Development," International Organization, Cambridge University Press, vol. 19(1), pages 150-153, January.
    2. William H. Branson & Julio J. Rotemberg, 1991. "International Adjustment with Wage Rigidity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 13-44, National Bureau of Economic Research, Inc.
    3. Richard B. Freeman & James L. Medoff, 1979. "New Estimates of Private Sector Unionism in the United States," ILR Review, Cornell University, ILR School, vol. 32(2), pages 143-174, January.
    4. Jeffrey D. Sachs, 1979. "Wages, Profits, and Macroeconomic Adjustment: A Comparative Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 269-332.
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    Cited by:

    1. Sessions, John G., 2008. "Wages, supervision and sharing," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(4), pages 653-672, November.
    2. Franz, Wolfgang & Profit, Stefan, 1994. "Wege aus der Unterbeschäftigung im Weissbuch der EU-Kommission: Eine kritische Würdigung," Discussion Papers 15, University of Konstanz, Center for International Labor Economics (CILE).
    3. Michael C. Burda & Jeffrey D. Sachs, 1987. "Institutional Aspects of High Unemployment in the Federal Republic of Germany," NBER Working Papers 2241, National Bureau of Economic Research, Inc.

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