Imperfect Competition, Compensating Differentials, and Rent Sharing in the US Labor Market

We quantify the importance of imperfect competition in the US labor market by estimating the size of labor market rents earned by American firms and workers. We construct a matched employer-employee panel dataset by combining the universe of US business and worker tax records for the period 2001–2015. Using this panel data, we identify and estimate an equilibrium model of the labor market with two-sided heterogeneity where workers view firms as imperfect substitutes because of heterogeneous preferences over nonwage job characteristics. The model allows us to draw inference about imperfect competition, worker sorting, compensating differentials, and rent sharing. (JEL D24, H24, H25, J22, J24, J31, J42)

Firm Dynamics, On-the-Job Search and Labor Market Fluctuations

We devise a tractable model of firm dynamics with on-the-job search. The model admits analytical solutions for equilibrium outcomes, including quit, layoff, hiring and vacancy-filling rates, as well as the distributions of job values, a fundamental challenge posed by the environment. Optimal labor demand takes a novel form whereby hiring firms allow their marginal product to diffuse over an interval. The evolution of the marginal product over this interval endogenously exhibits gradual mean reversion, evoking a notion of imperfect labor market competition. This in turn contributes to dispersion in marginal products, giving rise to endogenous misallocation. Quantitatively, the model provides a parsimonious reconciliation of leading estimates of rent sharing, the negative association between wages and quits, the link between job and worker flows, and the cyclicality of labor market quantities and prices.

Labor in the Boardroom

We estimate the wage effects of shared governance, or codetermination, in the form of a mandate of one-third of corporate board seats going to worker representatives. We study a reform in Germany that abruptly abolished this mandate for stock corporations incorporated after August 1994, while it locked the mandate for the slightly older cohorts. Our research design compares firm cohorts incorporated before the reform and after; in a robustness check we additionally draw on the analogous difference in unaffected firm types (LLCs). We find no effects of board-level codetermination on wages and the wage structure, even in firms with particularly flexible wages. The degree of rent sharing and the labor share are also unaffected. We reject that disinvestment could have offset wage effects through the canonical hold-up channel, as shared governance, if anything, increases capital formation.

Firm Wage Premia, Industrial Relations, and Rent Sharing in Germany

The authors use three distinct methods to investigate the influence of industrial relations on firm wage premia in Germany. First, ordinary least squares (OLS) regressions for the firm effects from a two-way fixed-effects decomposition of workers’ wages reveal that average premia are larger in firms bound by collective agreements and in firms with a works council, holding constant firm performance. Next, recentered influence function (RIF) regressions show that premia are less dispersed among covered firms but more dispersed among firms with a works council. Finally, in an Oaxaca–Blinder decomposition, the authors find that decreasing bargaining coverage is the only factor they consider that contributes to the marked rise in premia dispersion over time.

Union Density Effects on Productivity and Wages

We exploit changes in tax subsidies for union members in Norway to identify the effects of changes in firm-level union density on productivity and wages. Increased deductions in taxable income for union members led to higher membership rates and contributed to a lower decline in union membership rates over time in Norway. Accounting for selection effects and the potential endogeneity of unionisation, the results show that increasing union density at the firm level leads to a substantial increase in both productivity and wages. The wage effect is larger in more productive firms, consistent with rent-sharing models.