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IJM 29,1

INTRODUCTION

Compensation policies within rms: evidence from linked employer-employee data

Ana Rute Cardoso
IZA Bonn, Bonn, Germany, and

Chiara Monfardini
University of Bologna, Bologna, Italy
Abstract
Purpose The purpose of this paper is to introduce this special issue on compensation policies within rms while using evidence from linked employer-employee data. Design/methodology/approach The paper looks at the use of linked employer-employee data over time and how this has enabled progress in the understanding of the functioning of the labour market as the arena where labour supply and demand interact, under the mediation of labour market institutions and regulations. Findings The example of issues that have been covered using linked employer-employee data, generating new insights, could be extended and it is continuously being updated. Originality/value The articles collected in this special issue provide some ne examples of recent work on the eld of linked employer-employee data. Keywords Data analysis, Compensation, Employment contracts Paper type General review

International Journal of Manpower Vol. 29 No. 1, 2008 pp. 4-7 q Emerald Group Publishing Limited 0143-7720 DOI 10.1108/01437720810861976

Within a decade, use of linked employer-employee data has enabled striking progress in our understanding of the functioning of the labour market as the arena where labour supply and demand interact, under the mediation of labour market institutions and regulations. Having in the late 1980s asked the question Does the new generation of labor economists know more than the older generation?, Freeman (1989, p. 319) asserted the main conclusion I reach is that while, labor economists are more knowledgeable of labor supply issues, we do not know more about rm behavior, labor demand and the overall functioning of the markets. Use of linked employer-employee data by the research community during the last decade has fortunately rendered Freemans assertion to some extent obsolete nowadays (that does not, of course, exclude the possibility that the statement became outdated exactly because it had an impact mentoring the research that meanwhile developed). Use of linked employer-employee data has indeed led to successive accomplishments towards the identication of the microeconomic underpinnings of income distribution, unemployment, and growth. Initial studies relied on cross-sectional data and one of the rst challenges came from the puzzling rise in wage inequality that took place in several countries during the 1980s and 1990s. Linked employer-employee data enabled a shift in the emphasis of the analysis from the worker attributes namely wage differences across schooling levels, or the gender

wage gap to the role of employers and their wage policies. Similarly, unemployment could be analysed as the outcome, not strictly of certain worker attributes schooling, age and gender, for example but also of employers policies and characteristics. Longitudinal-linked employer-employee data tracking rms and/or workers over time enabled a jump into the study of dynamics, to look at a whole new set of issues: the nature of adjustment of employment and wages at the micro level to shocks such as technological progress, changing patterns of trade and growing internationalization of the economies; the role of labour market regulations in such adjustment; job and worker ows at the rm level as determinants of macro uctuations and changes in employment composition; labour demand and the substitutability across factors of production; worker careers, in terms of wage and job changes; micro determinants of the functional distribution of income; retirement decisions in a framework of ageing population in developed countries; vacancies, job search and matching in the labour market; the effectiveness of matching policies; the impact of rm fortunes (plant closures, in particular) on workers wages, the occurrence and duration of unemployment and successive employment spells; the impact of minimum wage policies. Another challenge was to open the black box to look inside the rm. The analysis of human resources management policies was enriched by the availability of comparable data on a large number of rms, replacing case studies of a few rms. New trends in company policies have been analysed, concerning in particular hiring, ring, promotions, wages and payment schemes, training, technology adoption, and how they impact on protability, on one hand, and on workers careers and worker ows, on the other. The example of issues that have been covered using linked employer-employee data, generating new insights, could be extended and it is continuously being updated. The articles collected in this special issue provide some ne examples of recent work on the eld. The rst two contributions in this volume provide new theoretical insights and empirical evidence on the wage formation mechanism in different European labour markets. The paper by Barth, Bratsberg, Hgeland and Raaum proposes an agency model to explain the rms choice between xed and performance-related pay schemes and test its main predictions with two repeated cross sections of Norwegian establishment survey data. Consistent with the theoretical model, they nd that performance pay schemes are more widespread in rms where employees have a higher autonomy in dening their working tasks. On the other hand, this compensating scheme is found to be less likely in small rms, and in presence of both centralized and local collective bargaining. Thanks to the two periods of observation available, the authors are also able to show that, net of changes in a set of labour market characteristics like industry structure and bargaining institutions, performance-related pay experienced a positive trend in Norway in the recent years. With a similar research approach Carneiro and Portugal test empirically, in the second paper of our collection, the prediction of the insider-outsider theory that rms with high labour turnover costs pay higher wages, due to the increased negotiation power gained by insider workers. The collective bargaining model proposed describes how rms wages are shaped by rm-specic characteristics, outside factors and insiders bargaining power. The empirical investigation is performed on a panel

Introduction

IJM 29,1

dataset of large Portuguese rms. Even though this market is characterized by high level of centralized negotiation, the estimated insider weight turns out to be similar to that of economies with more decentralized bargaining. New empirical evidence is found on the role of labour adjustment costs, showing that higher risks of being laid off weaken insiders power and results in lower wages. The insiders power effect is also found to be asymmetric, revealing downward wage rigidity. The paper by Martins looks at the relationship between turnover costs and wages from a personnel economics perspective, proposing an instrumental variable method to identify the causal impact of wage policies on the amount of worker churning experienced by the rm. The general identication strategy relies on estimating the impact of wages using the exogenous source of variation represented by the share of workers paid by collective bargaining contracts. The estimation is performed on a matched employer-employee panel dataset collecting the whole population of rms in Portugal. The idea that wages are a choice variable and therefore endogenous is supported by the results of the author. Adopting the instrumental variable method the estimated impact on churning turns from negative to non-negative. A possible interpretation of this nding it that workers effort might be weakly responsive to wages and rms consequently replace priced-out workers with more skilled new hires. Wages are back to the role of dependent variable in the nal paper in this issue, although at the individual rather than at the rms level. Giardas study analyses jointly the role played by age, supply effect and macroeconomic conditions on the wage determination process, using a large panel of Italian wages administrative data. The rather long time span covered by the dataset makes it possible to derive robust evidence on the worsening of lifetime wage expectations of younger generations. They benet from higher entry wages but face atter wage-age prole. A supply factor such as the relative size of the active population by age group is found to be negatively correlated with wages. Turning to the conditioning factors of the macro-economic environment in which they are determined, wages are found to be negatively affected by regional unemployment rate, but positively inuenced by real union wages. This collection of papers illustrates the potential from use of linked employer-employee data. Nevertheless, the current limitations to data access that still frequently hamper the progress of empirical research should also be mentioned. While the need for micro data has been identied, the discussion on the feasibility and conditions for granting wider access to these data by the scientic community is still evolving slowly. Ethical issues involved in accessing and analyzing micro data (such as condentiality or restriction of data use to specic scientic projects) are a major concern of data producers and often turn into a source of miscommunication with the scientic community, impeding or delaying data access. Hopefully, the quality of the scientic results generated on linked employer-employee data and the respect for the ethical issues involved will prompt wider collection and dissemination of this type of data. We would like to conclude this introduction thanking Adrian Ziderman for his invitation to collaborate in the editorial process of this volume and his support throughout its preparation. The papers in this special issue have been examined through a peer review system. We are grateful to all the reviewers for their comments and suggestions that helped the authors to improve their early versions.

Reference Freeman, R.B. (1989), Does the new generation of labor economists know more than the older generation?, in Freeman, R.B. (Ed.), Labour Markets in Action: Essays in Empirical Economics, Harvester Wheatsheaf, New York, NY, pp. 317-42. About the Guest Editors Ana Rute Cardoso is Senior Research Associate at the Institute for the Study of Labor (IZA Bonn), where she is Deputy-Director of the Research Program The Future of Labor. She received her PhD in economics in 1997 at the European University Institute (Florence). She is currently on leave from the University of Minho, Portugal. She is an elected member of the executive committee of the European Association of Labour Economists (EALE). Anas research interests include earnings dispersion and mobility, employer behaviour and the impact of labour market institutions. Ana Rute Cardoso is the corresponding author and can be contacted at: cardoso@iza.org Chiara Monfardini is Associate Professor of Econometrics at the Faculty of Economics of the University of Bologna since 2005. She obtained her PhD in Economics at the European University Institute (Florence). She is member of the Center for Household, Income, Labour and Demographic Economics (CHILD) and of the Health, Econometrics and Data Group (HEDG). Her research and teaching eld is microeconometrics, with particular focus on limited dependent variable models.

Introduction

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