Wages, Profits, and Rent-Sharing

D. G. Blanchflower, A. J. Oswald, P. Sanfey
1996 Quarterly Journal of Economics  
The paper suggests a new test for rent-sharing in the U.S. labor market. Using an unbalanced panel from the manufacturing sector, it shows that a rise in a sector's profitability leads after some years to an increase in the long-run level of wages in that sector. The paper controls for workers' characteristics, for industry fixed-effects, and for unionism. Lester's range of wages is estimated, for rent-sharing reasons alone, at approximately 24 per cent of the mean wage. WAGES, PROFITS, AND
more » ... S, PROFITS, AND RENT-SHARING I. Introduction One of the oldest questions in economics is that of whether the market for labor can be represented satisfactorily by a standard competitive model. The importance of this question, which has implications for macroeconomics as well as labor economics, has stimulated both controversy and much research. This paper blends microeconomic data on wages with industrial data on profits. It produces a new test of the competitive market hypothesis. Contrary to the implications of textbook theory, pay determination appears to exhibit elements of rent-sharing 1 . In a prominent early attack on traditional analysis, Sumner Slichter [1950] argued that a competitive model fails to explain the empirical evidence that apparently homogeneous types of employees earn significantly different amounts in different industries. His data, drawn from the US manufacturing sector, showed that wages appeared to be positively correlated with various measures of the employer's ability to pay. Slichter concluded that this correlation provided prima facie evidence against a conventional competitive model. Recent research into this issue by Dickens and Katz [1987], Krueger and Summers [1987, 1988] and Katz and Summers [1989] has reached the same conclusions using better data than were available in Slichter's time. These studies show that there are unexplained industry wage differentials and, in some cases, examine the correlation between wage levels and industry profitability. Although suggestive, the results are open to a number of criticisms. One is that the apparent pay/profit correlation may be caused by unobservable industry fixed effects. Some industries, for example, may use a technology that requires both high pay and a high rate of return on physical capital. A second is that early studies failed to control for employees' personal characteristics. An ideal data set would both have a panel element and provide controls for workers' characteristics. There are apparently no data sources of this kind. Related work, occasionally with panel data, has been done on European labor markets. This includes research by, for example, Blanchflower et al [1990], Beckerman and Jenkinson [1990] ,
doi:10.2307/2946663 fatcat:p6k7jensqjgjvipfqs4lv6bety