Spillovers of Equal Treatment in Wage Offers

Published date01 November 2014
Date01 November 2014
DOIhttp://doi.org/10.1111/sjpe.12054
SPILLOVERS OF EQUAL TREATMENT
IN WAGE OFFERS
Kohei Kawamura* and J
ozsef S
akovics*
ABSTRACT
We analyse a labour-matching model with wage posting, where reflecting
institutional constraints firms cannot differentiate their wage offers within
certain subsets of workers. Inter alia, we find that the presence of impersonal
wage offers leads to wage compression, which propagates to the wages for high
productivity workers who receive personalized offers.
II
NTRODUCTION
This paper studies a labour market where both workers and firms are verti-
cally differentiated. In such a setting, if firms could offer a personalized wage
to each worker, the outcome would be efficient matching with (firm-optimal)
competitive wages. In practice, however, “equal treatment” is often imposed
on offers to certain subsets of workers, either by law or by convenience. For
example, employers in the public sector are often required to offer the same
or similar salaries to workers whose observable characteristics (such as educa-
tion, job experience, etc.) are comparable, via either salary scales or a more
explicit equal-treatment rule.
1
At the same time, the workers’ productivity is
often observable by the employers (through detailed CVs, recommendation
letters, interviews etc.) who are restricted to compete in uniform wages for
workers with different productivity levels. Our analysis suggests that these
practices may have an implication not only on the wages of those who receive
“equal treatment” but also on the wages of workers with high productivity
who typically receive personalized offers. In particular, we show that the
inability to differentiate offers leads to inefficient matching and lower equilib-
rium wages than when the firms can make an individualized offer to each
worker.
*The University of Edinburgh
1
In this paper, these constraints are assumed exogenous. One possible explanation is polit-
ical pressures, especially from trade unions, towards “equality” among workers whose job
grade/title is the same. Or, particularly for low-level positions for manual work, the cost of
making individualized offers may outweigh the benefit of hiring (marginally) better matched
workers. An alternative view is that, since wage compression through equal treatment is
desirable for firms, they might actively coordinate to sustain it, despite the matching ineffi-
ciency it generates.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12054, Vol. 61, No. 5, November 2014
©2014 Scottish Economic Society.
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