Microdata evidence on rent-sharing

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Abstract:

We examine the effect of firm profits on wages for individual workers while focusing on the empirical complications associated with estimating the extent of rent-sharing. Controlling for worker and firm fixed-effects and using several instruments to deal with the endogeneity of profits, we report results indicating that Ordinary Least Square (OLS)-estimates strongly underestimate the effects of profits on wages. Moreover, the effect of profits on wages are estimated separately for firms with increasing and decreasing profits within a given time period. We find a positive and stable effect only in firms with increasing profits. This is in line with the idea that falling profits do not lead to wage cuts while increasing profits imply higher wages.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701721620

Affiliations: 1: Department of Economics, Stockholm University, Stockholm, Sweden 2: Research Institute of Industrial Economics, Stockholm, Sweden

Publication date: October 1, 2009

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