Christopher Flinn (NYU)

Firm’s Choices of Wage-Setting Protocols

Abstract: We analyze a labor market characterized by search frictions in which firms choose between posting non-negotiable wage offers and bargaining wages with individual workers. We use the model to study the positive and normative implications of heterogeneous wage-setting strategies in labor markets, as well as the potential effect of policies that seek to regulate wage-setting. We analytically derive – and empirically validate – a testable prediction from the model
regarding the cross-sectional prevalence of bargaining and renegotiation of wages among workers. We show how the equilibrium condition that determines the mix of bargaining and wage-posting firms in the labor market provides important identifying information for the surplus division parameter used by all bargaining firms. We then estimate the model and use it to evaluate counterfactuals in which either wage-setting procedure is mandated. We find that
eliminating bargaining reduces the overall gender gap in wages by 6 percent, the education gap by 3 percent, and residual wage dispersion by 12 percent, while leading to welfare losses for workers. Similar numbers are observed when bargaining is mandated, with ensuing welfare gains for workers. Either policy raises output by 1 to 3 percent by eliminating inefficient job mobility, but accounting for firm responses in vacancy creation can overturn these effects.