Academic journal article The European Journal of Comparative Economics

Is There Rent Sharing in Italy? Evidence from Employer-Employee Data

Academic journal article The European Journal of Comparative Economics

Is There Rent Sharing in Italy? Evidence from Employer-Employee Data

Article excerpt

Abstract

Using a unique employer-employee panel database, we investigate the extent of rent sharing in Italy from 1996 to 2003. We derive the following findings. First, after controlling for the national bargaining level, there is robust evidence of rent sharing at firm level. Second, by means of fixed effects estimates we show that the sorting of high-ability workers into high-profit firms appears to play a substantial role, since it captures a significant amount of cross sectional estimates of rent sharing. Third, in accordance to the related literature the endogeneity of profits causes a severe underestimation of rent sharing. Our final IV estimate of the elasticity of wages with respect to profits per employee amounts to 6%, with a "Lester" range of 24%. Moreover, we point out that the impact of rent sharing is not homogeneous across several dimensions (gender, occupation, sector and macroarea).

JEL Classifications: C33, J31, J41, L25.

Keywords: Rent Sharing, Sorting, Wage, Italy.

(ProQuest: ... denotes formulae omitted.)

1. Introduction3

Competitive labour market models predict no relationship between profits and wages at firm level: firms are wage-takers and face a horizontal labour supply. Therefore, if a firm becomes more profitable there is no reason why it should pay higher wages. However, non-competitive theories, such as efficiency wages models and bargaining theories, predict that there might be a positive relationship between wages and profits. In particular, rent sharing models underline that wages result from a bargain between the employer and the employees which generates a long-run positive relationship between wages and profits. In this setting, wages are determined by workers' outside options, by quasi-rent (firm profits evaluated at the opportunity cost of labour) and by relative bargaining power of the parties involved (Hildreth and Oswald, 1997).

The aim of this paper is to investigate the existence and the extent of rent sharing in Italy. We make use of a unique employer-employee database from 1996 to 2003, constructed by merging the INPS employer-employee database with the AIDA database, which contains information on the balance sheet of capital-owned firms. As a result of this merger, we are forced to restrict our analysis to this type of firm. We estimate a wage equation that includes the quasi-rent variable, which is the proxy for rent sharing. We also take into account several issues that have been proved to be relevant in order to get reliable estimates of rent sharing (Martins, 2009). More specifically, we control for the correlation between profits and workers' unobserved heterogeneity as well as for firm characteristics and for the endogeneity between profits and wages. Moreover, our data take into account the fact that wage setting in Italy is the outcome of bargaining at two different levels: a first centralized (national) level where minimum wages for all occupations are set in all industries (with even more than a national contract for the same industry); a second decentralized level where the employer and employees (or unions at firm level) bargain the wages over the constraints imposed by national contracts. Therefore, we introduce in our estimation dummies that controls for the type of national contract applied to each worker. This turns out to be a more reliable and accurate measure for the first level of bargaining with respect to using industry dummies, as usually done in the empirical literature, since the national bargaining occurs at the national contract level and not at the industry level.

The starting point of our empirical strategy is to use ordinary least squares (OLS) estimates, deriving an elasticity of wages with respect to quasi-rents per employee of around 6.8%, with a Lester range of 27%. After controlling for the first level of bargaining there is still a substantial role for rent sharing at the firm level: coefficient estimates are in fact reduced to around 15%, a finding in line with Arai (2003) and Arai and Heyman (2001) who point out that most of rent sharing takes place at firm level. …

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