Establishment Wage Differentials: Microdata from the BLS Occupational Employment Statistics Program Are Providing Researchers a Fresh Approach to Use in Studying How Wages Are Influenced by the Establishment in Which an Individual Works

By Lane, Julia I.; Salmon, Laurie A. et al. | Monthly Labor Review, April 2007 | Go to article overview

Establishment Wage Differentials: Microdata from the BLS Occupational Employment Statistics Program Are Providing Researchers a Fresh Approach to Use in Studying How Wages Are Influenced by the Establishment in Which an Individual Works


Lane, Julia I., Salmon, Laurie A., Spletzer, James R., Monthly Labor Review


Economists have long known that individual wages depend on a combination of employee and employer characteristics, as well as the interaction of the two. Although understanding establishment wage differentials is important for labor economics and theories of the firm, little is known about the magnitude of these wage differentials. Primarily this stems from the lack of microdata linking individuals to the establishments where they work, but also it reflects the technical difficulties associated with separating out employee and employer effects. This article provides new findings using microdata from the Occupational Employment Statistics program at the Bureau of Labor Statistics that permit both of these issues to be addressed, The data used for the research contain information from more than half a million establishments, in all sectors of the economy, with wages reported for over 34 million individuals in more than 800 occupations. This article contributes to the growing body of literature analyzing the impact of firms' compensation policies, and specifically, that which explores the topic of employer effects on wages.

The main contributions made by this research are the empirical estimates of the ways in which wages are influenced by the establishment at which the individual works. The decomposition of wages into employee and employer effects uses Ordinary Least Squares (OLS) regressions to partition the sum of squares of wages into worker and establishment components. The results show that employer effects contribute substantially to earnings differences--the results from the basic model show that controlling for detailed occupation, establishment dummies account for more than one-fifth of individual wage variation, The results also show that these large employer effects can be only partially explained by observable characteristics, such as the location, size, age, and industry of the establishment.

In order to examine the breadth of the establishment wage differentials across occupations, correlations of occupational wages within establishments were calculated, The results are striking--establishments that pay well for one occupation also pay well for others. Even after controlling for observable establishment characteristics, positive wage correlations within establishments for occupations that are closely related were found, as well as for occupations that one would not expect to be closely related in the production process. "l-his empirical finding may offer interesting implications for theories that attempt to explain the source of establishment wage differentials.

Background and literature review

Empirical estimates of establishment wage differentials. Establishment wage differentials are defined as the wage premium which controls for occupation and individual characteristics, and is common to all individuals in an establishment. While economists have known about these differentials ever since studies of employer wage policies were undertaken in the 1940s and 1950s, it is only recently, with the advent of large electronically linked employer-employee micro-databases, that systematic statistical analyses of establishment wage differentials have been conducted. The empirical strategy used by almost all of these recent studies has been to define the differentials as the percentage of individual wage variation accounted for by adding establishment indicators to a regression that already includes controls for occupation and worker characteristics.

In 1991, Erica Groshen wrote the seminal article in the modern literature? Using data for six manufacturing industries from the Bureau of Labor Statistics Industry Wage Surveys, she decomposed earnings variation into occupational and establishment differentials as well as the interaction between the two. She found that establishments contribute substantially to earnings differences--when controlling for occupation, establishment wage differentials account for a sizeable amount of individual wage variation, ranging from a low of 12 percent in the cotton and man-made textiles industry to a high of 58 percent in the industrial chemicals industry. …

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