The conclusion emerging from a burgeoning labour economics literature on firm rent-sharing is that firms faced with more favourable demand conditions tend to raise wages. But are all firms equally likely to share rents? Or will some respond by taking higher profits instead? And what are the implications for firms' employment responses? This project considers these questions in a setting of imperfect competition in the labour market, where firms have some power to set wages, and some firms are bound by wage floors.
The researchers first examine the question theoretically, by drawing out a simple but novel insight from a standard model of monopsonistic competition. They show that firm wage-setting behaviour changes at a productivity threshold directly related to the wage floor, and that there is a range of lower-productivity firms which will absorb revenue-productivity increases as excess profits, instead of increasing wages and employment. These predictions are then tested using matched employer-employee South African administrative data between 2009 to 2018. The study shows how the predicted wage, employment and profit patterns are evident in the cross-section of firms covered by collective bargaining agreements. This project also replicates and extends a leading method of identifying rent-sharing elasticities but estimates separately by firm revenue-productivity bins. As predicted by the theory, this research finds that firms below the threshold increase wages and employment less, and profits more, in response to revenue-productivity shocks, and that there is a break at the threshold where wage floors bind.
The study complicates the conclusions emerging from the literature on firm rent-sharing, and forms part of an explanation for “stalled” development and “jobless growth”. Unevenness in rent-sharing is of general relevance, and the study has implications for what minimum wages can and cannot accomplish in general. The developmental implications may also be particularly important for middle-income countries seeking to develop through increasing firm productivity while protecting workers with high minimum wages (e.g. Brazil and South Africa), and low-income countries with relatively high wage floors associated with subsistence or efficiency wages.
