Do workers share in firm success? Pass-through estimates for New Zealand

Corey Allan and David Maré

No 21_15, Working Papers from Motu Economic and Public Policy Research

Abstract: We study the extent to which firm financial performance is passed on to workers in the form of higher wages and the degree to which this pass-through has changed over the period 2002-2018. We use both value added per worker and a measure of quasi-rents as measures of financial performance. Value added per worker is the standard measure used internationally. Quasi-rents better approximate the resources available to be shared between workers and firms as it takes into account the rental cost of capital as well as the reservation wages of workers. We estimate the reservation wage bill for each firm using estimates from a two-way fixed-effect model. We estimate models similar to those typically used in the international literature and further decompose the estimated pass-through into the contribution from worker sorting and the contribution from rent-sharing. Our instrumental variables estimates of pass-through are in the range of 0.12 and 0.19 for value added and 0.11 and 0.07 for quasi-rents. Worker sorting explains between 35% and 50% of pass-through. While the extent of overall pass-through is relatively stable over time, the contribution of worker sorting declines dramatically to explain almost none of the estimated pass-through. We contribute to the literature by demonstrating a method to calculate quasi-rents, by testing for changes over time in pass-through, and examining the relative importance of worker sorting over time.

Keywords: Wage determination; Rent sharing; Worker sorting (search for similar items in EconPapers)
JEL-codes: D22 E25 J31 J71 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2021-11
New Economics Papers: this item is included in nep-hrm, nep-lma, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Do Workers Share in Firm Success? Pass-through Estimates for New Zealand (2021)
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