Abstract
I use linked employer-employee data from the German Federal Statistical Office to estimate within-firm wage differentials between temporary workers with fixed-term contracts and workers with permanent contracts in the context of dual internal labor markets. Wage-tenure profiles of permanent workers are estimated separately for each firm to obtain a proxy for the prevalence of internal labor markets. Temporary workers earn significantly lower wages in firms with steeper wage-tenure profiles. This finding is consistent with the segmentation in a primary permanent workforce with high wages and a secondary temporary workforce with low wages, if internal labor markets are more prevalent.
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Notes
Note that even though compensating wage theory and non-shirking efficiency wage models imply lower wages for the permanent workforce if the layoff probability is reduced via the use of FTCs, they do not imply higher wages for workers with FTCs. For example in the standard non-shirking efficiency wage model (Shapiro and Stiglitz 1984) workers have unemployment as an outside option with lower income than in employment, which induces work effort. Dual labor markets imply a second outside option for primary permanent workers, namely employment in the secondary workforce with FTCs. The larger the wage disadvantage for workers with FTCs, the larger would be the incentive for permanent workers to provide work effort and not to get fired from the primary workforce. Consequently, firms with dual ILM have an incentive to pay workers with FTCs lower wages than workers with permanent contracts.
Note that even in deferred compensation models (e.g., Lazear 1979), in which individual productivity does not necessarily increases over a worker’s career, workers with a higher productivity should still earn higher wage levels than workers with lower productivity - in other words, deferred compensation implies wage redistribution from low to high tenure but not from high to low productive workers.
See the homepage of the Research Data Centre of the German Federal Statistical Office (http://www.forschungsdatenzentrum.de/en/) for detailed information about the data set.
As the chosen threshold values with respect to firm size and the number of observations are quite arbitrary, I performed several robustness checks for different samples. The main findings are quite robust to this sample restriction, as long as we still focus on larger firms with sufficient workers to estimate earnings functions within firms.
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Pfeifer, C. A Note on Dual Internal Labor Markets and Wages of Temporary Workers: Evidence from Linked-Employer-Employee Data. J Labor Res 35, 133–142 (2014). https://doi.org/10.1007/s12122-013-9173-1
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DOI: https://doi.org/10.1007/s12122-013-9173-1