THE DETERMINATION OF WAGES OF NEWLY HIRED EMPLOYEES:
SURVEY EVIDENCE ON INTERNAL VERSUS EXTERNAL FACTORS
Czech National Bank
Central Bank and Financial Services
Authority of Ireland
Bank of Greece
European Central Bank
National Bank of Poland
Bank of Slovenia
This paper uses information from a rich firm-level survey on wage and price-setting procedures, in around 15,000 firms in 15 European Union countries, to investigate the relative importance of internal versus external factors in the setting of wages of newly hired workers. The evidence suggests that external labour market conditions are less important than internal pay structures in determining hiring pay, with internal pay structures binding even more often when there is labour market slack. When explaining their choice firms allude to fairness considerations and the need to prevent a potential negative impact on effort. Cross-country differences, that do exist, are found to depend on institutional factors (bargaining structures); countries in which collective agreements are more prevalent and collective agreement coverage is higher report to a greater extent internal pay structures as the main determinant of hiring pay. Within-country differences are found to depend on firm and workforce characteristics; strong association between the use of external factors in hiring pay, on the one hand, and skills (positive) and tenure(negative) on the other.
Keywords: wage rigidity, newly hired workers, internal pay structure, employee turnover, business cycle, survey data
JEL codes: J31, J41, J51
Acknowledgments: We would like to thank Rebekka Christopoulou for excellent data assistance; Silvia Fabiani, Roberto Sabbatini and other members of the WDN survey group for fruitful cooperation and discussions. Thanks are also due to Truman Bewley, Michal Franta, Christian Haefke, Guillaume Horny, Stepan Jurajda, Wiemer Salverda and participants at the June 2008 WDN Conference, at a seminar at the Athens University of Economics and Business, and at the University of Zurich for their comments on an earlier version of this paper. Views expressed in this paper are those of the authors and do not necessarily coincide with the views of the central banks the authors are associated with.
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