A Test of Negotiation and Incentive Compensation Models Using Longitudinal French Enterprise Data

John M. Abowd

Cornell University Department of Economics; Labor Dynamics Institute; School of Industrial and Labor Relations; National Bureau of Economic Research (NBER); CREST; Institute for the Study of Labor (IZA)

Francis Kramarz

Center for Research in Economics and Statistics (CREST); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)

April 1992

NBER Working Paper No. w4044

Abstract:

In this paper we model the determinants of firm level wages and employment explicitly allowing for firm and worker heterogeneity. Our firms have three types of workers (cadres, skilled and unskilled) and may explicitly choose from among three distinct contracting regimes (strong form efficiency, labor demand/right to manage, and incentive contracting). We apply the model to a representative sample of 1,097 French enterprises for the period 1978 to 1987. We find that firms with enterprise level agreements appear to implement incentive contracts. This is significant because in France a firm level agreement is voluntary. On the other hand, firms without accords appear to operate on their labor demand curves. That is, they make labor demand decisions using the sector level agreement as the relevant wage rate. Efficient contracts are dominated by the other two contractual possibilities. External wage rates, which we estimate for each group of workers within each firm, appear not to influence employment decisions in the manner predicted by efficient contracts regardless of the accord status of the firm.

A Test of Negotiation and Incentive Compensation Models Using Longitudinal French Enterprise Data

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