Wages and firm-level unexpected good times

Suppose that a firm unexpectedly experiences good times in the form of higher revenues. Does it choose to invest or hire more workers? Does it alter workers’ compensation, and if so mainly through base wages or other components of pay? How are these decisions shaped by the attributes of top executives? Research on these questions has faced two important challenges. First, it is difficult to quantify in a systematic but precise way the unexpected component of revenue shocks at the firm-level, while distinguishing it from anticipated changes in market conditions. Second, studying these questions jointly—and thus providing a comprehensive analysis of intertwined decisions at the firm-level—requires an unusually rich collection of longitudinal data on firms, workers and the components of compensation.

This paper exploits gaps between observed and recently forecasted GDP growth in export destinations to estimate the effects of unexpected revenue shocks on worker compensation. Using a rich combination of firm-level and employer-employee panel data sets for Portugal, the paper finds that unexpected revenue shocks are partly transmitted to workers in the form of higher average wages, especially close to the top of the within-firm wage distribution. The unequal average distribution of rents is mainly driven by wage effects in firms managed by high-skilled managers, and by changes in overtime and other pay. This suggests that different types of managers implement different pay systems in the firm and allocate rents differentially across workers.

Click here to go to the paper by Paulo Bastos, Natália P. Monteiro, and Odd Rune Straume.