Wage-setting Decisions on Newly Hired Employees:

This paper uses a survey on wage formation that was applied to 1,305 Colombian firmsto study wage-setting decisions with respect to newly hired employees. The Colombiancase is interesting, since the country´s labour market performance, especially itsunemployment rate and level of informality, differs not only from the developedcountries, where studies of this type are concentrated, but also from most LatinAmerican countries. The replies to the survey indicate wages for the newly hired arebased mainly on a predefined wage structure. This may help to explain, in part, thepresence of downward nominal wage rigidities in Colombia, since firms are unwillingto differentiate the pay of new hires from the wages of existing workers. Using logitmodels, we find that the probability of wages being bargained between the employeeand the employer is less in the case of larger firms. On the contrary, the larger firms aremore likely to determine wages according to a predefined wage structure. In general,the presence of flexible benefits and variable pay reduces the probability of wagesbeing determined pursuant to a predefined wage structure. The results also indicate theworker´s educational level, experience and job duties are the main determinants of thewages of newly hired employees.