Wages, Employer Costs, and Employee Performance in the Firm

In this paper I use data from a survey of firms to estimate the effects of a firm's wage level on several measures of its hiring costs and the characteristics and performance of its employees. These measures include the previous experience and current tenure of its employees; subjective productivity scores for these employees; job vacancy rates; perceived ease of hiring qualified workers for the firs; and hours spent hiring and training new workers. In doing so, I distinguish the case of high wages imposed on s firm by unions from that in which the firm might be choosing its wage level in order to maximize its profits. I also provide some rough measures of the extent to which firms offset their high wage costs in each case. The results show generally positive effects of firm wages on employee experience and tenure as well as on subjective productivity scores. The firm's wages generally have negative effects on job vacancy rates and positive effects on the perceived ease of hiring qualified workers. Training time is also reduced. While the magnitude of each individual effect may not always be large or even significant, their combined effects suggest that firms offset a good deal of their higher wage costs through improved productivity and lower hiring and turnover costs among their employees.