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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Do Firms Share Their Success with Workers? The Response of Wages to Product Market Conditions
Marcello Estevao and Stacey Tevlin

Abstract: We provide strong new evidence that industry financial conditions play an important role in wage determination in the U.S. manufacturing sector. Ordinary least squares estimates of the effect of rents per worker on wages are positive and significant, but quite small. However, using two standard bargaining models, we illustrate that this may stem from a variety of econometric difficulties that plague the OLS estimates. In this paper, we are able to overcome these issues and identify the effects of the industry financial situation on wages. We do this using the U.S. input-output tables to isolate exogenous variation in an industry's product market conditions. Our instrumental variable estimates reveal a substantial amount of rent sharing in U.S. manufacturing---much more than is consistent with a purely competitive labor market.

Keywords: Wages, rent-sharing, profit-sharing

Full paper (180 KB PDF) | Full paper (378 KB Postscript)

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Last update: April 27, 2000