DETERMINATION OF THE FIRM-LEVEL WAGE RATE: THE ROLE OF EMPLOYER-EMPLOYEE SPECIFIC EFFECTS

Year 2012, Volume: 4 Issue: 2, 365 - 374, 01.12.2012

Normala Zulkifli

Abstract

This paper examines the role of employees and firm characteristics in determining
the Malaysian economy’s pay structure. It utilises a uniquely matched firm-worker
dataset from one common year (2006), which allows for a more in-depth
analysis of worker- and firm-specific effects on the individual worker’s pay.
Using this matched data, we are able to estimate the statistical firm effect, but
since we only have data for one year, we cannot therefore disentangle aspects of
this effect that are due to unobservable worker or firm heterogeneity. And so, we
adapted the two-stage estimation strategy proposed by Abowd, Kramarz, and
Morgalis (2000) in order to keep any potential simultaneity bias under control.
The result indicates that observable worker characteristics and unobserved firm-effects
are important elements of pay determination. However, firm-effects seem
to explain the variability in pay determination more than observable worker
characteristics. In addition, the relationship between pay components (average
predicted pay and firm-effect) and firm performance (productivity and
profitability) exhibits a positive tendency. This implies that higher paid workers,
either because of worker characteristics or firm-effects, are being employed in
firms that are more productive and profitable.

Keywords

Pay determination, heterogeneity, matched employer-employee data

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