Wage growth and bargaining in the minimum wage era

Transcription

1 Wage growth and barganng n the mnmum wage era Kerry L. Papps * Lttle s known about the long-term effects of mnmum wages on workers. As demonstrated n ths paper, a mnmum wage should have a negatve effect on a worker s subsequent wage growth when wages are determned by ndvdual barganng, but no effect when wages are determned by collectve barganng. These predctons are tested usng longtudnal data from the Unted Kngdom. Workers who were affected by the mnmum wage before age 22 are found to have sgnfcantly lower wage growth later n lfe than others, but only f they worked at establshments that dd not negotate wth unons over tranng. Ths dfference n wage growth appears to be drven by dfferences n the levels of tranng provded. 1. Introducton Although t has been extensvely debated by economsts, a growng consensus has formed that mnmum wage laws have lttle effect on employment levels, even though they rase hourly wage rates (Belman and Wolfson 2014). Ths may mply that employers are able to pass the costs onto consumers n the form of hgher prces (Allegretto and Rech 2018), absorb the costs and make lower profts, at least n the short run (Bell and Machn 2018), or that workers respond by rasng productvty and reducng turnover (Papps 2012). Alternatvely, frms mght attempt to recoup the costs assocated wth the mnmum wage by economsng on aspects of the total employment package other than the basc hourly wage. One way of dong ths s to reduce the amount of on-the-job tranng offered to workers. In a semnal paper, Becker (1962) establshed that when the labour market s compettve, frms wll only pay for tranng f t s specfc to the frm. Ths mples that frms should cut back on general tranng whenever they are compelled to rase wages due to the mnmum wage (Rosen 1972). More recent work has shown that the stuaton s more complex when there s not perfect competton n the labour market (Acemoglu and Pschke * Department of Economcs, Unversty of Bath. Ths research s based on a report commssoned by the Low Pay Commsson. The author would lke to thank Paul Gregg, Rebecca Rley, Alan Mannng, Tm Butcher, Bob Ellott, Steve Machn, Felx Rtche for ther helpful suggestons, as well as partcpants at the Low Pay Commsson Research Symposum, September 2014, Royal Economc Socety conference, Aprl 2015, and Work, Pensons and Labour Economcs Study Group conference, July 2015, and at presentatons at the Unverstes of Brstol, Cyprus and Kent and Unversty College London. In addton, he s grateful to the staff of the UK Data Servce for ther assstance n accessng and analysng the ASHE data. 1

2 1999) and that frms mght actually rase general tranng for some workers when the mnmum wage ncreases (Acemoglu and Pschke 2003). Prevous emprcal research has not conclusvely establshed whether the mnmum wage affects ether the prevalence of on-the-job tranng or the rate of wage growth later n a worker s career (whch should change f tranng levels are adjusted). Some authors have reported a negatve relatonshp, whle others have found nsgnfcant results. Acemoglu and Pschke s work ponts to the mportance of the level of compettveness n the labour market, but prevous studes of the relatonshp between mnmum wages and long-run wage growth have gnored the role of another mportant labour market nsttuton: trade unons. The recent resurgence of popularty of mnmum wages n Western countres has potentally exacerbated the declne n unons roles n settng wages. However, unons bargan wth frms over more than just pay levels. Specfcally, f they negotate over the provson of on-the-job tranng, they may be able to nsulate young workers from any harmful effects of the mnmum wage. The nature of the relatonshp between the mnmum wage and tranng has mportant mplcatons for polcy makers. The fact that on-the-job tranng has a large effect on subsequent wage growth and most tranng takes place durng the early stages of workers careers s often gven as a justfcaton for allowng young workers to be pad wages less than the adult mnmum (Eyraud and Saget 2005). However, f there s no lnk between the mnmum wage and tranng, such youth rates or submnmum wages are unnecessary and wll only serve to prevent younger workers from reachng pay equalty wth adults. Ths paper examnes whether the long-run effects of the mnmum wage on wage growth vary accordng to the nature of wage barganng. A smple model of on-thejob tranng s presented, whch mples that the mnmum wage should have dfferent effects on a worker s subsequent rate of wage growth dependng on whether the level of tranng s determned by ndvdual barganng or collectve barganng. Longtudnal data from the Annual Survey of Hours and Earnngs and Workplace Employment Relatons Survey n the Unted Kngdom are then used to test these predctons. A quas-natural experment approach s taken, whch nvolves comparng the wage growth of otherwse dentcal workers who were affected by the youth mnmum wage to dfferent degrees because they entered the labour market n dfferent years. 2

3 Ths paper provdes the frst evdence of how the effects of the mnmum wage on wage growth vary by barganng system and, consequently, on the effcacy of youth rates n rasng the wages of low-wage workers over ther workng lves. In addton, the results suggest a role that unons mght play n an era n whch mnmum wage laws have eroded ther tradtonal role of rasng wages. 2. Background Early emprcal studes of the tranng effects of the mnmum wage used workers wage growth rates as a proxy for ther level of on-the-job tranng. These studes tended to fnd a negatve relatonshp between the mnmum wage and wage growth (Leghton and Mncer 1981; Lazear and Mller 1981; Hashmoto 1982), whch s consstent wth employers cuttng back on tranng n response to the mnmum wage. However, as noted by Grossberg and Sclan (1999), there are a number of problems wth usng wage growth as a proxy for tranng: wage growth depends on the fracton of job-specfc tranng that takes place and the relatve barganng power of frms and workers; other theores of pay structure (such as Lazear s (1979) delayed compensaton model) predct lower wage growth n response to the mnmum wage for reasons ndependent of productvty; and usng wage changes across all workers fals to account for the fact that most tranng occurs early n a worker s career. As a consequence of these problems, more recent studes have examned the effect of mnmum wages on drect measures of tranng partcpaton. Some of these fnd negatve effects (Schller 1994; Neumark and Wascher 2001), whereas others fnd an nsgnfcant relatonshp (Smpson 1984; Grossberg and Sclan 1999; Acemoglu and Pschke 2003; Arulampalam et al. 2004; Farrs and Pedace 2004). Although the use of drect nformaton on tranng avods the ssues noted by Grossberg and Sclan, t suffers from a number of other problems. Frstly, the avalable tranng data are almost always poor measures of the breadth and extent of actual actvtes that rase a worker s future productvty. Secondly, the benefts of some tranng mght be very small or mght be prmarly receved by frms, meanng that they have lttle drect effect on a worker s welfare. Fnally, a narrow focus on tranng s unable to provde evdence to polcymakers of how much the ntroducton of a youth mnmum wage rate mght rase young workers ncomes over ther entre careers. 3

4 For these reasons, ths paper revsts the lnk between mnmum wages and subsequent wage growth, usng panel data and a quas-natural expermental desgn to address Grossberg and Sclan s concerns. Two recent papers have examned how a person s exposure to the mnmum wage whle young affects hs/her subsequent wage outcomes. However, nether of these takes nto account the extent to whch the mnmum wage affects a specfc young worker s wage (and potentally level of tranng). Neumark and Nzalova (2007) only observe mature workers and determne what mnmum wage they were lkely to have faced n the past, based on ther age and current state of resdence. Cardoso (2009) used longtudnal data over a long perod, but assgned a mnmum wage based only on the year workers were born and when they entered the labour market, not on whether they were actually bound by the mnmum wage durng ther youth. Neumark and Nzalova found evdence of a negatve long-term effect of the mnmum wage on wages, whereas Cardoso found evdence of a postve effect on wages but also a negatve effect on the wage-tenure profle. Furthermore, unlke other studes that have looked at wage growth, the focus here s on the dfference n wage growth between mnmum wage workers n two sectors of the economy jobs wth ndvdual wage barganng and jobs wth collectve barganng. The only related prevous study was Acemoglu and Pschke (2003), who analysed how the effects of the mnmum wage on tranng vary by level of labour market compettveness, as measured by ndustry wage dfferentals. They found some weak evdence that tranng s postvely related to the mnmum wage among workers n less compettve sectors of the Unted States economy. However, Acemoglu and Pschke were restrcted by ther data source (the Natonal Longtudnal Survey of Youth 1979) to focus on tranng undertaken between ages 22 and 29, whch s lkely to be too late to capture most of the general on-the-job tranng undertaken by mnmum wage workers. These data also provded rather mprecse measures of a worker s hourly wage (and hence whether the worker was bound by the mnmum wage), as they rely on retrospectve survey responses. 3. The Unted Kngdom Natonal Mnmum Wage A natonal mnmum wage was ntroduced n the Unted Kngdom on 1 Aprl 1999, coverng all workers aged 18 and over. Intally, ths conssted of an adult rate for those aged 22 and over, set at 3.60, and a development rate for those aged 18-21, 4

5 set at On 1 October 2004, a (lower) rate was ntroduced for workers aged On 1 October 2010, the age lmt for the adult rate was lowered to 21 and an apprentce rate was ntroduced, for apprentces aged or those aged 19 and over and n ther frst year of ther apprentceshp. The mnmum wage rates are revewed each year by the Low Pay Commsson, an ndependent advsory body whch makes recommendatons to the Government. The Government has chosen to ncrease all of the rates each October snce 2000, but by varyng amounts each year. By October 2010, the adult rate was 5.93, the development rate was 4.92, the rate was 3.64 and the apprentce rate was The mnmum wage apples to all workers who have a contract to do work personally, rather than for a customer or clent. Hence, t apples to casual workers, temporary workers and agency workers, but not to the self employed. For the purposes of the mnmum wage, a worker s hourly wage s calculated by dvdng hs/her total gross pay for the reference perod (normally a month) by total hours worked durng that perod. Incentve pay s ncluded n ths calculaton, but not premum pay for shft or overtme work. All tme spent dong on-the-job tranng (and tme spent travellng to and from t) s subject to the mnmum wage. 4. Theory Consder a model n whch each worker, ndexed by, s assumed to work n the labour market for T 1 perods and wshes to maxmse dscounted lfetme earnngs: W t w T t t t0 (1 r), (1) where w s the worker s wage n perod t and r s the dscount rate. A worker s margnal revenue product n each perod defned as the value n a perfectly compettve product market of what the worker produces s assumed to consst of a fxed component μ, whch captures dfferences n productvty between workers, and a tme-varyng component γ, whch captures the fact that productvty ntally ncreases over the lfe cycle, before fallng. Workers are able to engage n onthe-job tranng, but only wth the permsson of ther employer. Tranng s assumed to take place durng the ntal perod of employment only and to produce human captal gans for the followng T perods. The cost of tranng manfests tself as a fall of θ n margnal revenue product n the frst perod, where 0, ], reflectng the [ max 5

6 fact that workers must take tme off ther regular dutes to undergo tranng. The benefts of tranng are a rse of f ( ) n margnal revenue product n perods 1 to T. To ease exposton, the followng functonal form s used: ft ( ) t, where t1 t and t t where s the frst dfference operator. t 1, t, (2) Equaton 2 s consstent wth a settng n whch the benefts from tranng (n terms of ncreases n margnal revenue product) are realsed over multple perods, but that the largest gans come frst and that eventually the growth rate n margnal revenue product falls to that of untraned workers. All tranng s assumed to be general n nature and, hence, perfectly transferable to other jobs. It wll be assumed that the margnal cost of tranng s outweghed by the expected margnal benefts of tranng over a worker s career, so that: T t1 t (1 r) t 1. (3) Frms are assumed to maxmse proft n each perod and to operate n an mperfectly compettve product market, so that there s a surplus equal to per worker each perod. 1 Two alternatve assumptons about the nature of barganng n the labour market are now dscussed n turn. Indvdual barganng If workers bargan ndvdually, t s assumed that they wll have nsuffcent power to obtan any of the product market rents. Therefore, worker s wage n any perod s equal to hs/her margnal revenue product: w t 0 f t 0. (4) t t f t 1,..., T Suppose ntally that there s no mnmum wage. The level of tranng has no effect on a frm s profts snce t s pad for by workers through lower wages n perod 0, but the frm can maxmse the worker s utlty by agreeng to provde the optmal level of tranng. Gven the assumpton made about tranng costs n equaton 3, t must be the case that all frms choose the maxmum amount of tranng avalable, 1 The presence of a surplus mplctly assumes that the workers and frms are barganng over ponts on a vertcal contract curve. 6

7 max, whch s the same for all workers. 2 From equaton 4, a worker s wage n the ntal perod s w. * 0 0 max Suppose now that a mnmum wage w s ntroduced. The frm s proft maxmsaton problem n perod 0 can be wrtten as follows: max 0 w0, subject to w 0 max{ 0, w}. (5) Obvously, f the mnmum wage s set below amount of tranng takng place. However, f * w 0, t wll have no effect on the w 0 max, the mnmum wage wll prevent the optmal level of tranng from takng place, because the frm s profts wll fall n ths case. Instead, the level of tranng allowed by the frm wll be: w w w. (6) * 0 max 0 Equaton 6 represents a case of perfect crowdng out between the mnmum wage and the amount of tranng. As Becker (2009) explans, n a perfectly compettve labour market frms provde general tranng only f they [do] not have to pay any of the costs. If the mnmum wage rses so hgh that tranng s cut to zero, the frm wll retan the worker as long as t stll makes excess profts from dong so. Further mnmum wage ncreases wll have no effect on tranng. 3 Therefore, a complete descrpton of the frm s tranng decson s as follows: 0 If w max max w w 0 * 0 f w w f w * 0 f * 0 w 0 0 w 0. (7), the frm wll make negatve profts n perod 0, so wll choose to lay off the worker. Snce tranng s only provded n perod 0, f the frm makes non-negatve profts n that perod, t must also do so n all subsequent perods. 2 Ths contrasts wth Acemoglu and Pschke s (2003) model, whch assumed that no tranng takes place n the absence of a mnmum wage. 3 Because both γ and β ncrease over tme, as the mnmum wage rses, t wll bnd frst n perod 0, then n perod 1 and so on. If the supernormal profts are hgh enough, t s concevable that the frm wll choose to renstate tranng once the mnmum wage s rased beyond a certan level, because t knows t wll keep all the returns from the traned worker. Ths s the concept behnd Acemoglu and Pschke (2003). However, no evdence of a postve relatonshp between the mnmum wage and tranng s found over any wage range (as seen n the frst column of Table 3). 7

8 Collectve barganng Suppose now that workers bargan collectvely and obtan a share,, of the total surplus. The level of wll be determned by the barganng power the worker s unon has. The unon can negotate wth the frm to provde ts share of the surplus,, as a combnaton of employer-provded tranng n perod 0,, and a wage premum n each perod,. Hence, n the absence of a mnmum wage, the worker s wage schedule wll be: w t 0 t t f t 0. (8) f t 1,..., T Rather than the level of tranng beng solely determned by the frm, t wll now be determned by the jont barganng of the unon and frm. If the unon wshes to maxmse a representatve worker s expected earnngs over hs/her entre career, ts objectve wll be as follows: max, T T, subject to t. (9) t (1 ) (1 r T t t t1 (1 r) t0 r t0 ) Snce every pound spent on tranng yelds more over the worker s lfetme than does an addtonal pound n wages (and snce ths s the case for every worker), the unon should prortse negotatng for the frm to pay for the optmal amount of * tranng n perod 0, so that max. Once ths has been ensured, the remnder of the worker s share of the surplus can then be demanded n the form of a wage premum, so that: T * t (1 r). (10) max t0 In the absence of a mnmum wage, the dstncton between negotatng over tranng and negotatng over pay s rrelevant, because ndvdual workers can always arrange to pay for addtonal tranng out of ther wages, as n the ndvdual barganng case. Once a mnmum wage s mposed, however, the frm wll attempt to recoup costs by cuttng back on any ndvdually-arranged tranng. As long as the unon has reached an agreement that the frm provde the optmal amount of tranng, ths wll not be possble and the frm wll have to absorb the costs of the mnmum wage, but t wll contnue to hre the worker, as long as t makes non-negatve expected profts, whch requres that w 0 max. Hence, the exstence of 8

9 collectve barganng ensures that the optmal amount of tranng contnues to be offered, even n the presence of a mnmum wage. Equlbrum wage growth Regardless of the nature of barganng, the change n a worker s wage between any two post-tranng perods s gven by the followng: w. (11) t Snce t t Under ndvdual barganng, the optmal level of tranng s gven by equaton 7. s always postve, a worker s perod 0 wage gap should have a negatve effect on hs/her subsequent wage growth (up to a certan pont), as frms reduce levels of on-the-job tranng. Under collectve barganng, the optmal tranng level s fxed at max, so the wage gap should have no effect on subsequent wage growth. The relatonshp between wage growth and the wage gap n the two scenaros s depcted n Fgure Data The analyss draws prmarly on data from the Annual Survey of Hours and Earnngs (ASHE), whch s an annual survey that collects data on the wages, work hours and other employment arrangements of around 1% of the UK workng populaton (Offce for Natonal Statstcs 2013). Basc addtonal nformaton, such as age and sex, s also ncluded. The ASHE was ntroduced n 2004 and replaced the New Earnngs Survey (NES). However, by applyng ASHE methodologes to NES data for the perod, the Offce for Natonal Statstcs has produced ASHE datasets for 1997 onwards. The analyss n ths study uses data for The ASHE sample s drawn from HM Revenue and Customs Pay As You Earn (PAYE) regster, based on the last two dgts of a worker s Natonal Insurance Number. Survey forms are sent to all employers of the selected workers to complete. The questons n the ASHE refer to a reference week, whch s n early Aprl of each year. Snce the responses are provded by employers rather than by employees, the ASHE wage and hours data are consdered to be hghly accurate, compared to tradtonal household surveys and censuses. If a person does not work n a gven year, he/she wll not appear n the dataset. Therefore, the only way to determne whether someone has moved out of employment 9

10 s by ther absence from the data n a gven year. Obvously, ths wll also nclude people who have moved abroad or ded. However, as long as the fracton of people makng these transtons s constant across the wage dstrbuton, ths wll not bas the results from the emprcal strategy outlned n the next secton. Workers mght also be absent from the ASHE f ther employers fal to respond to the questonnare or f they are not ncluded n the PAYE regster because ther earnngs fall below the Natonal Insurance Lower Earnngs Lmt. For the analyss, the sample s restrcted to those who were aged between 22 and 31, had full-tme jobs and who were employed n the followng year. In cases where a person reported more than one full-tme job n a year, only the job on whch he/she worked the most hours s ncluded. The choce of age range ensures that all ndvduals n the sample are observed n the ASHE between ages 16 (when they are able to leave school) and Ths age range durng whch people are subject to the year-old rate or the development rate for ages (or snce 2010) s ntally assumed to be the phase of a worker s career n whch on-the-job tranng takes place (perod t 0 n the model of the prevous secton). The sample s further restrcted to those who had a full-tme job at some pont between 16 and 21 and who were not bound by the mnmum wage when they frst entered the labour market. The former restrcton ensures that most unversty graduates are omtted from the sample, so that those ncluded have relatvely low levels of human captal and a greater need for general on-the-job tranng. The latter restrcton ensures that there s no downward bas n the estmated effect of the mnmum wage on subsequent wage growth, snce workers who are ntally hred at the mnmum wage may already be recevng less tranng than they would n the absence of a mnmum wage. As seen n Fgure 1, the magntude of the mnmum wage effect s equal to the dfference between a person s unconstraned perod 0 wage and the mnmum wage, w * w 0. The emprcal analyss follows ths, as well as the approach used by Lnneman (1982) and Curre and Fallck (1996), n constructng a treatment varable measurng how much extra an employer must pay to retan a current employee after a mnmum wage ncrease. The treatment varable, WAGEGAP, measures the cumulatve effect of all mnmum wage ncreases between 16 and 21 on person. It s 4 Specfcally, durng the sample perod, young people were allowed to leave school durng the school year n whch they turned

11 defned as follows, where AGEt s the person s age n year t, w s hs/her current hourly wage (n 2012 pounds, adjusted usng the RPI) and w(t 1 ) s the relevant mnmum wage n the followng year (takng nto account the worker s age): WAGEGAP max{ w. (12) 16 AGE t 21 (t1 ) wt,0} About 11% of the workers n the sample (accountng for 9% of the observatons) were bound by the mnmum wage sometme between ages 16 and 21. Means for the man varables used n the analyss are gven n panel A of Table 1, separately for those workers who were bound by the mnmum wage before age 22 and those who were not. Compared to the unbound workers, the bound workers earn less, are more lkely to be male and are less lkely to have job wth a collectve agreement. Among bound workers, average annual wage growth was 34 pence, whereas among the unbound workers, t was 47 pence. To examne the effect of collectve barganng, the analyss draws on a queston n the ASHE whch asks whether a worker s pay was set wth reference to an agreement affectng more than one employee, for example, agreements wth trade unons or workers commttees. A second wage gap varable was calculated, takng nto account only those observatons n whch a worker was covered by a collectve agreement between ages 16-21, as follows: COLAGWAGEG AP COLAG max{ w, (13) 16 AGE t 21 t (t1 ) wt,0} t where COLAG t s a dummy for whether a worker was covered by a collectve agreement n a gven year. COLAG was defned as the fracton of years durng the tranng perod n whch the ndvdual had a collectve agreement (and therefore ranges from zero to one). Fgure 2 plots average real wages between ages 16 and 31, accordng to whether or not a person was bound by the mnmum wage before age 22 and whether or not they had spent most of ther tme on collectve agreement jobs before age 22. Overall, wages ncrease steadly wth age. The unbound group has very smlar wages at each age level, regardless of whether workers had collectve agreement jobs or not. The bound group has lower wages than the unbound group and has smlar wages before age 22, regardless of collectve agreement status. However, among the bound workers, those who had collectve agreements before 22 experenced smlar wage 11

12 growth to the unbound group between 22 and 31, whereas the non-collectve agreement group fell further below the unbound group. The next secton examnes whether ths dfference n wage growth perssts, once the effects of other possble determnants are controlled for. The ASHE contans no nformaton on the nature of barganng between frms and unons or on the prevalence of tranng among workers. Therefore, the analyss draws on supplementary data from the Workplace Employment Relatons Survey (WERS) The WERS 2004 conssted n part of ntervews wth 2,295 managers at workplaces wth 5 or more employees, conducted between February 2004 and Aprl In each workplace, the most senor manager responsble for employment relatons and personnel ssues was selected. Managers were asked what proporton of experenced workers n the largest occupaton n the workplace had been gven tme off work to undertake tranng over the precedng 12 months and the average number of days of tranng that was undertaken. In addton, they were asked whether management normally negotated wth, consulted, nformed or dd not nform unons about rates of pay, tranng of employees, hours of work, holday enttlements, penson enttlements, recrutment or selecton of employees, grevance procedures, dscplnary procedures, staffng plans, equal opportuntes, health and safety, and performance apprasals. The WERS data are merged nto the ASHE sample at the establshment level, usng the workplace seral number. Means for the merged sample are reported n panel B of Table 1. The sample s much smaller than the full ASHE sample. Because the WERS data are merged n at the establshment level, people who worked at large establshments when they were young are more lkely to be n the matched sample. However, although average wage growth s slghtly lower than n the full ASHE sample, the dstrbuton of other characterstcs s smlar. To examne the effect of specfc types of barganng behavour, two further treatment varables are defned usng the WERS varables, analogous to COLAGWAGEGAP. These measure the cumulatve effect of the mnmum wage on young workers only at frms whch negotated over tranng or negotated over pay: NEGTRAINWA GEGAP NEGTRAIN max{ w, (14) 16 AGE t AGE t 21 t (t1 ) wt,0} NEGPAYWAGE GAP NEGPAY max{ w, (15) t (t1 ) wt,0} 12

13 where NEGTRAIN t and NEGPAY t are dummy varables ndcatng whether worker worked at a frm that negotated over tranng or pay, respectvely, n year t. Lkewse, NEGTRAIN and NEGPAY measure the fracton of years between ages 16 and 21 that the worker worked at a frm that negotated over tranng or pay, respectvely. 6. Analyss The emprcal strategy s to compare the wage growth rates of otherwse dentcal workers who have dfferent values of WAGEGAP because they entered the labour market at dfferent ponts n tme and hence were subject to dfferent values of the mnmum wage durng ther youth. The wage gap wll vary for a number of reasons: the overall ntroducton of the natonal mnmum wage n 1999, the ntroducton of the and apprentce rates, the lowerng of the age of elgblty for the adult rate and the annual ncreases n all rates by dfferent amounts. Results usng the ASHE sample To begn wth, the followng basc specfcaton s used: w WAGEGAP w AGE X ψ u where ( t 1) t t t t. (16) w s a person s real wage durng hs/her frst year n full-tme work (between ages 16 and 21) and controls for dfferences n wage growth that are due to dfferences n nherent productvty across people. Hence, the specfcaton compares workers who ntally earn the same wage, but who enter the labour market n dfferent years and therefore experence dfferent wage rses before 21 due to changes n the mnmum wage. AGE s ncluded as a proxy for the terms n equaton 11. X s a vector of control varables, comprsng a person s wage gap n year t (that s, max{ w(t 1) wt,0} ) and a dummy varable for whether the person s male. The contemporaneous wage gap controls for the possblty that workers wages wll grow because they contnue to be bound by the mnmum wage after age 21. λ s a year fxed effect and u s an error term. All standard errors are clustered by person. The frst column of Table 2 presents the results of estmatng equaton 16 usng the full ASHE sample. The youth wage gap (WAGEGAP) has an nsgnfcant coeffcent, but the ntal real wage has a sgnfcant postve effect. Among the 13

14 control varables, the contemporaneous wage gap has a coeffcent that s sgnfcantly larger than the value of 1 predcted, men are found to have sgnfcantly greater wage growth than women and wage growth s found to declne wth age. Although WAGEGAP has no overall effect on wage growth, the theory n Secton 2 predcts that t should only have a negatve effect on wage growth among workers who were covered by ndvdual agreements. In order to allow the coeffcent on WAGEGAP n equaton 16 to vary accordng to the type of wage agreement a person had before age 22, COLAGWAGEGAP s added as a regressor. COLAG s also added n order to control for systematc dfferences n wage growth between those who had collectve agreements when they were young and those who dd not, whch mght be caused by general dfferences n the amount or type of tranng provded n the two sectors or by the non-random selecton of workers nto each sector: w ( t 1) 0 1WAGEGAP 2COLAGWAGEG AP 3COLAG 4 AGE X w φ v 5 t t t t. (17) A sgnfcant estmate of 2 n equaton 17 ndcates a dfference n the relatonshp between wage growth and the wage gap between the collectve and noncollectve agreement groups. As seen n the thrd column of Table 2, the overall wage gap has a sgnfcant negatve coeffcent, ndcatng that the mnmum wage has a negatve effect on wage growth among those workers who were not covered by a collectve agreement. The value of ths ndcates that a wage ncrease of 1 between the ages of 16 and 21 brought about by the mnmum wage wll result n an 11 pence decrease n annual wage growth after 21, equvalent to an elastcty of at the mean. 5 However, consstent wth theory, the effect of the wage gap s sgnfcantly dfferent for those workers who were covered by a collectve agreement before 22 and the overall effect of the wage gap s nsgnfcant for these workers. The assumpton of decreasng returns to tranng (mpled by the shape of β n the model) means that the effect of the wage gap should fall as a worker ages. To examne ths, the regresson was run separately for workers aged and n columns three and four n Table 2. As predcted, the coeffcents on WAGEGAP and COLAGWAGEGAP were much stronger among the younger group. A bndng 1 ncrease n the mnmum wage between 16 and 21 s found to yeld a 16 pence 5 Takng nto account equatons 8 and 12, ths result mples that every pound of tranng before age 22 yelds benefts that grow by 11 pence a year between ages 22 and 31 on average. 14

15 decrease n annual wage growth between 22 and 26 (equvalent to an elastcty of 0.387), but no effect on wage growth between 27 and 31. Overall, the results suggest that the exstence of the 16-17, and apprentce rates of the mnmum wage has sgnfcantly rased wage growth among low-wage workers. Compared to a scenaro n whch the adult mnmum wage appled to all workers aged 16 and over, the average worker who was bound by the (actual) mnmum rate experenced 4.0 pence hgher per annum wage growth between ages 22 and 31 (or 12% at the mean). However, ths was solely drven by workers wth noncollectve agreement jobs: among ths group only, the effect s 7.4 pence (or 23% at the mean). Robustness tests A lkely explanaton for the larger-than-expected coeffcents on the contemporaneous wage gap n Table 2 s that workers near the bottom of the wage dstrbuton n a gven year tend to experence stronger wage growth regardless of the level of the mnmum wage (Dckens et al. 2015). If a person s poston n the wage dstrbuton s strongly correlated wth hs/her wage before age 22, ths mght bas the coeffcents on WAGEGAP and COLAGWAGEGAP. To control for ths, a set of dummes for a person s centle n the entre U.K. wage dstrbuton n a gven year are added as regressors n the frst column of Table 3. The coeffcent on the contemporaneous wage gap falls and s no longer sgnfcantly dfferent from the hypothessed value of 1. Age now has a postve coeffcent. However, the coeffcents on WAGEGAP and COLAGWAGEGAP are lttle changed and reman sgnfcant. The model presented n Secton 4 mples that when the wage gap s hgh enough, wage growth for the ndvdual barganng sector should fall to zero and that further mnmum wage ncreases should have no effect on wage growth. To examne whether equaton 17 obscures a non-lnear relatonshp, the squares of both WAGEGAP and COLAGWAGEGAP are added as regressors n the second column of Table 3. There s no evdence that the wage growth-wage gap profle flattens when the mnmum wage s partcularly hgh. The estmated relatonshp, whch s depcted n Fgure 3, s close to lnear and resembles the downward-slopng porton of Fgure 1. Excess profts are lkely to vary by ndustry, due to dfferences n the degree of compettveness of the product market. Snce collectve agreements are lkely to occur 15

16 only n ndustres where there are hgh rents, t s possble that the collectve agreement effect that has been dscussed so far smply reflects dfferences n the level of product market compettveness that are unrelated to the presence of collectve barganng. In addton, tranng s lkely to vary by ndustry due to dfferent rates of turnover, whch may also be correlated wth the wage gap measures. To control for ths, dummy varables were added to equaton 17 for the fve-dgt ndustry sub-class of each person s frst full-tme job. 6 Ths s found to have lttle effect on the results (as reported n the thrd column of Table 3). Even wthn narrowly-defned ndustral groups, havng an ndvdual agreement job results n sgnfcantly lower wage growth later n a worker s career, compared to workers on collectve agreement jobs wth the same wage gap. In addton to the overall level of rents per worker, the amount of tranng provded should be affected by the barganng power of the unon ( n the model presented earler). The degree of barganng power of a unon n the ASHE sample s unknown, but t s lkely to be related to the number of workers covered by an agreement. Usng nformaton reported n the ASHE, workers wth collectve barganng were classfed as beng represented by sngle-company agreements (organsatonal or workplace agreements) or multple-company agreements (natonal, sub-natonal or ndustry agreements). Unons whch negotate multple-company agreements are expected to have more barganng power than unons whch negotate at the company level only. As seen n the last column of Table 3, no sgnfcant dfference s found between the two types of collectve agreement. However, wage growth among those who worked at frms wth sngle-company agreements s slghtly lower, consstent wth the predctons of the model. In the results presented so far, all work done before age 22 s ncluded n the calculaton of the wage gap measures and all workers who commenced full-tme work before ths age are ncluded n the sample. Some of these workers wll have attaned tertary qualfcatons and therefore wll consttute a poor comparson group for the mnmum wage workers of nterest n ths study. To examne how robust the results are to ths decson, lower age cut-offs were used. 7 Table A1 reveals that the coeffcents on WAGEGAP and COLAGWAGEGAP have the same sgns when 19, 20 6 The UK Standard Industral Classfcaton of Economc Actvtes 2003 was used. 7 No nformaton on educaton s avalable n the ASHE. 16

17 or 21 are used as the cut-off age, although the coeffcent on WAGEGAP loses ts sgnfcance. The dfference n wage growth between mnmum wage workers wth collectve and ndvdual agreements remans hghly sgnfcant n all cases. Results usng the ASHE-WERS sample The results presented so far suggest that workers who have jobs wth ndvdual barganng experence worse wage growth later n lfe when the mnmum wage s hgh. However, the model presented n Secton 4 specfcally requres that unons bargan wth frms to preserve tranng n order to prevent frms from cuttng tranng n response to the mnmum wage. Barganng only over pay s not suffcent, because frms are left free to cut tranng to offset ncreased wage costs n ths case, as n the ndvdual barganng sector. In order to observe the specfc nature of barganng between unons and frms and to be certan that barganng over tranng s responsble for the observed dvergence n wage growth, the merged ASHE-WERS data are used. As seen n panel B of Table 1, only 46% of workers n the matched sample worked at frms who negotated wth unons over tranng when they were young, even though 73% worked at frms who negotated over pay, ndcatng that many unons negotate only over pay and not over other job condtons. Overall, negotaton over tranng s seen to be effectve at rasng tranng levels. In Table A2, measures of tranng are regressed on a seres of negotaton varables at the establshment level. Ths confrms that frms whch negotate over tranng provde tranng to a greater fracton of ther workers (n the frst column) and offer more days of tranng on average (n the second column). Negotaton over pay s assocated wth lower levels of tranng, perhaps ndcatng that frms attempt to offset the costs of payng hgher wage prema by reducng tranng provson. In the frst column of Table 4, equaton 17 s estmated on the matched ASHE- WERS sample, ths tme replacng COLAGWAGEGAP and COLAG wth NEGTRAINWAGEGAP and NEGTRAIN. Although the results are weaker than before (reflectng the smaller sample sze), there s a sgnfcant dfference n long-run wage growth between workers whose tranng levels were negotated between frms and unons and workers whose tranng levels were set by the frm unlaterally. When NEGPAYWAGEGAP and NEGPAY are added n the second column, they are found 17

18 to be nsgnfcant, confrmng that unons must negotate wth frms over tranng not just pay n order for workers to avod poor future wage growth. Fnally, the fracton of workers at the establshment who were provded tranng was added to the regresson n the fnal column of Table 4. Ths s found to have a sgnfcant postve effect on subsequent wage growth, suggestng that the tranng reported by frms n the WERS s of value to workers. Moreover, the coeffcent on NEGTRAINWAGEGAP becomes nsgnfcant once tranng s added, consstent wth the noton that the effects of the mnmum wage on future wage growth operate solely va tranng and not some other mechansm, such as the wthdrawal of delayed compensaton schemes. 7. Concluson Ths paper has examned whether the mnmum wage leads to lower wage growth later n a worker s career and how ths dffers accordng to the nature of barganng on a job. A smple model of tranng and proft maxmsaton mples that beng pad the mnmum wage when young should lead to lower wage growth thereafter for those who work n sectors of the labour market wth ndvdual barganng, but that the mnmum wage should have no effect on wage growth for those whose wages are determned by collectve barganng. Ths s because unons are able to negotate for employers to provde and pay for tranng, whch cannot be wthdrawn to offset the costs of the mnmum wage. Data from the Annual Survey of Hours and Earnngs n the UK reveal support for these predctons. Workers who receved large wage gans due to the mnmum wage before the age of 22 experence lower wage growth between the ages of 22 and 31, but only f they had ndvdual employment agreements before 22; the relatonshp s nsgnfcant for those who were covered by collectve agreements. Addtonal data from the Workplace Employment Relatons Survey confrm that ths dfference s drven by dfferences n the amount of tranng receved. Overall, the results ndcate the contnued mportance of unons n rasng wage rates, despte the popularty of mnmum wages, but suggest that negotatons over tranng should not be consdered as perpheral to a unon s objectves as they have tradtonally been. References 18

19 Acemoglu, Daron, and Jörn-Steffen Pschke The structure of wages and nvestment n general tranng. Journal of Poltcal Economy, 107(3): Acemoglu, Daron, and Jörn-Steffen Pschke Mnmum wages and on-the-job tranng. Research n Labor Economcs, 22: Allegretto, Sylva, and Mchael Rech Are local mnmum wages absorbed by prce ncreases? Estmates from nternet-based restaurant menus. Industral and Labor Relatons Revew, 71(1): Arulampalam, Wj, Alson L. Booth and Mark L. Bryan Tranng and the new mnmum wage. Economc Journal, 114(494): C87-C94. Becker, Gary S Investment n human captal: A theoretcal analyss. Journal of Poltcal Economy, 70(5): Becker, Gary S Human captal, 3 rd edton. Chcago, IL: Unversty of Chcago Press. Bell, Bran, and Stephen Machn Mnmum wages and frm value. Journal of Labor Economcs, 36(1): Belman, Dale, and Paul J. Wolfson What does the mnmum wage do? Kalamazoo, MI: W.E. Upjohn Insttute for Employment Research. Cardoso, Ana Rute Long-term mpact of youth mnmum wages: Evdence from two decades of ndvdual longtudnal data. Dscusson Paper No. 4236, IZA, Bonn. Curre, Janet, and Bruce C. Fallck The mnmum wage and the employment of youth: Evdence from the NLSY. Journal of Human Resources, 31(2): Dckens, Rchard, Rebecca Rley, and Davd Wlknson A re-examnaton of the mpact of the UK natonal mnmum wage on employment. Economca, 82(328): Eyraud, Franços, and Catherne Saget The fundamentals of mnmum wage fxng. Geneva: Internatonal Labour Offce. Farrs, Davd, and Roberto Pedace The mpact of mnmum wages on job tranng: An emprcal exploraton wth establshment data. Southern Economc Journal, 70(3): Grossberg, Adam J., and Paul Sclan Mnmum wages, on-the-job tranng, and wage growth. Southern Economc Journal, 65(3):

20 Hashmoto, Masanor Mnmum wage effects on tranng on the job. Amercan Economc Revew, 72(5): Lazear, Edward P Why s there mandatory retrement? Journal of Poltcal Economy 87(6): Lazear, Edward P., and Frederck H. Mller, Mnmum wage versus mnmum compensaton. In Report of the Mnmum Wage Study Commsson, vol. 5, Washngton, DC: US Government Prntng Offce. Leghton, Lnda, and Jacob Mncer The effects of mnmum wages on human captal formaton. In (Smon Rottenberg, ed.) The Economcs of Legal Mnmum Wages, , Washngton DC: Amercan Enterprse Insttute. Lnneman, Peter The economc mpacts of mnmum wage laws: A new look at an old queston. Journal of Poltcal Economy, 90(3): Neumark, Davd, and Olena Nzalova Mnmum wage effects n the longer run. Journal of Human Resources, 42(2): Neumark, Davd, and Wllam Wascher Mnmum wages and tranng revsted. Journal of Labor Economcs, 19(3): Offce for Natonal Statstcs Annual Survey of Hours and Earnngs, : Secure Access [computer fle]. 4th Edton. Colchester, Essex: UK Data Archve [dstrbutor], June SN: Papps, Kerry L The effects of socal securty taxes and mnmum wages on employment: Evdence from Turkey. Industral and Labor Relatons Revew, 65(3): Rosen, Sherwn Learnng and experence n the labor market. Journal of Human Resources, 7(3): Schller, Bradley R. (1994). Movng up: The tranng and wage gans of mnmum wage entrants. Socal Scence Quarterly, 75(3): Smpson, Wayne An econometrc analyss of ndustral tranng n Canada. Journal of Human Resources, 19(4):

21 Fgure 1 Predcted relatonshp between wage growth and wage gap n perod 0 Δw t Δβ tθ max Indvdual barganng Collectve barganng θ max * w w 0 21

22 Fgure 2 Mean wages for workers, by collectve agreement and bound status when young Notes: Bound workers are those workers who earned less than the followng year s mnmum wage at any pont between ages 16 and 21. The collectve agreement group refers to those workers wth more perods on jobs wth collectve employment agreements between ages 16 and 21 than on jobs wthout collectve agreements. ASHE survey weghts are used. 22

23 Fgure 3 Predcted wage growth by youth wage gap Notes: The predcted wage growth s calculated from the model n the second column of Table 3, settng all other varables at ther means. The horzontal axs ranges from 0 to 4.98, whch s the 99% percentle of WAGEGAP among workers who were bound by the mnmum wage before age

24 Table 1 Descrptve statstcs for the estmaton samples A. ASHE sample Varable All workers Bound Unbound workers workers Annual wage growth, Δw (2012 pounds) Youth wage gap, WAGEGAP (2012 pounds) Contemporaneous wage gap (2012 pounds) Real wage (2012 pounds) Collectve agreement when young, COLAG Male Age Sample sze 64,059 5,551 58,508 B. ASHE-WERS sample Varable All workers Bound Unbound workers workers Annual wage growth, Δw (2012 pounds) Youth wage gap, WAGEGAP (2012 pounds) Contemporaneous wage gap (2012 pounds) Real wage (2012 pounds) Frm negotated tranng when young, NEGTRAIN Frm negotated pay when young, NEGPAY Male Age Sample sze 1, ,531 Notes: ASHE survey weghts are used 24

25 Table 2 Results for wage growth regressons usng ASHE data Varable All observatons Aged Aged () () () () Youth wage gap (0.036) 0.112* (0.058) 0.159** (0.074) (0.046) Youth wage gap on collectve 0.128** 0.195** agreement jobs (0.065) (0.081) (0.091) Collectve agreement when 0.058** 0.113*** young (0.027) (0.041) (0.098) Intal real wage 0.027** (0.011) 0.028** (0.011) 0.045*** (0.016) (0.034) Contemporaneous wage gap 1.795*** (0.090) 1.796*** (0.090) 1.677*** (0.092) 2.243*** (0.255) Male 0.109*** (0.021) 0.110*** (0.021) 0.145*** (0.031) (0.070) Age 0.029*** (0.006) 0.028*** (0.006) 0.038*** (0.011) (0.027) R-squared Sample sze 64,059 64,059 43,211 20,848 Notes: All regressons nclude a full set of year (13 categores) dummes. Standard errors are clustered by person and are presented n parentheses. *, ** and *** denote sgnfcance at the 10%, 5% and 1% level, respectvely. 25

26 Table 3 Addtonal results for wage growth regressons usng ASHE data Varable () () () (v) Youth wage gap 0.104* (0.059) (0.103) 0.111* (0.060) 0.111* (0.060) Youth wage gap squared (0.043) Youth wage gap on collectve agreement jobs 0.157** (0.067) (0.121) 0.125* (0.066) 0.144* (0.073) Youth wage gap on collectve agreement jobs squared (0.051) Youth wage gap on snglecompany agreement jobs (0.057) Collectve agreement when young 0.077*** (0.026) 0.055** (0.027) (0.028) 0.081* (0.044) Sngle-company agreement when young (0.042) Intal real wage 0.073*** (0.013) 0.028** (0.011) 0.021* (0.012) 0.021* (0.012) Contemporaneous wage gap 1.236*** (0.204) 1.796*** (0.090) 1.825*** (0.090) 1.826*** (0.091) Male 0.158*** (0.021) 0.109*** (0.021) 0.154*** (0.024) 0.154*** (0.024) Age 0.014** (0.006) 0.028*** (0.006) 0.029*** (0.007) 0.030*** (0.007) Wage centle dummes Yes No No No Intal ndustry dummes No No Yes Yes R-squared Sample sze 64,059 64,059 64,030 64,030 Notes: All regressons nclude a full set of year (13 categores) dummes. Standard errors are clustered by person and are presented n parentheses. *, ** and *** denote sgnfcance at the 10%, 5% and 1% level, respectvely. 26

27 Table 4 Results for wage growth regressons usng ASHE-WERS data Varable () () () Youth wage gap (0.133) (0.210) (0.125) Youth wage gap at frms that negotated over tranng 0.424* (0.235) 0.451* (0.265) (0.365) Youth wage gap at frms that negotated over pay (0.229) Frm negotated over tranng when young (0.109) (0.110) (0.107) Frm negotated over pay when young (0.156) Proporton of workers recevng tranng 0.312* (0.183) Intal real wage (0.017) (0.017) (0.017) Contemporaneous wage gap 1.844*** (0.345) 1.846*** (0.344) 1.859*** (0.343) Male 0.247** (0.112) 0.247** (0.113) 0.221* (0.115) Age (0.025) (0.025) (0.025) R-squared Sample sze 1,751 1,751 1,694 Notes: All regressons nclude a full set of year (13 categores) dummes. Standard errors are clustered by person and are presented n parentheses. *, ** and *** denote sgnfcance at the 10%, 5% and 1% level, respectvely. 27

28 Appendx Table A1 Results for wage regressons usng dfferent tranng age ranges Varable Tranng age range Youth wage gap (0.119) (0.078) (0.049) 0.112* (0.058) Youth wage gap on collectve agreement jobs 0.197*** (0.075) 0.153*** (0.054) 0.092* (0.054) 0.128* (0.065) R-squared Sample sze 23,291 39,084 51,952 64,059 Notes: All regressons nclude ntal real wage, contemporaneous wage gap, male, age, collectve agreement when young and a full set of year (13 categores) dummes. In each column, the sample perod runs from the year after the tranng perod ends to age 31. Standard errors are clustered by person and are presented n parentheses. *, ** and *** denote sgnfcance at the 10%, 5% and 1% level, respectvely. 28

29 Table A2 Establshment-level results for tranng Varable () Proporton recevng tranng () Average days of tranng Frm negotates tranng 0.044*** (0.012) 0.818*** (0.106) Frm negotates pay 0.047* (0.024) 0.780*** (0.223) Frm negotates work hours 0.148*** (0.025) (0.233) Frm negotates holday enttlements 0.087*** (0.023) 0.716*** (0.203) Frm negotates pensons 0.032** (0.013) (0.120) Frm negotates recrutment 0.103*** (0.013) 0.881*** (0.117) Frm negotates grevance procedures (0.042) (0.368) Frm negotates dscplnary procedures 0.084** (0.041) (0.364) Frm negotates staffng plans (0.011) 0.267*** (0.099) Frm negotates equal opportuntes 0.073*** (0.018) 0.413*** (0.154) Frm negotates health and safety 0.094*** (0.020) 0.937*** (0.178) Frm negotates performance apprasals 0.050*** (0.012) 0.935*** (0.108) R-squared Sample sze 4,272 3,916 Notes: All regressons nclude a full set of 3-dgt ndustry dummes. *, ** and *** denote sgnfcance at the 10%, 5% and 1% level, respectvely. 29