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| Secret Handshake Agreement, Productivity Transfer, and Scale Premium of Wages |
| LIU Yuanchun, DING Yang
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Shanghai University of Finance and Economics;
School of Economics, Renmin University of China |
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Abstract In recent years, the problem of wage distribution imbalance between workers in China has become serious. The wage level of some enterprises, especially leading enterprises, is very high and is increasing rapidly, whereas that of some other companies remains relatively low. Why the wage level of leading enterprises is so large remains in question. According to the neoclassical theory, as long as labor flows freely, wages tend to be equalized across enterprises and the productivity gap disappears because marginal productivity is strictly equal to wages. Even if leading enterprises have higher productivity at the beginning because of their scale and capital advantages, it may only lead to greater employment and not cause drastic changes in wages. Therefore, many scholars pay little attention to the productivity gap when explaining the wage differences between enterprises.
However, in practice, the productivity advantage of leading enterprises can often be smoothly transferred to wages, known as the wage premium. According to existing explanations, the wage premium mostly stems from employees' human capital, per-capita capital, technical, and resulting per-capita productivity advantages. This paper attempts to explain the following problems from another perspective: in the enterprise scale expansion process, what type of transmission mechanism exists between enterprise productivity, per-capita productivity, and wages, and how does this mechanism evolve？ Wages are an important part of income. Clarifying the above issues is conducive to recognizing the source of the wage gap, which has important research implications.
In the theoretical dimension, this paper aims to explain the impact of productivity on wages in different situations, focusing on the role of market shares as an intermediary variable. By constructing a model of labor supply and demand under incomplete competition, we find with greater market share, it is easier for employers and employees to reach a tacit understanding; the employers reach some form of a secret handshake agreement with employees to pursue employment stability and persuade employees to manipulate the labor supply through association, making them deviate from the optimal wage scale, which is similar to the phenomena of production restriction and price increase in a product market monopoly. Thus, employers and employees successfully internalize the productivity advantage of enterprises into per-capita productivity advantages, preventing its spillover to external workers. Although the proportion of employee segmentation declines with this process, it is far from sufficient to offset the impact of the increase in per-capita productivity, thereby resulting in a wage premium.
In the empirical dimension, we conduct an econometric analysis using the data of listed companies (including most of the leading enterprises in China) from 2012 to 2020 to test the above proposition. We include 4,434 companies from 19 industries in our sample. We choose enterprises with operating incomes above the 90th percentile of the industry as leading enterprise representatives. We use the FE-IV method for econometric regression. Our results show that the productivity-wage transmission strength of the leading enterprises is only slightly weaker (by approximately 4%) than that of the near-median-value enterprises. In contrast, the per-capita productivity difference is much higher (greater than 40%). Moreover, this advantage does not come from the leading enterprises' higher quality of individual workers. Finally, referring to the method of Blanchard and Summers (1986), we prove that leading enterprises display more obvious signs of secret handshake agreements.
The contributions of this paper can be summarized as follows. First, our findings deepen our understanding of the productivity-wage transmission mechanism. In the past, people were confused about the roles of enterprise productivity in wage determination; they did not deny its practical power, but they could not break from traditional theory. This paper highlights that the labor market structure is the key. If the market is frictional, productivity differences may be transferred to wages. Second, this study reminds us that some of the highly paid employees from leading enterprises do not receive high wages because of personal productivity but may monopolize the labor supply through secret handshake agreements. To better achieve common prosperity, we should not only fight against the product market monopoly but also prevent the unreasonable behavior of internalizing productivity advantages.
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Received: 01 November 2021
Published: 12 October 2022
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