Speaker: Justin Bloesch, Ph.D. Candidate in Economics, Harvard University
Abstract: We argue that productive firms share rents with workers only in occupations where workers have individual hold-up power. We present a model of wage determination where firms produce using a novel generalization of Kremer (1993)’s O-ring production function. Workers have individual hold-up power if (i) labor is organized into distinct, differentiated positions (ii) the output of positions is individually complementary or “critical” in the production process, and (iii) skills are position-specific, i.e., skills are acquired on the job and are not transferable across positions or firms. If output losses from an unfilled position are larger at productive firms, incomplete contracts and on-the-job search incentivize productive firms to pay differentially high wages. We estimate individual worker hold-up power by occupation using the effect of worker deaths on firm profits in Danish administrative data and using a measure of within-firm, across-position task differentiation from US job posting data. High hold-up occupations exhibit both higher wage levels and higher long-run passthrough of permanent firm productivity innovations to wages, supporting the main model predictions. Accounting for heterogeneity in hold-up power across occupations has numerous implications for wage inequality: (1) greater employment of men in high hold-up occupations can account for one fifth of the Danish gender wage gap; (2) rising “superstar firms” increase wage inequality; (3) hold-up power decreases the responsiveness of wages to labor market slack.