The Determination of Wages of Newly Hired Employees: Survey Evidence on Internal versus External Factors

28 Pages Posted: 10 Mar 2010

See all articles by Kamil Galuscak

Kamil Galuscak

Czech National Bank

Mary Keeney

Central Bank and Financial Services Authority of Ireland

Daphne Nicolitsas

Bank of Greece

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Pawel Strzelecki

National Bank of Poland; Warsaw School of Economics (SGH)

Matija Vodopivec

Bank of Slovenia

Date Written: January 27, 2010

Abstract

This paper uses information from a rich firm-level survey on wage and price-setting procedures, in around 15,000 firms in 15 European Union countries, to investigate the relative importance of internal versus external factors in the setting of wages of newly hired workers. The evidence suggests that external labour market conditions are less important than internal pay structures in determining hiring pay, with internal pay structures binding even more often when there is labour market slack. When explaining their choice firms allude to fairness considerations and the need to prevent a potential negative impact on effort. Despite the lower importance of external factors in all countries there is significant cross-country variation in this respect. Cross-country differences are found to depend on institutional factors (bargaining structures); countries in which collective agreements are more prevalent and collective agreement coverage is higher report to a greater extent internal pay structures as the main determinant of hiring pay. Within-country differences are found to depend on firm and workforce characteristics; there is a strong association between the use of external factors in hiring pay, on the one hand, and skills (positive) and tenure (negative) on the other.

Keywords: Wage rigidity, newly hired workers, internal pay structure, employee turnover, business cycle, survey data

JEL Classification: J31, J41

Suggested Citation

Galuscak, Kamil and Keeney, Mary and Nicolitsas, Daphne and Smets, Frank and Strzelecki, Pawel and Vodopivec, Matija, The Determination of Wages of Newly Hired Employees: Survey Evidence on Internal versus External Factors (January 27, 2010). ECB Working Paper No. 1153. Available at SSRN: https://ssrn.com/abstract=1547771

Kamil Galuscak (Contact Author)

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Mary Keeney

Central Bank and Financial Services Authority of Ireland ( email )

P.O. 559 Dame Street
Dublin 2, D2
Ireland

Daphne Nicolitsas

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Pawel Strzelecki

National Bank of Poland

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Matija Vodopivec

Bank of Slovenia ( email )

Slovenska cesta 35
Ljubljana, 1505
Slovenia

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