Wage Posting versus Wage Bargaining

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Workers who had the option to remain at their earlier jobs when they took their current jobs... earn $2.07 more per hour [on average] than those who did not have existing jobs to fall back on when they took their current jobs.

Some workers bargain with prospective employers before accepting a job ("wage bargaining") while others consider a posted wage as a take-it-or-leave-it opportunity ("wage posting"). In Evidence on the Determinants of the Choice between Wage Posting and Wage Bargaining (NBER Working Paper No. 16033), co-authors Robert Hall and Alan Krueger survey a representative sample of 14,000 U.S. workers to inquire about the wage determination process at the time they were hired into their current or most recent jobs. One third of their survey respondents report bargaining over pay before accepting their current jobs, while one third have precise information about pay when they first meet with their employers, which is a sign of wage posting.

The authors go on to document a sharply negative relationship between education and precise information about pay: non-high-school graduates are almost twice as likely as those with a professional education to know their prospective pay exactly. In fact, the researchers find that college graduates and those with professional training are rather unlikely to hold posted-wage jobs. Thus, wage posting appears to be much more important in the jobs that are available to those with less education.

This higher incidence of wage posting for the least educated is consistent with the view that a minimum-wage job is inherently posted. But jobs held by women also are more likely to have been posted-wage positions, Hall and Krueger find. Posted-wage jobs are also common in the government and union sector.

Moreover, there is a great deal of variation among job-seekers when it comes to wage bargaining. Twenty-eight percent of those who did not graduate from high school report bargaining over wages, versus 56 percent of those with professional degrees. Bargaining is also more common among minority workers (over 40 percent) and less common for women (24 percent).

The skill level of the work is also important: among knowledge workers (those with a post-college education whose work involves problem solving) almost all (86 percent) report bargaining. Among blue-collar workers, only 5 percent report that they bargain over the wage.

The authors next study the impact of having the ability to wage bargain along with the option of keeping an existing job. They find that in considering a new job opportunity, having the option to keep the current job, which about half of job-seekers do, will substantially influence one's tendency to establish a wage through bargaining. This is especially true for more educated, problem-solving workers. However, the incidence of actual wage bargaining among those who could have kept their previous jobs varies tremendously, and it remains especially high for knowledge workers and for senior workers.

These results on wages support the job-ladder model: that is, workers who had the option to remain at their earlier jobs when they took their current jobs can earn higher wages than those without that option. Indeed, those holding the option earn $2.07 more per hour than those who did not have existing jobs to fall back on when they took their current jobs.

Finally, the authors investigate two aspects of the relationship between bargaining and the distribution of wages, controlling for observed characteristics including education. First, if the distinction between wage posting and bargaining is meaningful, then the dispersion of wages among workers who accept posted wages should be less than the dispersion among those who bargain. Hall and Krueger find this to be the case no matter what factors lead to employers' choices about the mode of wage determination. Second, labor market theory suggests that wages resulting from bargaining may be higher than posted wages, on average. For observationally similar workers in this survey, that is the case.

-- Claire Brunel