Value added, wages and labour market flows at the establishment level

ABSTRACT

In this article, we analyse the connection between value added, wages and labour market flows at the establishment level. We develop a simple model to illustrate the expected comovement of these variables. For the empirical analysis, we link the new German Administrative Wage and Labor Market Flow Panel data set to the IAB Establishment Panel. We show that establishments’ hires rates have a positive and separations rates a negative comovement with establishment-specific value added, whereby hires react by more than separations. In addition, we provide evidence that establishments’ partial equilibrium reaction is an important driver for aggregate labour market dynamics.

KEYWORDS:

• Labour market flows
• value added
• wages
• administrative data
• establishments

JEL CLASSIFICATION:

• E24
• E32
• J64

Acknowledgement

We would like to thank an anonymous referee and Johann Ludsteck for helpful suggestions and discussions. The authors gratefully acknowledge support from the German Research Foundation (DFG) under priority program “The German Labor Market in a Globalized World” (SPP 1764) and the Hans-Frisch-Stiftung for financial support.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Note that hires rate and selection rate are used interchangeably here, although the former refers to the number of new hires divided by the number of employees and the latter to the number of hires divided by the number of applicants. However, for a given steady-state firm size, the qualitative movements of these two rates are the same (see Appendix A.1).

² The driving force is the assumption that aggregate shocks show more persistence than idiosyncratic shocks. In the end, this is an empirical question. Aggregate productivity shocks are known to be persistent. By contrast, when we estimate the coefficient for the lagged dependent hires rate based on Equation (8), we obtain statistically insignificant results. This is a sign that establishment-specific revenues are not persistent at the annual frequency.

³ More precisely, we focus on ‘regular workers’ (see Appendix A.2).

⁴ Strictly speaking, are the average overall real earnings per full-time worker. In line with search and matching models where employment is adjusted along the extensive margin, we refer to this variable as the wage (per full-time worker).

⁵ An AWFP extension for the IAB Establishment Panel will be provided by the Research Data Centre (FDZ) at the IAB by the end of 2018 (see Stüber and Seth 2017).

⁶ The comovement between current wages and current value added is very small. Across all subgroups, we find a stable estimated coefficient of about 0.02 in fixed-effects log-log estimations.

⁷ Carlsson and Westermark (2016) argue that this may be considered as a sign for inefficient separations. See their paper for details.

⁸ Estimations for subsamples of different bargaining regimes in East and West Germany are available on request.

⁹ The median firm’s separations rate is % and we assume .

¹⁰ In a richer model, the number of applicants may be driven by the number of vacancies and market tightness.

¹¹ AWFP data are also available on a quarterly frequency.

Additional information

Funding

This work was supported by the Deutsche Forschungsgemeinschaft [ME 3887/3-1 and STU 627/1-1] and the Hans-Frisch-Stiftung