Recruitment and retention of labour as factors in wage determination

University: Economics

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The CBI dataset utilised in this paper permits an in-depth analysis of the
influence of wage settlements over time, across regions and so forth. Given
that value of output, volume of output and value added per person employed,
are modes of measuring output used mainly by certain types of industries, it
would be reasonable to use these variables to proxy for the extent of
insider power in these industries. It is well known that insider power are
greatest where the rents to be shared are the greatest. Preliminary analysis
by the author has shown that the most appropriate method of measuring most
service sector output, such as professional and scientific services and
business services, is by the value of output per person employed. The ONS
has informed the author (indeed, their statistics show) that these
industries have one of, if not the highest gross domestic product (GDP) in
the UK, of course, CBI data does not indicate this. In addition, I have also
used the size of the bargaining group as a proxy for an indication of the
firm size. There are two caveats to note here: first, all employees of an
establishment may not join a bargaining group. Second, some establishments
may have more than one bargaining group. These caveats may lead to
underestimation of the firm size.

Although the CBI\ dataset may lack information, such as financial
information, overall the CBI dataset does permit us to develop and establish
an analysis of the influence of wage settlements over time, including an
in-depth/detailed analysis of the RRF. The CBI dataset allows us to explore
the influences of wage settlements adequately and satisfactorily as does the
WERS dataset. However, it should be noted that there may be some limitations
with respect to the choice of explanatory variables, as alluded to above.
So, the dataset is fairly well equipped to provide reasonably satisfactory
answers to our question, bearing in mind the possible data limitations.

The price settled, that is, the terms of trade in Metcalfe ($2006$b),
implicitly incorporates factors such as the importance of the RRF to firms
and the workers' desire to retain and new workers desire to gain employment
in the firm, since by definition the wage bargained is monopolistically
priced, that is, the wage that each agent is indifferent to. Thus, in this
paper I will investigate the influences of wage determination in general,
but focus special attention on the RRF, since it is labour turnover costs
that sustains IOT. This, exemplifies the importance of recruitment and
retention as a major negotiation consideration exerting upward pressure in
wage settlements, using a unique illuminating and previously unexploited
longitudinal dataset. The latter is the primary goal of the paper.

In setting the wage, primal factors such as the importance of recruitment
and retention of labour will be accorded major consideration. Both parties
are accurately aware of the pivotal role played by the importance of
recruitment and retention of workers. Second, bargained wages will be a
function of the future financial performance of the firm. I have established
this empirically in Metcalfe ($2006$a).

\noindent I now investigate the importance of recruitment and retention of
labour as a major bargaining consideration. Successful/prosperous
establishments pay higher wages to recruit and retain workers. Similarly,
more workers would want to be employed and want to be retained in
successful/prosperous firms.

If recruitment and retention is important in wage-bargaining and prosperous
firms pay high wages to recruit and retain workers this could have serious
macroeconomic implications for the behaviour of the economy. For example, if
recruitment and retention activities occur in more prosperous establishments
and regions, then there will be agglomeration effects and increasing amount
of workers would want to be employed and want to retain their employment in
these prosperous establishments. Equally these prosperous establishments
would pay higher wages to lure workers and retain more workers at the
expense of the other less prosperous or deprived regions of the economy.

We are therefore, interested in a variety of issues. First, is recruitment
and retention of labour a major consideration in wage settlements? Anecdotal
evidence suggests that managers view the need to improve the ability to
recruit and retain labour as important determinants of pay settlements. For
example, the prevalence of ascending pay scales is a manifestation of the
importance of the RRF to firms. Equally, the importance of workers to be
employed and to retain their employment in these firms, is also propounded
in the EWT. Indeed, in some EWTs $($Salop, $1979$; Shapiro and Stiglitz, $%
1984)$ it is suggested that higher wages are paid to reduce quits. This has
been developed further by Lindbeck and Snower $(1988)$, (hereafter LS) in
insider-outsider theory, in which higher wages are paid on account of
turnover costs. Other theoretical and empirical studies have also found
turnover is an important determinant of higher wages (see for example,
Martin, $1999$). Gregory, Lobban and Thomson ($1987$), using CBI data,
suggested that recruitment or retention effects are fairly important, as
part of a general enquiry on wage determinants. But no attempt has been made
to analyse in detail how important this factor is in wage determination.
This paper bridges this crucial gap.

My main purpose is to attempt to pin down the importance of recruitment and
retention effect with some precision. A second issue of some interest is the
question of what actually determines the need to enhance the ability to
retain and recruit labour, as a factor exerting upward pressure on the level
of settlement. Here I am interested in investigating a variety of
characteristics of establishments, with an emphasis on industries, regions
and bargaining groups, which consider the RRF as very important in exerting
upward pressure on wage settlements. Therefore, the main purpose of this
analysis is to complement my empirical analysis in chapter $3$ of Metcalfe ($%
2006$a), which is applied to the IOT. This will provide an indication of the
characteristics of establishments who are most likely to consider the need
to recruit and retain labour as a very important factor in exerting upward
pressure on wage settlements, and identify those establishments where
insider factors may be greatest, given the importance of turnover costs in
this theory. I accomplish the former and the latter over a very long
dimension, identifying this need and where insider power may be greatest
with bargaining groups, industries, regions, which previous studies have
been bereft of.

The outline of the paper is as follows. In Section $2$, I discuss
characteristics of those establishments likely to consider the RRF to be a
very important factor in wage settlements. Section $3$ discuss our data.
Section $4$ provides preliminary data analysis pertaining to influences on
wage settlements in general. Section $5$ empirically models the importance
of RRF. Section $6$ discuss the results. Section $7$ concludes.
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