Human Resource Management Practices and Wage Dispersion in U.S. Establishments

which firms, seeking to increase group cohesiveness, may find it profitable to do so by paying efficiency
wages to the low end of the firm’s wage distribution therefore reducing wage dispersion.

Each approach predicts different outcomes for the relationship between workplace practices and wage
dispersion. The cohesiveness or motivational approach predicts that workplace practices toward more
employee involvement should be associated with wage compression. The productivity or skill-biased
technical change approach can predict either lower or greater wage dispersion. One expects that an
increase in the demand for skilled workers following adoption of the practices leads to greater demands
in the task requirements for production workers and therefore greater wages. On the other hand, it also
leads to greater demands on the managerial part and therefore greater compensation for managers than
for production workers. Overall, whether workplace organization practices are associated with greater
or lower wage dispersion is an empirical question.

Evidence of increased wage dispersion following adoption of employee involvement practices would
favor the productivity hypothesis and the idea that managers’ productivity is increased by more than
production workers’ productivity by the practices. Evidence of wage compression may favor either
the motivational hypothesis or the productivity hypothesis if employee involvement practices increase
front-line workers’ productivity more than managers’ productivity.

Note that wage dispersion, as a prediction of the productivity hypothesis, can also be motivated
based on productivity loss rather than productivity gains associated with workplace practices adoption.
Indeed, it is likely that, shortly after adoption, productivity falls as changes in the organization of
the workplace involve adjustment costs. Those costs may be greater for production workers leading to
lower productivity and wages and therefore greater wage dispersion. To distinguish the two possibilities
one needs information on the timing of adoption and whether complementary training was adopted.
Information on training is available in the data and will be exploited in the estimation part.

2.2 Empirical Framework

According to the productivity hypothesis, wages reflect the value of workers’ marginal productivity.
The idea that workplace practices adoption follows from on-going skill-biased technical changes can be
represented in a production function framework as follows.

Assume a competitive economic environment in which firms’ production function depends on capital
and equipment, summarized in the variable K, and on two types of labor inputs, managerial LM and
production LF . It is assumed that workplace organization practices (summarized in the index P) affect
production through their impact on labor efficiency units. Define θ_M(P)andθ_F (P) as the amount
of efficiency units associated with each type of labor. With Y as the aggregate output produced, the
production function can be defined as:

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