zero whenever θM (P ) = θF (P ) for firms adopters. This term can have a positive or negative impact
depending upon whether workplace practices increases managerial workers’ productivity more or less
than production workers.
Now consider the cohesiveness hypothesis proposed in Levine (1991), whereby production depends
upon worker cohesiveness C(.) which is a function of the firm’s wage dispersion:
Y = C(wF/wM)F(K, LM,LF)
where C is such that C' > 0 and C" < 0. Given these assumptions, the first-order condition for an
interior solution for the firm is to set the elasticity of the cohesiveness function C with respect to wage
equal to the elasticity of F with respect to labor.
δCw δF L
δWC = δLF
(7)
Although the main derivations of the model are carried out under the assumption that the demand
for higher skilled workers is fixed, the condition above is valid for both types of labor. Using this
condition and the Cobb-Douglas type of production function described above allows one to derive a
wage ratio condition:
wM _ βM CwF
wF βF CwM
(8)
Where CwF and CwM are the derivatives of the cohesiveness function with respect to wages for
production workers and managers respectively. This condition can be tested if the ratio of marginal
cohesiveness with respect to wages is assumed constant. Assume for example that C(wF ,wM)=ewF-wM
and wF = λwM. This function is positive and increasing in wF and in wF/wM. The parameter λ
describing the degree of wage compression is such that 0 <λ≤ 1. Cohesiveness increases with λ while
the ratio CM, equal to 1 /λ, decreases with λ.
One can introduce the role of workplace practices in the firm’s decision to reduce wage dispersion
by assuming that workplace practices toward greater employee involvement affect cohesiveness through
the parameter θ. Assume P is an index of workplace organization practices, then λ(P) is such that
λ(P) > λ(0) or in other words, that wage compression is greater among workplace practices adopters.
log ( wM )=log ( βM )+log ⅛⅛)
wF βF λ(P)
(9)
The two perspectives of the relationship between workplace organization and wage dispersion de-
scribed in equations (6) and (9) can be estimated using the following equation:
log ( WM )=π+βlog ( LMM )+γp+e
(10)