How are wages determined? : a quasi-experimental test of wage determination theories

Abstract

We use novel quasi-experimental variation to (i) test whether firm-specific demand shocks impact wages, and (ii) to disentangle predictions coming from wage bargaining and firm upward sloping labor supply curve (wage posting). We use a unique institutional feature of public procurement auctions in Brazil: the moment in which the auction ends is random. Under this setting, for close auctions in which firms are constantly outbidding each other by incremental amounts, winner and runner-up are as good as randomly assigned. Using this first variation, we find that winning a government contract increases wages. In addition, contract value is higher for auctions that (randomly) end earlier. We use these two sources of exogenous variation to disentangle the effect on wages that comes from changes in firm size (wage posting) and the part that comes from changes in contract value holding size constant (bargaining). We find direct evidence of bargaining.