The Wage Determinations in the Manufacturing Sector - Essay Example

What are the reasons behind the wage determinations in the manufacturing sector Introduction The real wages of European workers have experienced a decline over the last few years. In real terms, the results show a decline of the labor compensation per hour - 16,5 per cent in 1996-1999, 28 per cent in 2000-2003, and 33 per cent in 2003-2006. Moreover, the workforce considered their wages growing less than their labor productivity per hour. The data for these periods shows a bad performance of the real wages per hour in Europe in manufacturing and services. In 2001 approximately 24 per cent of the US labor force earned less than $9 per hour. In spite of the fact the majority of the workers with high school education are low-wage workers, some of them are relatively high-paid. There are a great number of studies on wage rates and their distribution among workers with certain social and/or demographic characteristics. This essay proposes a theoretical framework and provides an analysis which predominantly complies with the existing literature. The author investigates the reasons behind the wage rates in the manufacturing sector in order to provide a forecast for the next decade. 2. Factors behind the wage determinations in the manufacturing sector. Today's picture of wage-rates in the manufacturing sector is determined by foreign markets' competition and the increased complexity of the jobs, which are moving away form the usual routine. Over the last few decades, the demand for workers in the manufacturing sector has increased. Employees with a high school diploma or less now face an increasingly sophisticated market in which new basic, physical and mechanical skills are required. The nature of low-skilled workers' jobs has changed due to the changes in labor market institutions. New technologies changed workplace organization and new types of goods and services were introduced. This led to unionization and improved organizational structure of the manufacturing industry. Topel (1993) defines several wage-rates determinants: immigration, education, inequality and female labor force participation, changes in product demand, international trade, and human capital investment. A study of Tachibanaki (1975), which covers twelve years (1958-1970), pays special attention to the influence of certain factors for wage-rate differentials. Tachibanaki's (1975) research uses major variables like sex (male or female), occupation, size of the firm, experience of the workers, age, working hours, bonuses, special payments. Tachibanaki (1975) agrees that the principal wage-rate differentials: differentials in education; racial and sexual discrimination; age; trade unions. The last two decades were marked by the constant growing globalization which has been proven to affect the demand on the manufacturing workers' market. This negative impact results in lower wages. According to Bogliacino (2009) there are two possible outcomes in terms of competition-limiting norms, depending on the time period (short run and medium run). Since this essay's goal is to provide a forecast for the future of wage-rates and their determinants, attention should be paid to the results on the mid-run, where "lower productivity growth is detrimental to wage growth" (Bogliacino, 2009). The question is, how does the process of globalization affect the bargaining power of workers in the manufacturing sector For the purposes of the essay SID (Sectoral Innovation Database) produced at the University of Urbino will be used. SID mixes data from several surveys regarding the economic performance of the EU countries. The unit of analysis comprises 21 industries belonging to manufacturing sector in the countries that comprise approx. 80 per cent of the European economy, namely France, Germany, Italy, Spain, Portugal, the Netherlands, United Kingdom, Poland and Norway in the period between 1994 and 2006 (Table No.1). Table No. 1 Manufacturing industries included in the SID Industries NACE Food, drinks and tobacco 15-16 Textiles 17 Clothing 18 Leather and footwear 19 Wood and products of wood and cork 20 Pulp, paper and paper products 21 Printing and publishing 22 Mineral oil refining, coke and nuclear fuel 23 Chemicals 24 Rubber and plastics 25 Non-metallic mineral products 26 Basic metals 27 Mechanical engineering 28 Office machinery 29 Manufacture of electrical machinery equipment 31 Manufacture of radio, TV and communication equipment 32 Manufacture of medical, precision and optical instruments, watches and clocks 33 Motor vehicles 34 Manufacture of other transport equipment 35 Furniture, miscellaneous manufacturing; recycling 36-37 Source: Bogliacino, 2009 During the analyzed period (1994-2006) a major change occurred into the European economy. The highly industrialized countries shifted from manufacturing to services. Thus, workers began to lose their bargaining power. This led to an increase of inequality. In order to examine whether the evolution of wages leads to convergence or divergence, Bogliacino (2009) provides a simple test by presenting a regression of the rate of change over the initial level (Table No. 2). The coefficient is always positive, which leads to the suggestion that polarization is a generalized trend over time, except a single three-year period (1996-1999). This means that the inequality-enhancing trend has been increasing over the years. The table also shows that the effects of polarization are much stronger for the sector of services than for the manufacturing industries. Table No. 2 Results from a regression of the rate of change of real hourly labor compensation over a constant and the initial level Sample Estimated coefficient Overall sample 0.65 [7.36]*** 1996-1999 -0.73 [-1.74]* 2000-2003 1.00 [3.26]*** 2003-2006 1.21 [3.29]*** Manufacturing 0.09 [0.38] Services 0.87 [3.61]*** High innovations 0.18 [0.60] Suppliers dominated 0.53 [2.19]** Source: SID database Notes: Dependent variable: compound rate of change of real hourly labor compensation. Robust t- statistics in brackets. * Significant at 10%; ** significant at 5%; *** significant at 1% Apart from the polarization effect, wages impact over inequality over the functional distribution. There is a conflict between wages and profits that affects the overall income distribution due to the variance of their concentration level. Only a relatively small group of population enjoys profits through stock dividends or bonuses. (Bogliacino, 2009). This functional distribution effect can be observed in Graph No. 1 where the rate of change of productivity per hour is compared to the wage-rate changes. The data refers to the period between 1996 and 1999 but it can be assumed that the pattern is pretty much the same for the rest of the analyzed period (1994-2006). Graph No. 1 Bogliacino (2009) suggests an institutionalist view of wage-rate theory. According to the scholars, a wide range of possibilities is defined by factors such as technological opportunities, international and domestic markets and labor supply determinants. However, elements like bargaining power, customs and norms define the specific wage-rates at the organizational level. It could be accepted that the level of nonunion wage rates varies due to the changes in the business cycle. Thus, the union/non-union wage differentials narrow during the period of expansion and increase during the period of contraction. This influences the wages of workers in sectors with cyclical output such as manufacturing. As it was noted above, Europe has observed wage dynamics over the last few decades due to the low mobility of employees in many manufacturing industries. According to the EIRO (Eurofond's European Industrial Relations Observatory), the average wage rates increase for the workers in Europe dropped from 2.7 per cent in 2006 to 2.3 per cent in 2007. According to the paper, "collective bargaining plays a relatively significant role in pay setting across Europe". The report indicates a trend that will play a major part in the future defining of wages, namely collective bargaining, as collectively-agreed pay increases in sectors such as chemicals (Pay developments - 2007; see Graph No.2). Although the minimum wage increases and rates usually are the same for all workers, in some countries another trend can be observed. Ten EU countries apply lower wage rates to the young/inexperienced workers (Table No. 3). Graph No. 2 Average collectively-agreed pay increases, 2006 and 2007 (%) Table No. 3 National minimum wages of younger and less experienced workers, 2007 Country % of full rate Applicable to Belgium (see note to Table 3 above for details of additional rates based on age and level of experience) 94% Workers aged 20 years 88% Workers aged 19 years 82% Workers aged 18 years 76% Workers aged 17 years 70% Workers aged 16 years and younger Czech Republic 90% Workers aged 19-21 years in the first six months of employment 80% Workers aged 18 years and younger Ireland 90% Workers aged 18 years and over in the second year of employment, as well as workers aged over 18 years and undergoing the final third (lasting one month to a year) of a course of authorised training or study 80% Workers aged 18 years and over in the first year of employment, as well as workers aged over 18 years and undergoing the second third (lasting one month to a year) of a course of authorised training or study 75% Workers aged over 18 years and undergoing the first third (lasting one month to a year) of a course of authorised training or study 70% Workers aged under 18 years Latvia 114% Workers aged 15-18 years, who may only work up to 35 hours a week rather than the 40 hours on which the minimum wage is normally based Luxembourg (% of qualified or unqualified workers receiving adult wage rate, as appropriate) 80% Workers aged 17 years 75% Workers aged 15 and 16 years Malta* 95.1% Workers aged 17 years 93.1% Workers aged under 17 years Netherlands 85% Workers aged 22 years 72.5% Workers aged 21 years 61.5% Workers aged 20 years 52.5% Workers aged 19 years 45.5% Workers aged 18 years 39.5% Workers aged 17 years 34.5% Workers aged 16 years 30% Workers aged 15 years Poland 80% Workers in their first year of employment Slovakia 75% Workers aged 16-18 years 50% Workers aged under 16 years (and workers aged 16-18 years who have a disability) UK** 83.33% 'Development rate' for workers aged 18-21 years inclusive, as well as workers aged 22 years and above during the first six months in a new job with a new employer and who are receiving accredited training 61.59% Workers aged 16 and 17 years, other than apprentices Notes: * In 2006, the percentages were 94.97% for workers aged 17 years and 92.86% for workers aged under 17 years - the relative value increased due to higher increases in 2007 in the wage rates for younger workers than for the full adult rate. ** In 2006, the percentage was 83.18% for the development rate - the differential with the full adult rate narrowed in 2007 due to a higher increase in the development rate than in the adult rate. In 2006, the percentage was 61.68% for the rate for those aged 16-17 years - the differential with the full adult rate increased in 2007 due to a lower increase in the development rate for those aged 16-17 years than in the adult rate. Source: EIRO In spite of the fact that collective agreements and legislation concerning minimum wage rates are gender neutral, it remains the case that females in most EU countries receive, on average, lower wages than men. Economical science relies upon several mechanisms explaining the gender rate differential. One of the theories is that women adopt unequal burden as they perform home-related duties (Fuchs, 1989). Graph No. 3 illustrates the gender-pay gap by presenting women's average earnings as a percentage of the earnings of men. A close examination of the data shows that the gap averages 15,9 per cent across the EU countries in 2007, compared to 16,2 per cent in 2006. Graph No. 3 Women's average earnings as a percentage of men's, latest figures (%) 3. Conclusion In particular, the differentials that will alter their influence over the wage rates over the next decade are: 1. Sexual discrimination. As it can be observed from the graph above, the gender-pay gap decreases over the years, and in the next decade it probably will be significantly reduced. 2. Workers' mobility. The globalization will lead to greater mobility and more choices for workers, which means that employers will have to provide higher wage rates in order to keep them. 3. Shift from manufacturing to services. This will lead to reduced bargaining power for workers in manufacturing, since they will try to keep their jobs. However, this factor will be significant only for the highly industrialized countries. 4. Customs and norms. In a globalized world, there are not common customs and norms that everybody should stick rigidly to. Due globalization, common customs and norms will reduce their influence over the wage rates. Market forces such as collective bargaining will continue to play a major part in the formation of wage rates. However, it is not likely that their role will alter significantly in the near future. References Bogliacino, F. (2009) Poorer Workers. The Determinants Of Wage Formation In Europe. International Review Of Applied Economics Vol. 23, No. 3, May 2009, 327-343 Fuchs, V. (1989) Women's Quest For Economic Equality, Journal Of Economic Perspectives, No. 3 Topel, R. (1993) Regional Labor Markets And The Determinants Of Wage Inequality, American Economic Review, Vol.5, No. 83 Tachibanaki, T. (1975) Wage Determinations In Japanese Manufacturing Industries - Structural Change And Wage Differentials, International Economic Review, Vol. 16, No. 3 Pay Developments - 2007 [Online], Http://Www.Eurofound.Europa.Eu/Eiro/Studies/Tn0804019s/Tn0804019s.Htm [Accessed: 07 November 2010] Read More