Do workers share in firm success? Pass-through estimates for New Zealand

Do wages increase
when firm performance improves?
Yes, but not as much.

Aotearoa New Zealand, like many other developed countries, has had a decline in the share of total national income that goes to workers. Workers' wage growth during the 2010s was low compared to the 2000s, despite strong economic growth and fewer people unemployed. These trends raise concerns about if economic success is being widely shared across the population of New Zealand.

New Zealand policy makers are discussing how to ensure economic growth is inclusive – that the benefits of a growing economy are shared widely among our population.

This paper contributes to this discussion by looking at inclusive growth at the firm level. We look at the extent workers share in the financial success of the firms they work at. We do this by estimating how much the benefits of good performance are passed through to workers in the form of wages. We test if the extent of this pass-through of benefits has changed over time, and how much of the benefits pass-through can be accounted for by worker sorting and rent-sharing. Worker sorting is the tendency for higher quality workers (who attract high wages no matter which firm they work at) to work in better performing firms. Rent sharing is when firms with higher rents (profits in excess of the minimum required level to remain in business) pass some of their profits onto workers as higher wages.

Our research finds that workers have received between 30% and 40% of total firm rents, although the share has been declining since 2010. We find that workers in higher-rent firms receive about 12% of the extra rents, and workers in firms with growing rents receive about 7% of the increased rents at the firm. Our results are in line with comparable international studies on these topics.

Our results show workers do share in firm success. Workers in better performing firms tend to earn higher wages and workers in firms with improving performance tend to benefit from this improved performance. However, wages do not vary as much as rents. In good (high rent) years, wages increase only slightly, and in bad (low-rent) years, wages are only slightly reduced.

See a summary version of this paper on the Ministry of Business, Innovation and Employment website.

DOI: doi.org/10.29310/WP.2021.15

Citation

Allan, Corey and Dave Maré. 2021. “Do workers share in firm success? Pass-through estimates for New Zealand". Motu Working Paper 21-15. Motu Economic and Public Policy Research. Wellington, New Zealand.