In this paper, we develop a dynamic model of firm-level bargaining, along the lines of
Manning (1993). In this context, we provide a firm level wage equation that explicitly accounts
for firm heterogeneity. This wage equation explains inter-firm wage differentials by
differences in labour productivity and job turnover. More precisely, our model predicts that the
higher the rate of job destruction within one firm, the higher the compensation of workers. We
estimate our wage equation using matched employer-employee panel data in the
manufacturing sector, where firms are tracked for five years, between 1988 and 1992. The
empirical estimates, using GMM techniques, are fully consistent with our theoretical
prediction of equalizing differences: workers who take into account their intertemporal
discounted income will support lower wages when they benefit from lower unemployment
risks within their firm. In our model, wages are set to maximize a Nash bargain criterion, and
according to the estimators used or the industry we consider, we show that workers have an
average bargaining power between 0.15 and 0.25, measured on a scale going from 0 to 1.
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