This paper analyzes the dynamics of wages and worker mobility within firms with hierarchical structures of job levels. The paper empirically implements the theoretical model proposed by Gibbons and Waldman (1999) that combines the notions of human capital accumulation, job rank assignment based on comparative advantage and learning about workers' ability. The paper measures the importance of these elements in explaining intra-firm wage and mobility dynamics using survey data from the German Socio-Economic Panel (GSOEP). The use of this data set makes it possible to examine this issue over a large sample of firms and draw conclusions about the common features characterizing firms' wage policy. The GSOEP survey also provides information about workers' job ranks within the firm that is unavailable in most surveys.The results of the estimation are consistent with non-random selection of workers onto the rungs of the firm's job ladder. There is no direct evidence of learning about workers' unobserved ability but the analysis reveals that unmeasured ability is an important factor driving wage dynamics. Job rank effects remain significant even after controlling for measured and unmeasured characteristics.

The paper addresses two broad research questions: 1. How do internal uncertainty associated with the task environment and external uncertainty arising from market volatility impact organization design? 2. What are the relationships among various elements of organization design: delegation of decision-making, incentives, monitoring, and internal labor market practices (promotion, training, employment security)? We expand on Prendergast (2002a), who challenged the conventional view of a tradeoff between risk and incentives, and build a single unified framework for answering our two research questions. Using a uniquely rich dataset that contains detailed information about the task environment of core employees and organization design at the individual, group and firms levels in 530 Minnesota firms in the mid 1990s, we first find support for Prendergast's key argument that internal uncertainty (over which employees have control) affects directly the allocation of decision-making and only indirectly incentives (via allocation of decision-making). This confirms similar findings by Foss and Laursen (2005), DeVaro and Kurtulus (2010) and Shi (2011). We also find that internal uncertainty has much impact on organization design through the choice of delegation of decision-making at the employee level, less so at the group level, and very little at the firm level, whereas external (market) uncertainty has little effect on organization design, especially at the individual and group level. Decision-making, monitoring, various internal labor market practices and incentives are strongly related to each other through substitution and complementarity.

The authors analyze how firms of different sizes reward measured skills and unmeasured ability. The empirical methodology, based on nonlinear instrumental variable estimation, permits direct estimation of the returns to unmeasured ability by firm size. An analysis of panel data from the Canadian Survey of Labour and Income Dynamics for two periods, 1993–1998 and 1996–2001, reveals statistically significant differences between firms of different sizes. In particular, returns to unmeasured ability are higher in medium-sized firms than in either small firms or large firms. The authors find that the firm-size wage gap and the differential in returns to unmeasured ability between small and medium-sized firms is mainly explained by ability sorting. The fact that larger firms reward ability less than medium-sized firms is consistent with an explanation based on monitoring costs. When firms become “too large,” monitoring costs may prevent them from rewarding ability directly through wages.

Key provisions within healthcare reform will likely further increase the cost of employer-sponsored insurance. Theory suggests that workers pay for their health insurance through a wage offset. We investigate this issue using data from the Medical Expenditure Panel Survey. GMM estimates aimed at correcting for endogenous worker mobility reveal evidence of a trade-off for workers who are offered health insurance as the only fringe benefit. On the other hand, employees in establishments with a more comprehensive set of benefits enjoy higher wages relative to employees in establishments that offer no benefits. Health also affects the wage-health insurance trade-off.

In this paper we seek to understand how firms learn about what adjustments they need to make in their organization structure at the workplace level. We define four organizational systems: traditional (the simplest system), high-performance (the most complex system), decision-making oriented, and financial-incentives oriented (intermediate complexity). We analyze (1) the effects of learning-by-doing on adoption of more or less complex systems, (2) the shape of the performanceexperience learning curves associated with different systems, (3) the match between perceived organizational capabilities and the choice of systems, (4) the influence of other firms' systems and performance on a firm's adjustment decisions, and (5) the effect of a firm's location on its decisions.JEL Codes: D83, L25, M54