The role of the firm in wage determination : an African case study

 World Bank Reprints No.236. S. van \Vijnbergcn, "Stagflation~ryEffects of Monetary Stab~iization Policies: A Qua,ltitative Analysis of Scluth Korea," /ourrral of Dczvclop- I I I L ~ I I ~ E ~ ~ ) r ~ o r r ~ i c s No. 237. Gershon Feder, Richard just, a n d Knud Ross, "Projecting Debt Servicing Capacity of Developing Coun:ries," /oltrrrnl of Firrarrcial arrd C)rtnrrtitntiz~cp rrnlysis So. 238. Richard H. Goldman and Lyn Squire, "Technical Change, Labor Use, and Income Disrribution in the Muda Irrigation Project," Ecorronric LIc~z~c~lo~)rrrc.r~tnrrti Crrltrrrrll Clrnrr,yc* No. 239 j. Michael Finger, "Trade and the Structure of Arr.erican Industry," .41r1rnls oJ tlrc. /I rrrcrisrrrt Acadcrrr:r of Politic-nl nrtd Sot-ial Scicrrcc No. 210. David M.G. Newbery and Jost.ph E. Stiglitz, "Optimal Commodity Stock-piling Kulcs," Oxford Eco,rorrric Pnpc,rs No. 211. Bela Balassa, "Disequilibrium Ar,alysisin Developing Economies: An Overview," It'orlti Dcz~clol~rrrcrrl No. 212. T.N. Sriniv'lsan, "General Equilibrium Theory, Project Evaluation, and Economic Development," i'lrc Tllcory r~r!ciE.rfrcricrrcc of Ecorrornic D ~ ~ ~ ~ ~ ~ ~ o ~ J I I I ~ ~ I I ~ No. 213. Emmanuel jimcnez, "The Value of Squatter Dwellings in Developing Countries," ,'rorrorrric- Dc*z~rl(~yrr~rrttrlrrri Crrltrrrnl Cl~arrgc No. 214. Boris Pleskovic and Maj a n Dolenc, "Regional Development in a Socialist, Developing, and Multinational Country: The Case of Yugo- slavia," I ~ ~ t t ' r ) / r ~ t Ru,yir)rrnl i ~ ~ ~ r l l Scicvrrcc,Rczlici~. No. 245. Mieko Nishimizu and John M. Page, Jr., "Total Factor Productivity Growth, Technological Progress, and Technical Efficiency Change: Dimensions of I'roductivity Change in Yugoslavia, 1965-78," Tlre E i - o ~ r ~ ~ r/olrrrrnI r ~ i c No. 216. j. h.1. Finger, "'The Politic.11 Econo~r;. of Administered Protection" (with H. Keith tlall and Douglas R. Nelson), Tltr Amt-ricnrr Ecorrorrric R(.zli['ii*:and "The Ir,dustry-Country Incidence of 'Less than Fair Value' C'lses in U.S. Import Trade," Qrrsrtcrly Rc.zliczcl of Ecorrcjrrricsatrd Brisirrcss No. 247. Nancy Birds.111 an$ Susan Hill Cochrane. "Education and Parental Dtncision Ma king: 11Two-Cieneratio~tApproach," E J ~ c i r ~ t isrrd~Drzlcl- i ? ~ l ~ ~ l l l l ~ ' ~ l t N 1 . Kcmal Dervis, J'iimc d e Melo, .lnd Shcrman Robinson, "A,Ceneral Equilibrium r1n.llysis o f Foreign Ekchange Shortages in a De,'elo Y PinR Economy," Tlrc ~(-c'jrrorrris/orrrrrrrl a No. 219.- Kyu Sik Lee, "A h.lodel of lntraurban Employment LocaBon: An Application to Rogc~t,~,Colombia," /orrrrrnl of Llrbnrr Ecorrorrrid 0 So. 250.' J . 13. Knight and R. ff. Sabot, "From Migrants to Proletarians: Employment Espcriencc, Mobilitv, and Wages in Tanzania," O.rfcvd Brrlli~tirrof El-orrc~rrric-sc11rll S!,.!idics No. 251. M. Louise I.'ox, "Income Distribution in Post-1961 Brazil: N e w Results," Iorrrrrrrl of EL-orrc~rrricHis!ory No. 252. Ni/.ar Jetha,"The LVelf.lre Cost c ~ Tas'ltion: ItsMeaningand Measure- f mCnt," R I ~ I I ~ ~/or! I I~rI~!cr~rc~!i~l-is~-trl~ ~ r r n l ) ~ ~ L ~ I ~ I ~ I ~ ~ I I ~ ~ I ~ ; ~ I I I  DETERXlIlvATION: A N AFRIC.4N CASE S-T'LJDY To what extent are tvilgcs in a developing cotintry determined by the personal characteristics of employees and to what extent by the characteris- tics of their eniploycrs? Insofar as employers ?lay a role in wagc determina- tion. what are the firm chilractcristics which ir.Huence wr~grs?These are the questions tvhich we attempt to answer ir7 this papcr. We do so by meanq of an carninp function analysis o f a sample drawn from the manuf;icturing sector of Tanzania. Thc establishment-based survyl, conducted by one of the authors in 1971, covcrs about l.Oo() employees in some 17 firms in Dar es salaam.' Information was gthercd2on the characteristics of the 21 larger firms (those with 50 or more cmploccs). accounting for a total cf 660 sampled emplo)ces. This permits thc simultaneous analysis of the influence on wages of both perwnal ant1 firni chariicterist~cs. Thcories of \\.age dctcrmination focusing on individtlal productive charac- teristics ; ~ n dthose focusing on group affi1i;ltion differ in their ;lssumptions ahout the hchii\iour o f rhc I;~t-~ot~rniarkct. In ;Iperfectly conipctitivc labour market 9ro;lp ;iffiliation does not influence wages. Irrespective of differences amon5 gr .19psof workers in goods produced. in the technology or organiza- tion used to produce them. in the ownership or protitability of such production. its ?;c:ilc or its location. competition in the I;lbour niarkct will ensure that ail norkers tvith the snnic pcr5on;il economic characteristics receive the same rate of +y. Differences in pay arise only if employers discriminate anions workers on the basis of personal non-economic charac- teristics o r if the desirability of t:mploymcnt \.arics ;Imong different jobs. Implicit in theories of wage dcterniin;~tionthat cmph;~sizegroup iifflintion is the asst~mptioiiof I;ihour rn;lrkct ~~npcrfcctio~is.Yon-nilirkct forces which. directly or 1)v rcstrictirig i;lhc~t~r~ ~ i ~ h i l ict v;. ~ w;ige\~ toc cIep;lrt from the ~ ~ compctitivc Ic~cl.mu%tbe \ufticicptly po\vcrful to ple\.cnt competi:i n in the market from eroding \\age diffTentia!s among homogcncous workers. Y In Section 7 we sketch out various arguments. relilting to the characteri5- tics of firms. nhich could cspl;lin \$y group ;lftili;liion of this type matters. ' I\ wrnplc 01 44 rnanufdclurlng ::rm\ u;~\*r.~;ltlornl~\clcctctl from a eorr,prchcnsivc Ccntr;ll Bureau t>f St;~r~,t~csIl\r abf lirrn\ In Lhr cs.S.II;I.I:~. \rr;rt~l~cd h! rhrcc \I/C c;ttcgorics. 1-10. I(L40. ; ~ n 51N')') crnplt~\r.r\.I n c w h lirln ~ l :Iwmplc o i one third t)f ~ h cI;tho~~rfc1rr.c or 30 worker\. \\h~chc\cr w;l, \ni.~llcr. -.I\ r.!nclornl! \clcclccl from .Icclrrrplr.~~li\r I-!ihc :~rr;r's cmp!~~!cc\.I n ;~tldit~rm. crnplo!cr.\ ncrc intcr\icucd In 7 0)f the h m;~nuf;~cruringlirms in Dar fdb c\ S;~l:r;lniuhlch cnipltl)c~!'(HI tlr mtvc \\t)rLcr\ I)r.t;~~lcdintcr\~cu,ucrc condtrctcd uith each of the \;~rnplcd~.mplt~\cc\:In tt17;il OSh cniplt~\cc\ncrc ~ntcr\icuc~l 'From rhc 1')71 Indu\rr~.~lC'cn\!~\ return t11c;lch \.~mplcdlirln  THE ROLE O F THE FIR51 IN WAGE DETER5IINATION Most of the empirical work on the determination of wages has involved a testing of hypotheses within either the 2ersonal characteristics or the firm characteristics paradigm. In Section 3 we attempt a nesting cf the two paradigms by including boih firm and personal variables in the earnings function. Star~dardizingin this Hay for the personal variables. we examine the extent of segmentation among firms. and the relative importance of employer- and employee characteristics. We find that firms play a signi- ficant, albeit the minor, role. Sections4-45go on to examine the influence of particular firm characteristics. Thus Section 1 assesses the role of firm ownership on wages and poses the question: Do foreign firms pay more? Section 5 is concerned with the influence of trade union membership, and Section 6 with that of various proxies for 'ability to pay', such as firm size. Section 7 su~nmarizesand concludes. 2. Why should firms matter? Explanations of persistent inter-firm wage differentials for apparently homogeneous labour divide into two categories on the basis of the wage determination mechanism assumed to be at work. On one view, employers are forced by employees to raise wages above the competitive level; on the other, employers may have reason voluntarily to raise wages. On the former view, wages are seen as the outcome of a process of collective bargaining. The outcome depends partly on the bargaining power of workers: thc greater their degree of organization and their cohesiveness, the greater their ability to impose 'costs' on employers through industrial action. The outcome also depends on the bargaining power of firms; the ability to pay high wages may reduce the will of employers to resist worker pressures. The other view of firm-related wage determination is that em- ployers unilaterally raise wages above the Hoor provided by competitive market forces or minimum wage legislation. One explanation focuses on non-productivity benefits that may accruc :o certain employers as a consequ- ence of wage increases. the other c n the efcct of wages on labour productiv- a ity. There are thus four main sets of hypothtses; examples of each are introduced briefly below. ~ i i h n sur a low proportion of workers unionized. Implicit here is the assumption that trade Gens function much as they do in industrialized countries. However. the prediction of the effect of unionization on wages could be revcrsed if there was reason to believe that unions had become an instrument for implemen!ing a government policy of wage restraint. Highly profitable firms will pay higher wages than firms operating at the margin. Tnis cannut be a clear-cut prediction owing to two counter- arguments. The will to resist wage increases may be greater in highly  protitiihle firms if :hi.ir esccptional performance is duc to supcrior manage- ment. 5:orcovcr. althoilgh it seems implausihlc in the case of the many m,rnufacturing firms in nhich wage costs arc ;Ism;rll proportion c.f total cc,sts. high prutitahility could he the result of paying low .iJagcs. In atldition to currcnt profits. thcrc arc various othcr critcria for "ability to pay", reflecting long run profitability. One is nigh capital intensity: ti!^ lowcr the proportion of wagc costs in total cohts. the less scnsitivc arc profits to a given wage increase. I t is for this reason that technological dualism is somctimcs said tc: give riw to labour niarket dualism. A positive relation hetwcen wage5 and capital intcnsit). howcvcr. suppor:s this hypothesis only if it can he shown that thc choice of technique was not in rcsponse ti1 high wagcs. Secondly, ahility to pay may be positivciy associated with s i x of firm. Large tirms may reap grcatcr xonomies of scale. havc more monopoly power and he morc likely to hc protected hy povernmcnt tradc policics. In that c;rce. thcy havc rcatcr capacity to pay high w:rp$>shoth hecause of high profits and the easc Lvith which thcy can sust;rin p~~ofitshy passing on cost incrcascs to consumc'rs. I t is commc)nlyargued that foreign firms arc willing to pay more than local firms. .I.lultinational conipanics may sce thc piryment of high wagcs as a form of insurance in a hostile environment. I t could be a way of securing the loyalty of employees, of avoiding chargcs of 'exploitation'. and of reducing political pressures for nationaiizaticon. Host governments mi1y choosc riot to discourage wagc incrcibcc:~in multinationals if thcy regard highcr wagcs as a means of Lvresting from forcign owners a larger nationa! sharc of value added. This hypothesis is not independent of the ability to pay hypotheses: the multination:~lsmust havc the resources to pay high wages. However, it is often asscrtcd that multinational opcrations in less dcvclopcd countries tend to hc highly profitahlc. as iI rcsult of thcir monopoly or collusive oli~opoly positions. iind that mu1tination;rls tend to use morc capital intcnsivc tcch- niques of protluction, irrespective of thc \v;rse Icvcl. so making profits less sensitive to wages. Thcrc are virrious reasons wby emplovers miry perceive a relationship hetwccn wages and productivity. According to the 'cfficienc:~wagc' hypoth- esis. an increase in wages can in~provcthe health. energy or morale of workers. arid hcncc thcir producti\,ity. c\ccording to the 'lahour turnover: hypothesis. highcr wagcs can diminish labour turnover in the firm. and hcnc' $ reduce training costs. A third hipothcsis is that. by raising wagcs relative te thosc in other firms. an employer can 'crc;rm' the most productivc member? of the labcwr force W:rgc difTcrcnccs among firms may in that asc refle* diifercnces-in the productivity of thcir workers which are not captured b y thc pcrsonirl economic variahlcs in the multiple rezrcssion equaticns owing the incvitzhlc crudcncss of thc v;rriahlcs ;rvailahlc 3sprvxies for personal productivity. Bcc;~useof diffcrcnccs in thcir char;rctcristics. tirms arc liable to diffcl- in thc cxtcnt: to tvhich t h q \vish to raise thc \v;rgc for cfticicncy wage reasons or f c I;rbour turncwer rcasons. and in tbc cxtcnt to \vhich they ~  THE XOLE OF THE FIR31 IN WAGE DETEh'\f!:<.' rlON find it protitable to cream workers. These differences are liable to be revealed by firm variables in the regression analysis. In th: first two cases, labour market segmentation exkts among firms, in the sense that there are no differences in labour productivity at the time of hiring, and there is no ter,dency for wage differences to be redcced through competition. In the crzaming case. the labour market is not segmented in so far as the wage differences reflect differences in personal productivity. 3. The mrgnitude of segmentation among firms There were large differences in average wages among thc firm!, of our sample. Table 1 indicates that average wages among the 24 larger firms ranged from 192 sh. to 722 sh. per month; the mean cifthe distribgticrii was 369 sh. and its standard deviation 1-U sil. Bui we need somehow to measure the extent to which this variation was due to differences among firms in labour force composition in order to isolate the influence of a worker's firm on his wage. Even a simple comparison of average wages and average length of schooling of employees in the various firms (Table 1) suggests that compositional differences were important: the correlation coefficient was 0.67. How best can the influence of firm affiliation be isolated? In the many earnings function studies for developing countries, the influence of firm affiliation or1 earnings is generally ignored because the data used in most such studies lre generated by urban or even national household surveys. With such a widespread frame it is generally impracticable to select a sample sufficiently large to yield enough obsenfations within individual enterprises for statistically significant i'esults. Thus the few indirect assess- ments of the impact of firm affiliation are generaily based on agzregative rather than individual data. A typical study might regress sectoral data of average educational attainment, occupational distribution, firm si? -.capital intensity and other characteristics of enterprises on average earnings by sector. Significance of a firm variable in such equations is interpreted as evidence in support of the general proposition that, for wages of i~ldividual workers. firm affiliation matter^.^ Our data pcrmit us to improve on thesc me:hods by using a simple. though rarely used. tcchniquc. We add to the earnings function dummy variables rcpresentirlg the firms in which the workcrs in the sample are employed. Whether the dummy cocfficicnts arc significantly.large is then a direct test of the proposition that firm affiliation matters. This procedure is made possiblc by the character of the sample. Because the sample was chosen from a limited number of manlfacturing establishments. randomly selectcd in the first stage. respondenls are dispersed among a smaller numbcr of firms. The procedurc is preferable to the convc.ntional method using sectoral averages for two reasons. First. the hypothesis that firm affiliation matters is best tested using data on i~dividualworkers and firms. 'Sce. forex;~rnplc.Ficlds and .\larul;lnda (1976).  TABI r I '4 t.rr,Jqr \ t ' u ~ ~cmd )'~,urcof Sc hooirng hy Frrtn. utrd rhc c'oc.fficrorfe o t ~rhe Firm - s L)r,ttrttr\ \'urruh1c,c1 Arrruqe Wcr~e .-l~.rru.qrYrurc ( i r f i c k n r on (he Fjrtn r tlrrll~fr~cprr nlonrh) of Scltooliflg Firnr fluf?tf?ry C'uriuhle2 I 721.9 h. I 0.28'- 2 564.7 5.5 0.15' 3 545.4 4.h 0.24" 4 5 4 . 8 4.3 0.23** 5 542.9 5.3 0.(k% h i32.U 6.2 0.15 7 4W.2 6.4 O.(K X 393.9 3.8 0.03 9 384.2 4.7 O.lh' 10 367 3 4.4 O.(Nl II 358.8 3.8 -0.tM I2 2-11.X 4.0 -0.lM 13 340.5 4.4 -0.00 I 4 319.0 2.8 -0.14' 15 1 S . h 3.5 -0.If,. Ih 275.2 4.8 -II.IZ' 17 271.5 2.5 -0.25' 18 167.2 -. 1 7- -II.olI !9 159.2 1.S -U.oZ 20 219.1 6.2 -0.25' ' 2 I 217.2 2.5 -0.29" --7 =i 211.6 2.9 -0.11 23 207.7 3.5 -0.27'' 24 191.3 2.6 --0.tM Indic;~tesin thic. and in suh\cquent tables. that thc coefhcient is significant at the 5 percent level. " Indicates in [hi>. and in suhr.cquent tables. that the coefficient is significant at thc I percent Icvcl. ' The repessi\)n cquation has lop earnings as the depcndcnt variable and, in addition to thr Crm dummy variables reported in thc *table. the following independent variables: continuous variablcs representing years o f cducation. ycars of wage cmploymcnt cxpcricnce and its quart; dummy variablcs rcprcscnt- - - ins non-African rare. malc sex. posses5ion of formal training. regular cmploy- mcnt status. three age groups and four crcupational groups (with African race. .* fcm;~lc\ex. no f?rmal training. casual cmploymcnt status. age group 31-34. and -- unskilled crcupation as thc haw sub-categories). .. Thc \ub-category of 23 srnall firms is thc hasc in the dummy variable analysis. w Secondly, the firm dummy variables capture all the influence of firm affiliation on wages. and not just that associated with particular characteris- tics of firms such as profitability and degree of unionization. The lack of significance of variablcs measuring specific firm characteristics does not exclude the pos*iihility of segmentation among firms owing to o:her unspe- cified characteristics.  An earnings functioi~was estimated with the natural logarithm of earnings as the dependent variable and with a full set of personal characteristics and firm dlirnmies as the independent variables.' The coefficients on each of the firm dummy variables are listed in column 3 of Table 1; the base sub- category represents the remaining 23 firms with fewer than 50 employees. Half of the coefficients (12 out of 24) are significant at least at the 5 percent level, suggesting that, even after controlling for differences among workers in personal characteristics. firm affiliation continues to matter. Indeed, judging by the coefficients, to some workers it matters a great deal. To take the extreme cases, an employee in firm 1 with the same personal characteris- tics as another in firm 23 nevertheless earns over 70 percent more.' Of the 12 firms with significant coefficients, 5 pay at least 15 percent more than the group of small firms which constitute the base dummy, and 5 pay at least 15 percent less. It would be misleadingon the basis of this evidence to conclude that labour market segmentation among firms has great influence on the structure of wages in Tanzania's manufacturing sector. Consideration of the proportion of total variance in log earnings explained by certain groups of variables puts such segmentation in perspective (Table 2). A worker's firm is a poor predictor of his wages. When added to the personal variables, the firm dummies raise the explanatory power of the equation by only 3 percentage points (raising R* from 0.63 to 0.66)" on their own they produce an RZ of 0.10. The firm dummy variables contribute only 13 percent of th~:explained variance; the personal variables explain 87 percent, of which those variables more likely to represent productive characteristics account for 59 percent and those personal variables more likely to represent discrimination and scgmentation among workers for the remaining 28 percent (Table 2). Before we attempt to cxplair~the reasons for labour market scgmentation among manufacturing firms, we should recognize that the influence of such seg- mentation is relatively minor. There are two possible techniques for determining whether the payment of premium wages is associated with partic~~larcharacteristics of firms such a as high profitability. a high proportion of workers unionized. and foreign ownership. We can simply replace the firm dummy variables in the earnings function with the variables-that measure the firm characteristics. Alterna- tively. we can use the cocf 9ients on the 24 firm d~~mmies.which constitute a I n this. and ill a11 other regression equations rcprted below, e3timates were made with both the ah\olutc w;lge and its n a t r a l logarithm as :he dependent variable. I n no case were the roults \ubstantivrly affected hy tbchoice of dcpcndcnt vari;ible; only the logarithmic results are pre\rnted in the tahles. - 'In the case of 3 continuous variable. the coefficient in the acmilogari!hmic equation indicates the proportion;~tcchange in earnings attributable to a unit increase in that variable. In the case of a dummy variahlc. the coefficicnt under5tatcs the proportionate increase in earning\; w e Halvorscn 2nd Palmquist (1980) for the dcriv;~tionof the propartionate change in the dependent vnri;thle. Se\crthelrss. a hierarchical F te3t indicates that the contr~hutionof the firm dummies is \ienificant at the one percent Icvcl.  J. B. KSIGItT ASD K. H. SABOT 5 1 TABLE 2 The 11'elrrrit.e Cor.rrrbunon of Frrrt! .iffiliurion ro [he E.rpluiticd Varia~icein Log Earnings Pcrr+*r~ru~rrural e.rpluincd ~.urirrnrc.rliur ir c.tplcincd by sclerrctl graicp3 of ~~uriuhlesin: .J/ a. Regrrssion uith h. Regression with firm dummy firm charrrctcristic variables variables Personal variables 87.3 95.4 of H hicl~: (i) likely to represent productive 58.7 ch;~ractcristics (ii) likely to represent discrimination 28.6 and \egmcntation Firm variahlcs 12.7 4.6 Sores I . The method of apportionment was as follows. We cstimatcd an earnings function using a full sct of independent \ariablc$: by means o f the function we then cstiniated the predictcd earnings (5)of cach employee (j). cocl'licicnt on each indcpcndent variahlc (i) in turn was The sct equal to zcro, and predicted earnings (G,,) wcre estimated using the hypothetical function. Thus w,, means thc wage 01 cmploycc j predicted on the assumption that independent variahle i has no influence on wages. The variances of LL, and k,, wcrc calculated. ;rnd thc pcrccntage contribution of Ito the explained vari;~nccin carnings estimated as (var (6;) - var (iv,,)/S, (var (w,) - var (;,))). See Knight and Sabot (198%). 7,. The rcgrcssion equation on which thc exercisc is bascd has log earnings as the dependent vari;ihle and the following indepcndent variables. Personal variahles: (ij ycars of education. years of wagc employment eupcriencc and its square. occupation. formal training; (ii) sex. race. age. employment status. Firm variahles: (a) dummy variables rcprcscnting cach large firm; (b) ownership c;rtcpnry. size. capital intensity. unskillcd and semi-skilled as a proportion o f labour force. proportion of cmployccs unionized. and protits as percentage of total costs. 3. "Employment status" distinguishes regular cmployecs, a h o are employed by the month and havc various legal rights. and casu;rl employees, employcd by the day and without legal protection (the hasc sub-catcyor)). a hierarchy of firms ordered on tk basis of the wages they pay to workers with the same personal characteristics. as the dependent variabie in another equation with 24 observations. The characteristics of firms would be the independent variables in such an equation. -- The latter techniquc appeals because of the clear separation between firm .q and individual variables.' But the former technique proved more helpful in ' assessing the effect of particular firm characteristics. and its results are = reported bclpw. We do. however, put the firm dummies to one further use. I When the 2J.coefficientc of the firm dummies are the dependent variables a.ld the characteristics of firms the independent variables. the highest value obtained for the corrected R: is only 0.38. Similarly. when the variables 'It was \uggcstcd by Rces and Schultr (1970) who considered using. but did not pursue. this ;rppro;~chIn thcir \tutly of the Chicago !ahour market.  THE ROLE O F THE F I R M IN W A G E DETERMINATION representing firm characteristics are substituted for the firm dummy vari- ables, the contribution of firm affiliation is reduced from 13 to 5 percent of the explained variance of log earnings (Table 2). lhus there is a presump- tion that characteristics of firms other than those we have measured also have an impact on wages.8 4. Do foreign firms pay more? The conventional wisdom that foreign firms pay more9 requires careful scrutiny. The interesting question is not whether they do pay more but whether, if that is true, they do so because they are foreign. A simple comparison of foreign and local firms might well reveal significant differ- ences in mean earnings. However, it would fail to distinguish between the contribution of multinational status alone and that of other chatacteristics (such as high technology products, capital intensity, profitability, large scale production, or a unionized labour force) which might be associated with multinational status. This can be done, subject to the limitations imposed by multicollinearity, in a multiple regression analysis of the sort we attempt below. But the problem is more complicated. It is correct to standardize completely for such characteristics as capital intensity only if capital intensity is causally independent of ownership status. If foreign firms sre more capital-intensive wholly because they are foreign, no standardization is required: standardization should logically be performed only on that part of the difference in capital intensity which is independent of ownership status. The relevant but difficult question becomes: What long run changes in the characteristics of a firm would there be as a result of a change in ownership The diificulties of answering this question and of unravelling complex inter-relationships is illustrated by the following statement from a recent survey of evidence on chcice of techniques in manufacturing in less de- veloped countries: the MNCs are frequently pictured as the special villains of the appropriate- technology effort. They are, so the argument goes, tied to their capital-intensive technology in the developed countries. . . . And, even if they are considering adaptations. they frequently pay higher wages than do locally owned firms, and - they can obtain their capital abroad at cheaper rates, so they would have less incentive to adapt."' The former statement implies that highe capital intensity flows from multi- national status; the latter that higher capital intensity flows froin higher wages. which apparently flow from multinational status. As we shall see. the * Indeed. both methods of assessment suggest that the other characteristics explain just over 60 percent of the contribution of firms to the variance of wages. 'See Arrighi (1973). Reuber (1973). Knight (1975). Lim (1977).  J. H. K S i G f I T A X D R. tj. SABOT problems of collinearity between certain varianles and otvnership status make causatior difficult to establish. -The manufacturing sector of Tanzania does not divide neatly into twc cwnership categories. Whether thc government owns all or part of a firm may have an intluence on waizs ia it. The government has 3n opportunity to implement its wage policies in the parastatal enterprises." Foreign participa- tion in some firms falls short of complete ownership. Thus we distinguish five groups of firms: wholly government owned and thus wholly local (Jl); wholly private and wholly foreign (52); who!ly private, but part local and part foreign (53); partly government owned and partly foreign (J1); and wholly privately owned and wholly local (J5). Initially we ignore the issue of the influence of government participation on wages, and focus our attention on the diffe~encesi l lcharacteristics and wages between foreign and local private firms. Seventeen of the 21 larger firms f2:l into these categories (8 foreign an3 9 local); their empl:)yees comprise two thirds of the labour force of the firms for which we have data on firm characteristics. Table 3 shows that employees in foreign private firms earn on average 21 percent more tilt4.n those in local private firms. It also reveals differences in firm characteristics between foreign and local privzte firms which are consis- tent with the caricature of multinational enterprises in developing countries. Whether judged by the number of employees or by val*: added. foreign firms are larger. 'They are three times as capital intensive, and labour productivity as measured by value added per employee is higher. Were it not for the extraordinarily poor performance of one, loss-making, enter- prise, the multinationals would be more profitable than local firms:I2 as it is, on average those in the 1971 survey are less so. True to their image of being particularly accommodating to labour organizations in host countries, foreign entcrpriscs have a slightly higher proportion of their labour force unionized; they rely less on casual workers. Turn;ng !o the characteristics of employees in the two ownership categories of firm, we have reason to believe that foreign firms are more skill-intensive as well as more capital-intensive. Ernployecs in, foreign firms have received more ,formal education, and a higher proportion have received training provided by the firm. White collar workers comprise a substantially higher proportion of the labour force in the - foreign tirms. On the other hand. workers in multinationals have had, on average, marginally less experience in the tirm and less experience in wage - "' * White (197s). pp. 42-3. flc cilcs as propr:nenls of this view Stewart in Streelen (ed.) (1973). .ind Strccccn (1072). " ,\ pnra>t:lt;ll organization is dclincd by the government of Panzania as "not an integral part of the government. hut a11inhtitution. organization or agency which is wholly or mainly finilnc~cdor owned and controlled by the government. The criterion of such public enterprises would hc o\rncrship by the governnlcnt of 50 percent or more of the capitill shares. or other forms of governmental particip;trion ;ind cffcctive inllucncc in all thc main aspects of managc- mcnt of the cntcrprisc." Ouotcd hy Jacli>i,n ( lc>79).p. 236, from government statcme.lts. " Despite the danger that multin:~tionalswill usc 'tr;insfcr pricing' to undcr5tare their profits in order to cv:ldc t:~v;~tionor csch;rngc controls in a dcq:cl~;pingcountry.  THE ROLE O F THE FIRM IN W.4GE DETERMINATION T A B L3~ Characrericrics of Foreign and Local Privare Firms: ,%fean Valrces of Personal and Firn: Variables Foreign Local Variable (J2) (J5) . .. - .-s(m 391 320 , years of Education (E) 4.1 3.3 Yeais of Employment Expe~ience(L2) 8.6 8.7 Formal Training (F4) 0.09 0.06 Supervisory (01) 0.01 0.02 Clerical (02) 0.18 0.07 ..iilledIHeadman (03) 0.23 0.28 Semi-skilled (04) 0.35 0.42 Unskilled (05) 0.20 0.20 Age 15-19 ( A l ) 0.05 0.07 Age 20-34 (A2) 0.74 0.72 Regular Emplayment Status (R2) 0.96 0.85 Non-African (72) 0.09 0.11 Number of Employees ( X ) 134 96 Value Added (V'COO) 1.717 1,258 Valued Added per Employee ( V E ' W ) 14 3 11.7 CapitaVLabour Ratio ( K ' W ) 24.7 7.5 Profit as Percentage of Costs ( P ) 1U 17 Proportion of Workers Unionized (U) 0.91 0.86 Proportion of Unskilled and Semi- skilled in Total Employment (HZ) 0.55 0.60 Number of Obw rvations (N) 202 202 Notes 1. Mmetary values are expressed in shillings per month. 2. The mean value of a dummy variable indicates .he proportion of the sample in the particular sub-categorj. . a employment generally. However, this is more likely to be explained by differences in the age of enterprises or in their rates of growth than by higher labour turnover in foreign enterprises.'-' It must be stressed that the& various differences in group characteristics are not necessarily the result '&ownership status. The heterogeneity of the manufacturing sector means t b t such differences may reflect differences in the composition of productiojwith foreign firms disproportionately repre- sented in particular types of manufacturing activity, including motor assem- bly and c t ~ m i c aproducts. l In large part, these differences between the two 01,vnership groups in employee and firm characteristics can account for the difference in mean  J. B. K S I G t i T AKD R. ti. S A B O T 55 TABLE 4 earn in^ Flcncrionfor rlle Large Firm Sumple Combining Pcrsottai L * I ~ Firm Variables Irrdependcnr Firm Vurioble>' Wholly government firm' !;I) -0.487" Provortii~nof workers unionizcd (U) -0.765' -0.107 Firn. size: SO or more employees' (X2) 0.1IF* 0.121" Proportion cf workers unskilled or semi-skilled (H2) Prof .- ah a pcrcenta_rc of costcJ (P) 0.020 0.09!" Capital- -labour ratio (K'900) -9.0001 - 0 . W ,.V ' 628 628 p 0.675 0.654 S.E. 0.358 0.369 F 62.97 63.41 IThe dependent variable is log earnings and. in addition to the firm variables reported here. thc folltruing ;Ire i~ldepcr~dcllt\ariahles: y e a n of cduc;~tion.ye2rso f wage enlployment cxpcrirncc ;is:' its square. formal trainiag. occupation. sex, race. Jge and employment status. 'The ba\c sub-categories in the durrmy variables are pr' :te local rirms and firm size . . 'Althounh he numhcr of oSscrvations. corres~ondineto the number of em~lovccsin thc 24 large firms, is 628. the number of values taken by the firm variables is 24. The appropriate tests of significance for the firm charactcristics are unclear; the asterisks are based on thc normal tc\t. 'Costsinclude !he costsof lahour and intermediate inputs, and rent and interest. eration of a difference in the struchure of wages between rivate foreign and local firms. The net premium paid to Asiar,IJ as opposed to African eniployces is over 3 third higner in local than in foreign firms. We attribute this to rhc Iligi? proportion of local firms owned and managed by ~ s i a n s . ' -~ Were it not for :his feature of local films. a wage premium in foreign firms ' - might he disccrnibie. ? ' h1uitin;ricmals have a favourable i m ~ a con waee structure in the :\ensethat t functions for foreign and local private firms. The influelice of variables which might be inter~retedas re~resentinehuman ca~italis '' A5 Europeans wcre cxcluded from the survey. almost all of the non-Africanswere Asians. " Knigh! and Sahot (!YRZa).  56 M E ROLE OF THE FIRS1 IN WAGE DETERMINAT'ION TABLE5 Ecrnings F~cnctionsfor Emplojees of Foreign and Local Private F i r m Coeyic~ents Independent Variables Foreign Local Years of Educaiion ( E ) 0.051" 0.022" Years of Employment Experience ( L 2 ) 0.066'' 0.043" (L2)' -0.0017" -0.0009' Supervisory (01) 0.549" 0.493" Clerical (02) 0.427" 0.496" HeadmanISkilled (03) 0.235" 0.231" Semi-skilled (04) 0.082 0.125' Age 15-19 ( A l ) -0.160 -0.042 Age 35-49 (A3) 0.070 0.168" Age 50- (Ad) 0.253 0.195 Casual Employmcnt Status (R2) -0.400" -0.207" Non-African (72) 0.641" 0.902" Constant 4.845 4.844 ~2 0.692 0.729 S.E. 0.316 0.281 F 33.23 39.59 Number of Observations (N) 202 202 ,\'ores: The base sub-categories of the dummy variables are unskilled occl~pation (05). Age 20-34 (.42). regular employment status ( R l ) . and A!:ican race ( T l ) . The dependent variable is log earnings: all independent variables in the regression equation are reported in the table. greater for the Former than for tb; latter group. Conversely, the influence of personal variables which might be interpreted as proxies for a worker's 'social station' is greater in local firms. The higher premium paid to Asians by local firms is an example of the latter case because in Tanzania Asians were traditionally accorded higher status than Africans. Employers accept- ing the traditional hierarchy may. through their wage structure, consciously or unconsciously help to sustain it. The returns to employment experience are markedly higher in foreign than in local firms, whereas the co;lv:rse is true of the returns to aging. Given that years of wage employment and its square are included as ,independent variables in the regression analysis, it is implausible that the coefficient on .age can be interpreted as a return to human capital. In more traditional societies age per se is accorded status. 'These results may thus reflect a greater tundency among local employers to have their wage structure conform to a traditional social hierarchy. Government is in a bett. .-position to influe&e wages in the parastatal . . org; I. 3ns than in the private sectol. I t is important to discover whether parastatal status raises or lowers earnings, because this will help us to assess !he influence of government wage policy. If parastatals do pay homogeneous labo~rmGre than other firms. then a government policy of curbing parastatal pay might be justified on both distributive justice and allocative efficiency  grounds. However. if the difference in mean wages is due !o differences in labour force composition, then the distributional benefits are more arbitrary, and the allocative effects harmful insofar as parastatals ccnstrained from paying high \\ages are unable to attract or retain the more productive workers they want to employ. Parastatal organizations are represented in our sample by 4 partly govern- ment owned and partly ioreign firms (J1). P.nother form of partnership, 2 private firms with part local and part foreign ownership (J3), is also analyzed. The premium paid by foreign firms appears to vary with the precise ownership arrangement. Table 4 indicates that foreign firms which enter into partnership with local firms pay 9 percent more than local private firms (the premium is not statistically signiticant), whereas a partnership between foreign firms and the government is associated with particularly high premiums. The coefficient on J.1 is significant and indicates a premium of 19 pcrcent in relation to the base sub-category, IS. How is this remarkable result to be explained? Does it mean that the influence of government has been to raise wages rather than to lower them? The most plausible explanation is suggested by the pattern of nationalization in Tanzania. The parzstatals are more capital-intensive, larger and more profitable than the private firms. The values of K, X and P for the J4 group (43128, 716 and S8) are fai higher than those for J2 and J 5 shown in Table 3. These characteristics-capital-irrtensity, size and profitability-rn~j well be the reason for the form of owncrship rather than being the result or simply a coincidence. i.e. those firms were the first targets for state participation. Prior to their affiliation with government, such firms may have paid particu- larly large premiums because of !heir economic characteristics and foreign status." The fact that the premium on parastatal ownership (J4) is signi- ficantly positive, whereas that on foreign ownership (12) is not, suggests that firms must have not only the motive but also the means to pay more. We have provided an explanation of the high wage premium paid by parastatals in 1971 which does not attribute the premium to government policy. Consistent with this is the fact that the one firm in the sample which was. from its inceptioh, wholly government-owned (JI) paid wages signi- ficantly below wages in the group of private lccal firms as revealed by its dummy coefficient in the multiple regression analysis. Indeed, there is reaspn to believe that government policy after 1967 was to reduce pay, i.e. t h a ~ t h eparastatals were subject to a more stringent wage policy than was the6rest of the economy." This was effccted through the Standing Commit- tee& Parasiatal Organizations (SCOPO). SCOPO was established by the e '"This m interpretation would he favoured by Jackson (1979). p. 236: ". . . nationalization measures were aimed Iarzely at the larger capital-intensive multina- tional corporations \vho rnos~l!tended to pity above-avernee wages." " Thcre is an alternative expi~nationfor the large premiu,.; on the JJ variab!e. Thc former foreign firms may not have heen persistently high payers. Rather. the managements of these firms may have raise.? pal; in anticipation of the parastatal wasc policy.  58 THE ROLE OF THE FIR.51 IN WAGE D'TER.~IINI\TION President in 1967 to ex2 nine pay in parastatal organizations. A year Izter it issued a directive which prescribed common basic pay scales for all paractat- 21employees.'" These were in marly cases below the pay of persons then in p s t . The scales were not revised betwccn 1968 and the year of our survey. However. in 1971 many parastatal employees v.we \till rccelving higher pay than the scales indicated because individuals were permitted to retain their pre-SCOPO pay levels. albeit without increments. on a personal basis. Our finding of pure ownership status effects suggests that the government policy of attempting to erode the premium paid by parastatals was well advised on grounds of allocative efficiency as well as equity. 5. Do unions drive up wages? in the model of wage determination bitsed on countervailing power, trade unions are expected to be more succc~sfulin raisirig the wages of their members. the greater is their strength and aggressiveness. This in part will depend on certain economic variables. For instance, unions are likely :o be more successful in raising wages. the lower is the employer's eiasticity of demand for labour (and so the smaller are the adverse employment effects) and the smaller is the relative size of the unionized sector (so facilitating a relative gain). Factors such as these will determine the size of the coefficient on an independent variable indicating uniuriization in an earnings function. The view that trade unions are generally able to raise real wages in less developed countries is not held unanimously. Unions may be ill-organized and lack financial or political power, and be weakened by the abundance of unemployed and poor workers keen to step into wage jobs. As a result. unions need not have the impact that is apparent from their actions and statements." in particular, where government clashes with the unions and subordinates them. they may cease to play an etfective role in wage determination. If they become instrumerits of government policy, and that policy is 0r.e of wage restraint, unions may cven be effective in depress- ing wages. The role of trade unions in Tanzania appears to be better depicted by the 'government contro!' than by the 'countervail~ngpower' model.'" The government adopted a series of measures during the 1960s which effectively subordinated union aims to its own. It-was able to obtain the c-quiesrence of workers and their organizations in .5policy which severely rcstricted the rights to strike and to engage in free collective bargaining. In return it offered them new and substantial ben).fits in .he form of greater security, and participation. = In 1962 the Trades Disputes (Settlmcfit) Act was passed which prohi- bited strikes and lockouts unless a prescribed sea of conditions had been '"SCOPO (1%). "See. lor instance. House and Relnpcl (1976). "'For detailed accounts see Fried!and :i9h9) and Jackon (1079)  J. B. KNIGHT AND R. 'rl. SABOT 59 fulfilled. In 1964the National Union of Tanganyika Workers Act established NUTA as the so!e trade union. dissolving the Tanganyika Federation of Labour and its member unions. NUTA was subsequently affiliated to the Tanganyika African National Union (TANU), the ruling political party, and average wages within an establishment to a maximum of 5 percent, except under extraordinary circumstances. In the same year it established a Perma- nent Labour Tribunal to mediate in all labour disputes, and it effectively barred all stnkes and lockouts. Compensating benefits for these restrictions and regulations include sever- ance allowances, introduced in 1962; the establishment in 1964 of the National Provident Fund providing pensions for retired workers or their widows, and for disabled workers; passage of the Security of Employment Act, also in 1964, which provided for the establishment of Workers' Com- mittees in all enternrises em~lovingat least 10 NllTA members. and laced ranzania is reflected in the trends in strike activity. Table 6 shows !h;tt the TABLE 6 Srrike Acrivity in Tanzania 1955- 1973 .\'umber of Number of Workers,%'umber of Working Year Srrikes' Involved Days Losr 'Excluding strikes lasting less than one day. Source: Jackson (1979). Table 1.  .1'tIE ROLE OF 111E FIRXI IY \V:\<iE DEIEKXIIS:\~I~ION number of strikes. \vorkers in\,ol\.ed. and total working days lost rose rhr,)ughout the 1950s: in 1960. tt~e!car before Independence. roughly one quarter of all wage cniployees were iil\.ol\.cJ. Strike acti~itysteadily dc- clined in the 1960s. and after 1068 vcry fc\v strikes took place. -The -countervailing power' modcl of the role of trade unions in the \\age dctcrmination process is clear in its prediction of the slgn of thc coefficient on the unionization variable: it will be positive. tlo\\cver. whit1 prediction is implied by the 'govcrnnlent control' model. w-hich sccms to be more appropriate in the Tanzanian case? The coefficient could be either zero or negative. depending on whether the unions arc passive or actively depress wages. If wages are determined compctitivcl!~or by the st:ltutory minimum in the non-unionized sector. and if the competitive or statutory wage is similarly effective in the unionizcd sector, unions should be irrelevant to wages. However. if NUT/\ attempts to hold down wagcs against worker demands or employer initiatives. and 1s better ablc to do so in more unionized firms. unionization may actually reduce pay in a firm. Various difficulties arise in attempting. by mcans of the sign and size of the cocfficient on the unionization variable, to test these competing argu- ments. Consider the hypothesis that unions raise wages. Insofar as the union movement has a general political impact, for instance by influencing govern- ment minimum wage legislation. this effect \vill not be reflected in the coefficient. If non-unionized firms choose to raise the pay of their employees in order to avoid the threat of unionization, the c~~cfficientwill again be an understatement. On the other hand, it is also possible that the coefficient will exaegcrate the influence of unions. Employers illunionized firms, faced with having to pay relatively high wages, are in a position to 'skim the cream' by selecting the most productive from the pool of available workers. Insofar as they are ablc to select and retain the more able workers, the coefficient on unionizi~tionmay be in part a proxy for productivity not captured by the independent variables representing economic characteris- tics. This last argument applies also if unions depress wagcs: the negative coefficient may part,ly represent lower productivity. A further problem arises in the precisc formulation of the unionization variable. The data permit two proxies for union strength: whether a worker is a mcmbcr of NUTA (as a personal variable) and the proportion of cmployecs who arc members of NUTA (as a firm variable). The choice ' should depend on whether the union ncgotia!es for its members alone or negotiates to establish rates of pay in the enterprise as a *hole. The latter is a more appropriate assumption for Tanzania. Both lproxies for uni,)n strength were tried: they gavc similar results. and only-thos: for the firm variable arc presented below. Unfortunately. even the firm variable-union members as iiproportion of all employees in a firm (U)-may be;Ipoor prosy for union strength. There arc no non-union firms among the 21 Ii~rgcfirms in the sample. The proportion of the cmployccs unionizcd ranges from the lowcst value of 69  percent to the highest of 100 percent. It may be that. while the strength of the union varies among firms. it is not influenced by variation of U over this narrow range. It is surprising. therefore. that the unionization variable produces a decisive result. The coefficient is negative. as predicted by the 'government con:rol' hypothesis. and it is significant (regression a in Table 3). The value of the coefficient implies that a rise in the value of U by 10percentage points would reduce pay by roughly 7 percent. The union movement in Tanzania, it seems. IS an instrument of government policy rather than the representative of wage-earner interests. The alternative explanation of the sign of the unionization coefficient is that it represents a non-causal association: unionization may simply be a proxy for some other firm characteristics which are responsible for reducing the wage. That this might be the case is suggested by regression b in Table 4, showing that the coefficient on U remains negative but is no longer signi- ficant when the firm ownership variables are dropped from the regression. As Table Y below shows. unionization is negatively correlated with profits, with the share of unskilled and semi-skilled employees in the total, and with parastatal ownership. It is unlikely that the collinearity between U and J4 can explain the negative coefficient on U, however, because U is positively correlated with JZ and 13. the other ownership categories with positive coefficients. Nevertheless, some doubt must remain about he interpretation of the negative association between unionization and earnings. 6. Does ability to pay raise wages? For managers of firms on the margin of profitability the will to resist pressures for higher wages is reinforced by the knowledge that the existence of the tirm is imperiled. Countervailing power models of wage determination suggest that indicators of ability to pay, such as firm size or capital intensity or. more generally. profitability. are likely to prove good indicators of a firm's rate of pay. But if there is no upward pressure on wages from their workers. there is no reason why,Srms able to pay more should do so unless they would themselves benefit. We should not be surprised, therefore, if the proxies used to measure ability to pay in the earnings function are not significant. Ideed. this proved to be the case for capital intensity (A3 and profits as a qrcentage of total cost (P) (Table 4. regression a). However. when the firm ownership dummies arc dropped from the equation (regres- sion b). the coefficient on profits as a percentage of costs becomes signi- ficantiy posit&. reflecting the correlation (+O.J89) between profits and the highest payirrb ownership category." This suggests that it is those firms which have both the means and the motive to pay more-the most profitable foreign firms. which were included in our parastatal category-that do so. :'Since the coefficient on firm size is unchanged and that on the capital-lahour ratio remains neplipihle. it appears that current profits arc the hesr indication o f ahiliry to pay.  hZ T)1E ROLE OF Tt1E FIRXI IS W:\GE DETEKStIShlION The conventional view i.; that largc firms pay mcrc than sniall firms. Simple supporting evidence. shoiving Incan earnings by size of firm. is not hard to find for rich and poor c~untrics.~'Few cconomctric attempts have been made to isolate the cffect of firrn size by st~ndardizingfor other variables. One such study for Kcn):~t'o1:nd that carnings tended to rise with firm size for the education lclvels 0- I1 !.c:\rs of schooling. but not for those with more than 11 years of xhocjling.'3 It is of interest. therefore. to discover xhether firrn size has zn cffcct in our sample. However. lve should not be surprised if the resu:ts ;Ire Lrcak. The reasons for espccting a positive association between firm size and earnings apply Lvithin a sub-sector and only incidentally to the manufzcturing scctor as a whole. The indicator of firm size chosen was the number of employees.'J Whcn firm size was entered as a continuous variable (X). the coefficient was negligible and insignificant. A search ior a non-linear relationsliip using dummy variables sugzestcd a distinctiu.1 between those firms with 50-79 employees and those with SO or more (X7): wases in the larger firms arc 13 percent higher (Table 4). Further disaggrcgiition within the above YO categ- ory failed to reveal successive wage increments with increasing firm size. It is possible that the occupational structure of employment in a firm influences the level and structure of wages paid by the firm. The greater the proportion which a particular type of labour constitutes of total employment, the more costly to the firm is a wage increase for those workers. We therefore hypothesize that the greater the proportion of unskilled and semi-skilled employees in the total employment of a firm, the lower the wage it pays them. If wage pushfulness were equally strong at the higher occupa- tional levels. it would also be the case that the greater the proportion of unskilled and semi-skilled employees-and thus the smaller the proportion of skilled and white coll;lr employees-the higher the wage paid in skilled and white collar occupations. and hence the wider the occupational wage structure. However. thew predictions flow from the countervailing power model of wage determination. and if it is suspect. so also are the predictions. To iest them we estimated separatc. earnings functions for each ,occupa- tional group. and inc!uded among the firm variables either unskilled em- ployees as a proportion of total cmployces (HI) or unskilled and semi- skilled employees as a proportion of total en~ploxecs(Hz).Table 7 presents the results. The evidence is consistent with the rediction that a relatively ' large 'base to the occupational pyramid depress is wages at the base. The coefficient on HI is negative. but not significantJor unskilled earnings, and the coefficient on H2 is significantly negative foenskilled plus semi-skilled earnings. The evidence is not consistent. howeve* with the other prediction that a relatively large base to the occupational p*.-amid raises wages at the -. -- Phelps Brown (1977). pp. 275-6. 'T:~ira(1966). p. 185. "'Thias and Carnoy ( 1972). Tahlcs 2.10. 3. I I. C .1 . ' Gross output and value added in contin~lousform wcrc 3150trlcd ;Ir ~ndicators.hut the rssu:ts were the same as for S.  J. B. KSIGHT ASD R. H. SABOT TABLE7 Corffic~enrs on Occupatioml Structure Variables in Earnings Functions Stratlficd kv Occupo~ion Occupafion .Vwnbers Coefficient on .H1 Coefficienr on HZ White Collar 102 -1.51" -1.58" Semi-skilled 231 -0.17 Unskilled 172 -0.10 Unskilled and Semi-skilled 103 -0.79" AU Occupations 660 -0.19" -0.96'' .Voles: The data relate to all employees of the 24 larger firms. The dependent variable in the regression equation is log earnings and the . independent variables not reported in the table are the following. Personal variables: years of education. )ears in current employment. years in pre\ious employments. and dummy variables representing race. sex, pos- d o n of formal training. employment status. migrant status. age groups and. in the case of all occupations combined. occupation groups. Firm variables: ownership category. size, capital intensity, profits as a percen- tape of total costs, and the proportion of employees unionized. top. The coefficients on H1 and H2 are negative and significant for all occupations ~ombined,'~and negative for each occupation separately. Moreover. the numerical size of the negative coefficient increases with skill level. As the proportion of unsk.illed and semi-skilled employees increases, the occupational structure of wages is compressed. We can only speculate on the explanation. The ditferences among firms in H1 and H2 may reflect differences in products and production processes. For instance, a high proportion of skilled and supervisory workers (low H1 and HZ) might be associated with high productivity, and hence high pay, of such workers. Examples wou!d be engineering workshops, motor repair and other non-standard skill-intensive products. In these establishments, which employ a high proportion of craft artisans. the low values of H1 and H2 may be a proxy for the skill level of the skilled. The sample of manufclcturing firms is too small and diverse for the satisfactory analysis of industrial sub-categories. However, the 7 firms in our sample of 24 which appear to fall into this category have lower values of H1 and H2 (i7 and 45 percent respectively) than the 24 firms as a whole (26 and 60 percent). If this interpretation is correct, then the ayity to pay argument may still apply to relatively unskilled wages. Years agcrsumner Slichter found that the unskil- led wage in the U.S. tended to be high in industries where the semi-skilled and skilled wage was also high. and where wage costs were low and net "The coefficient on H2 inpl~esthat earnings fall by 6.2 percent for every 10 percent rise in  THE ROLE OF TtIE FIR51 IN WAGE DETER51INATION profits high in relation to salcs." He attributed this result to the influence of managerial policy as opposed to market forces. Correspondingly. it is possible that in Tanzania a high proportion of unskilled ard semi-skilled labour causes firms to keep these wages low, and that internal labour market considerations then account for the low wages found also at the higher occupational levels. The variables H1 and HZ bring out s general problem in trying to estimate the effect on earnings of any one firm characteristic. such as occupational structure. This is shown by the size and significance of the corrclation coefficientsbetween the independent variables in Table 8. For instan~e.H2 is collinear with X (positive). with the highest paying firm category. 54 (positive), and wiih U (negative). Size of firm (X) is correlated positively with the high paying firm categories (53 and 53) and negatively with U. The collinearity is not only due to the small number of firms in the sample: some clustering of firm characteristics is likely to be endogenous. Although our results on the influence of particular firm characteristics must be qualified for these reasons. they reveal a coherent story consistent with the institutional 7. Conclusions The methodological contribution of this paper is that, by combining personal and firm characteristics. we have been able to make an advance both on earnings function studies which include only personal characteristics and on studies of firm wage determination which use only firm characteris- tics and the averaye characteristics of employees in the firm. We have been able to test hypotheses concerning the role of the firm in wage determination while standardizing for personal characteristics. Our examination of the relative importance of the personal and the firm explain about 13 percent of the variance in explained earnings, i.e.. their contribution to the overall inequality of pay was very limited. Nevertheless, the coefficients on the firm dummy variables varied considerably, and, when these were replaced by firm characteristics. some of the characteristics It was possible to test the hypothesis that foreign firms pay more by compyring the coefficients on the dummy variables represe~~tingownersl~ip "Slichfer(1950).  J . B. KSIGHT ASD R. H. SABOT TABLE8 Firm Variablc Corrcla.:.. 'befficicnrs 1$, 1.000 -0.193" -0.382" 0.391" .0.343" -b.207" -0.205" -0.160" 0.266" 0.619- 0.171" -0.082' -0.199" 0.485" 1.000 -0.2&8" -0.391" -0.227" Norc: A two-tailed significance test is applied. status: foreign firms pay little more than locally owned private firms. However, we found evidence that foreign firms' wage structure is economi- cally more rational and conforms less to social hierarchy than that of local employers. Given that the government policy after 1967 was to restrain wages, we expected the coefficient on the dummy variable representing parastatal enterprises to be negative: on the contrary, it wa's positive and larger than that for foreign companies. The most plausible explanation is suggested by the pattern of nationalization in Tanzania. The parastatals were previously the most profitable foreign firms, which had paid the highest wages. Nationalization had been fairly recent, and the implementation of the government policy of curbing pay would take time. The finding on parastatals is therefore support for. and not refutation of, the view that foreign firms pay more if they are sufficiently profitable. The role of trade unions in Tanzania appears to be better depicted by the 'government control' than by the 'cauntervailing power' model. The govern- ment adopted a series of measures during the 1960s which effectively subordinated union aims to its own. In the multivariate analysis, unioniza- tion turned out to depress wages. The sign on the firm unionization variable was negative. and the coefficient significant. If there is no upward pressure ' on wages from workers. there is no rearm why firms able to pay more should d o so unless they would themselves benefit. Nevertheless, various indicators of 'ability to pqy' were included as explanatory variables in the earn:ngs function. Altholrgh profitability and capital-intensity proved to have insignificant coefficients, there was some evidence in favour of the ability to pay hypothesis. 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