Wages Equal Productivity. Fact or Fiction

Using a matched employer-employee data set of manufacturing plants in three subSaharan countries, I compare the marginal productivity of different categories of workers with the wages they earn. In each country, I observe approximately 135 firms and an average of 5.5 employees per firm. Under certain conditions, the wage premiums for worker characteristics should equal the productivity benefits associated with them. I find that equality holds strongly in Zimbabwe (the most developed country in the sample), but not at all for Tanzania (the least developed country). Results for Kenya are intermediate. Differences between wage and productivity premiums are most pronounced for characteristics that are clearly related to human capital, such as schooling, training, experience, and tenure. Moreover, where the wage premium differs from the productivity benefit, general human capital tends to receive a wage return that exceeds the productivity return, and the reverse holds for more specific human capital investments. Schooling tends to be over-rewarded, even though most of the productivity benefit comes from job training. Wages tend to rise with experience, even though productivity is mostly increasing in tenure. Sampling errors, nonlinear effects, and non-wage benefits are rejected as explanation for the gap between wage and productivity effects. Localized labor markets and imperfect substitutability of different worker-types provide a partial explanation. ∗Department of Economics, University of Toronto, 150 St. George Street, Toronto, ON M5S 3G7, Canada, [email protected]. Seminar participants at the University of Illinois, Kellogg School of Management, and Catholic University of Louvain provided useful suggestions. Funding by the Connaught Foundation is gratefully acknowledged.