Which employers pay a higher college wage premium?

Purpose - Our work aims at identifying the employer-specific drivers of the college (or university) wage gap, which has been identified as one of the major determinants of the dynamics of overall wage and income inequality in the past decades. We focus on three employer-level features that can be associated with asymmetries in the employment relation orientation adopted for college and non-college-educated employees: (a) size; (b) the share of standard employment; (c) the pervasiveness of incentive-pay schemes. Design/methodology/approach – Our establishment-level analysis (data from Basic Survey on Wage Structure, 2005-2018) focuses on Japan, an economy characterised by many unique economic and institutional features relevant to the aims of our analysis. We use an adjusted measure of firm-specific college wage premium, which is not biased by confounding individual and establishment-level factors and reflects unobservable characteristics of employees that determine the payment of a premium. Our empirical methods account for the complexity of the relationships we investigate, and we test our baseline outcomes with econometric approaches (propensity score methods) able to address crucial identification issues related to endogeneity and reverse causality. Findings – Our findings indicate that larger establishment size, larger share of regular workers and more pervasive implementation of IPSs for college workers tend to increase the college wage gap, once all observable workers, job and establishment characteristics are controlled for. This evidence corroborates our hypotheses that a larger establishment size, a higher share of regular workers and a more developed set-up of performance pay schemes for college workers are associated with a better capacity of employers to attract and keep high-educated employees with unobservable characteristics that justify a wage premium above average market levels. Originality/value – Our contribution to the existing knowledge is twofold. First, we combine the economics and management/organisation literature to develop new insights that underpin our testable empirical hypotheses. This enables us to shed light on employer-level drivers of wage differentials (size, workforce composition, implementation of performance-pay schemes) related to many structural, institutional, and strategic dimensions. The second contribution lies in our measure of the ‘adjusted’ college wage gap, which is calculated on the component of individual wages that differs between observationally identical workers in the same establishment. As such, the metric captures unobservable workers’ characteristics that can generate a wage premium/penalty.