The Role of Firms in Wage Formation: Evidence from Immigration and Local Taxes in Switzerland

Contrary to what many standard textbook models of perfect labor markets would predict, wages are often set by firms, which enjoy a strong power as labor market makers in many settings. In the conventional model, wages are determined by supply and demand, with employers accepting market wages as given. In recent decades, the perspective asserting that employers possess some degree of wage-setting power has gained prominence within the field of labor economics. On the theoretical front, monopsony models are shown to be more coherent with the various labor market phenomena that are challenging for the canonical labor market model to account for adequately. Empirically, numerous studies have demonstrated that firms play a pivotal role in shaping wage determination (Abowd, Kramarz, Margolis - AKM, 1999), significantly contributing to the escalation of wage inequality (Card, Heining, Kline - CHK, 2013).

The proposed research project aims to deepen our comprehension of the role that firms play in shaping wage structures and other labor market outcomes. To accomplish this aim, we leverage the distinctive institutional context of Switzerland and its labor market. The proposed project is structured into two distinct phases. The research will be structured in two parts. The first part examines the impact of immigration and economic shocks on immigrants and natives' sorting across firms, wage disparities, and economic integration. To gain causal and credible evidence we analyze policy shocks, such as the free movement of labor with the EU, and exchange rate fluctuations. The second part investigates how variations in local income taxes in Switzerland affect labor markets and whether these effects are mediated through firms. We explore tax-induced changes in labor supply and their implications for wages, especially in concentrated local labor markets, and serve by the exceptionally granular income tax scenario to identify wages and labor supply tax elasticities. The divergent tax regimes across locations and over time in Switzerland provide a unique empirical framework to explore the mediation of wage and employment responses to tax policy changes through firms.

This project offers significant contributions on multiple fronts. First and foremost, it provides a profound understanding of the pivotal role that firms play in addressing two fundamental inquiries in economics: (i) the mechanisms governing labor market adjustments in response to immigration shocks, and (ii) the intricate interplay between taxation, firms, and the workforce. These fresh insights have the potential to capture not only the attention of the Swiss context but also resonate within the broader economics community. The project's second notable contribution lies in the richness of available data sources. Much akin to existing literature, we leverage population data extracted from social security records (specifically, AHV data) to estimate models akin to those proposed by AKM and related scholars, thus disentangling firm-specific effects. Furthermore, we employ a multifaceted data approach by linking AHV data to the population register (STATPOP), facilitating the tracking of individuals across different residential locations. Additionally, we integrate immigrant register data (ZEMIS), offering insights into the legal status trajectories of immigrants over time. Lastly, we harness comprehensive municipality-level data pertaining to tax schedules, sourced from the Swiss tax authority (EFV), enabling precise income tax assignments. This amalgamation of comprehensive datasets equips us to illuminate novel perspectives on the intricate role that firms play in shaping wage structures and various labor market outcomes.