Estimating the Wage Premium to Supervision for Middle Managers in Different Contexts: Evidence from Germany and the UK

Abstract

The analysis of wage distribution has attracted scholars from different disciplines seeking to develop theoretical arguments to explain the upward or downward trend. In particular, how the middle management wage premium changes in different contexts is a relatively neglected area of research. This study argues that wage distribution changes in different contexts, representing different forms of capitalism. To shed light on this, we considered the size and the shape of the wage premium to supervision paid to middle managers in Germany and the UK. We find evidence of two forms of context: middle managers are paid differently for the same task according to the economy where they work; of this amount, about half of the difference is related to the context. We frame the analysis within the literature on varieties of capitalism.

Keywords

context Germany middle managers UK variety of capitalism wage premium

Introduction

Recent studies on remuneration have concentrated on two groups: blue-collar or menial workers (Dencker and Fang, 2016) and chief executive officers (CEOs) or senior managers (Deng and Gao, 2013). Research has thus neglected an important aspect, namely skilled middle managers, who constitute a significant portion of the labour force (McNulty and Brewster, 2019). From their viewpoint, some countries are more attractive than others, which affects the overall performance of economies (Özçelik et al., 2019). Self-reported earnings satisfaction is one area that has been explored, albeit modestly. In addition to this work on subjective perceptions, there is a need for objective measures to explain the different remuneration of middle managers in different contexts. That is, there is a lack of research into why they find one labour market more appealing than another. This particular focus is relevant, in that studies on different countries and industries show the great importance of supervisors in shaping the perceptions of employees and organisational functioning (Škerlavaj et al., 2016).

This article refers to the varieties of capitalism (VoC) literature on the economics of industry organisation and firms’ strategic choices in countries with different forms of capitalism (Hall and Soskice, 2001). This literature suggests that economic and cultural diversity generates dissimilarity in employment relations. Following Hall and Soskice (2001), this article studies Germany and the United Kingdom as examples of alternative models of capitalism and industrial relations: the former a Coordinated Market Economy (CME), the latter a Liberal Market Economy (LME). Both labour markets, for different reasons, have been quite attractive to immigrant workers. Both have been open to waves of skilled migrants, acknowledging their value for firms, regions and the nation. The proportion of highly educated immigrants is higher in the UK than in most other European countries (Bryson and White, 2019).

This article contributes to the literature in three ways. It estimates the distributions of middle managers’ wages in the two countries and analyses how each shapes remuneration and the wage premium to supervision (WPS). Middle managers are defined as employees with responsibility for organising and monitoring others. Statistics on Income and Living Conditions (EU-SILC) 2009 data are used to estimate the wage distribution that would prevail if, other parameters equal, no employees were middle managers and compare it with the actual distribution, thus computing the WPS in the UK and Germany at all deciles. The portion of this difference that depends on the national context is measured, generalising the approach of Blau and Kahn (1996), which studies international differences between the average of the wage distributions, to the entire wage distribution. This is a good method for estimating the effect of context on the WPS. This article is the first to follow the data analysis process set out below, taking a new approach to analysing remuneration practices through the VoC lens.

The second contribution is new empirical evidence, extending and further supporting VoC theory. This study develops a new tool to examine the impact of context on employees’ remuneration and sets out new evidence supporting Hall and Soskice (2001), suggesting that context does indeed shape the wage distribution, over and above individual, job and firm characteristics; specifically, this analysis contributes to the VoC debate on governance in Germany and Britain.

The third contribution is to the literature on the middle management wage premium. A number of scholars have looked into the sources of international differences in CEO compensation, including those between Germany and the UK (Bruce et al., 2005; Fernandes et al., 2013; Gomez-Mejia et al., 2005), but this is the first empirical evaluation of WPS differences. The questions raised may be relevant for two reasons. First, the resources going to supervisory employees represent an opportunity cost where they could be allocated to more profitable activities (perhaps higher wages to other workers). Second, it contends that the WPS is determined by context variables such as labour market institutions, corporate structure and firm organisation (Acemoglu and Newman, 2002).

The rest of the article is structured as follows. The next section discusses the literature and describes the data and the procedures. The concluding section sets out the key findings, with discussion of theoretical and policy implications.

Existing research

Middle managers and wage premium

Studies of employee remuneration have mainly taken two directions. On the one hand, the literature has identified individual characteristics shaping the distribution of wages (DiNardo et al., 1996). On the other, researchers have focused on the determinants of employee compensation, especially at the top of the hierarchy (Jensen and Murphy, 1990). In this, the role of the WPS is a relatively neglected area of research. This is an important gap to fill because, as theory suggests, the WPS is likely to affect wage inequality (Rueda and Pontusson, 2000). The remuneration of CEOs and top executives is known to be less strongly affected by the context (Greckhamer, 2016), as their compensation is dominated by the variable component, whereas the WPS represents a fixed component. As noted, the WPS also represents an opportunity cost where resources could be directed to more productive uses (Bernhardt, 1995). And, most importantly, it is driven by the broader economic context (Acemoglu and Newman, 2002).

VoC: Germany versus the UK

Research on employment relations has used the VoC framework to understand patterns of HRM practices in different labour markets (Kalleberg, 2009). The original approach of Hall and Soskice (2001) distinguishes two archetypes of market economy, CME and LME, the essential difference being the mode of coordination that employers favour. Germany and Britain are used as examples of alternative types of capitalism or contexts (Baccaro and Howell, 2017). The UK is an LME, stock-market-centred and characterised by shareholder-favouring firms and institutions. Hall and Soskice (2001) describe a fluid UK labour market where workers can be dismissed at short notice, enabling British firms to sustain losses of market share. In this type of economy, firms coordinate their activities primarily via hierarchies and competitive market arrangements, and equilibrium outcomes are given by supply and demand conditions in competitive markets. The UK financial services industry has been dominant for decades, making market competition more important than regulation and emphasising financial incentives for managers. Overall, British companies are more concerned with profits and dividends than their German counterparts (Vitols, 2001).

Germany is characterised instead by employee-favouring firms within a corporate culture in which employees perceive the company as a community, with the state assigned to regulate and promote cooperation. Germany operates as a CME, characterised by the role of the government as producer of public goods; it has retained its traditional manufacturing sector while developing a context that supports science-based start-ups. The labour market is marked by strong social insurance and protection, commitment to standards and stable employment relations. Firms depend on non-market relationships for coordination with other actors, and the context accordingly fosters long-term employment strategies, making lay-offs a less common response to declining returns. These features are evident in the Hartz reforms and the representation of German workers on corporate supervisory boards (Eichhorst and Marx, 2011).

More recently, scholars have analysed the tendency to convergence among different types of economy. The liberalisation thesis posits that the two archetypes are not actually that dissimilar, with LME features penetrating the CMEs (Streeck, 2008). Recent work on VoC and worker mobility similarly points to these changes. Even so, Hall and Thelen (2009) tend to agree that significant differences between LMEs and CMEs persist. Recent research suggests that for studies of employment relations the VoC framework is still valid (Hassard and Morris, 2018; Hertwig et al., 2018; Kornelakis, 2014). For example, Farndale et al. (2017) offer evidence of substantial variation in HRM practices between the two types of economy. Compensation practices, such as the wage premium, are regulated at national level (Festing, 2012), with very considerable differences. In line with this literature, the present article acknowledges that wage bargaining and compensation practices are severely constrained at institutional level, with fundamental differences rooted in the different nature of LMEs and CMEs. Discretion in compensation and inequality are expected to be less pronounced where there is more regulation (Thelen, 2001), as in CMEs; greater discretion is expected in LMEs. Research shows that the UK labour market is associated with deregulation and polarisation (Sisson et al., 2018).

It is here hypothesised that British middle managers should earn a higher WPS than their German counterparts, and that the difference increases with rank. Similarly, the distribution of the WPS should be considerably more unequal in the UK (Rueda and Pontusson, 2000). The following hypotheses are accordingly formulated:

Hypothesis 1a: The WPS helps shape the distribution of wages in Germany and the UK.

Hypothesis 1b: The middle management WPS is higher in the UK than in Germany.

Hypothesis 1c: The difference between the WPS in the UK and Germany increases as wage levels rise.

The question, then, is how much of the difference in WPS is due to the different contexts. Compensation practices are shaped by corporate governance mechanisms, which are path- and context-dependent (Brewster et al., 2008). The VoC framework posits that firms are embedded in their national environment and emphasises institutional interaction effects. Thus, firms’ decisions and practices are affected by multiple factors. Different types of economy display diverse patterns of HRM in response to local institutional factors (Jackson and Deeg, 2008). Firms are affected by the local norms and culture, to which their practices must conform (Farndale et al., 2017). This suggests the following hypothesis:

Hypothesis 2a: The context helps shape the WPS.

A second body of literature, rooted in labour economics, helps in understanding the features of the British and German labour markets and addresses the research question proposed here. Specifically, the evidence shows that the British labour market is now characterised by marked polarisation between high-paid and lower-paid positions (Goos and Manning, 2007; Salverda and Mayhew, 2009), which digitisation has accentuated. Germany is considered the archetype of a continental ‘European’ welfare state, where employment protections are stronger. Brücker et al. (2014) find that there is less wage flexibility in Germany than in Britain. Specifically, the WPS is determined by contextual factors, such as labour market institutions, corporate structure and firm organisation (Acemoglu and Newman, 2002).

This article draws on these two lines of research, one maintaining that LMEs and CMEs produce country-specific norms and corporate behaviour, the second shedding light on the specific characteristics of each type:

Hypothesis 2b: The effect of the context on the WPS to middle managers is greater in Germany than in the UK for low wages.

Methods

Dataset

The question of empirical measurement of the WPS has been relatively unexplored, owing chiefly to the absence of datasets permitting international comparisons and the lack of a common European definition of middle manager (Baker and Holmström, 1995).

The present study exploits the cross-sectional EU-SILC (EU Statistics on Income and Living Conditions) dataset for 2009,¹ which is widely used to test predictions derived from socio-economic theories in different economies (Bünning and Pollmann-Schult, 2016; Dotti Sani and Scherer, 2018; Sánchez-Mira and O’Reilly, 2019). The survey uses common questionnaire, guidelines, definitions and procedures for all the EU economies and weights the data to account for unit non-responses and other problems of attrition. The results reported here reflect these weighted data. This study, indeed, is a good example of the advantages the dataset offers, insofar as both the sampling strategy and the definition of middle manager are common to the two countries. In line with the theoretical definition in Leonard (1987), Acemoglu and Newman (2002) and Beaudry and Francois (2010), EU-SILC defines a middle manager as an employee with:

formal responsibility for supervising a group of other employees . . . directly, at times doing some of the work they supervise . . . The supervisor or foreman takes charge of, directs the work and controls that it be properly done. (EU-SILC, 2009: 195)

The survey also provides information on many characteristics of the job (permanent/temporary, full-time/part-time), firm (size, sector of activity) and individual (age, citizenship, gender, education, skills). Several covariates serve to control for omitted-variable bias and self-selection. Despite the large number of variables, fewer than 1% of the observations are lost.

The dependent variable is the (natural) logarithm of monthly gross wages. Table 1 reports preliminary evidence for the three sets of variables. The final sample consisted of 8588 employees in Germany and 6609 in the UK. Britain had a higher percentage of middle managers. In Britain, middle managers earned an average €3474.70 a month, other employees €1920.11. The corresponding figures for Germany were €2924.85 and €1627.57.

Table 1.

Sample characteristics.

Variable		Germany		United Kingdom
Variable		Middle managers	Other employees	Middle managers	Other employees
Job characteristics
Wage (Euros)		2924.85	1627.57	3474.70	1920.11
Middle managers			74.66	38.74	61.26
Permanent position		91.08	95.22	95.55	98.52
Full-time position		63.99	86.40	70.86	88.98
Individual characteristics
Age (average)		45.18	44.78	43.78	44.33
Gender (male)		66.50	42.65	55.08	43.57
Married		92.40	62.29	62.29	65.39
Local		97.68	98.25	94.74	95.55
Education	Primary	0.41	0.62	0.00	0.00
	Lower secondary	1.70	5.77	5.00	13.73
	Upper secondary	34.88	49.33	48.71	58.48
	Post-secondary (not tertiary)	7.58	8.56	3.63	4.30
	Tertiary	55.42	35.71	42.66	23.49
Skills (ISCO-88)	Level 4	63.28	45.66	71.99	32.06
	Level 3	17.97	27.99	16.91	39.00
	Level 2	12.22	12.09	5.23	7.93
	Level 1	6.53	14.25	5.86	21.02
Firm characteristics
Firm size (% > 10 employees)		84.01	80.54	86.21	82.74
Sector of economic activity
Agriculture and fishing		1.14	1.06	0.69	0.7
Manufacturing, mining, electricity		20.77	26.84	15.91	14.92
Construction		4.65	6.94	5.04	6.33
Wholesale, retail trade, repair services		14.47	13.97	14.05	10.23
Hotels and restaurants		1.47	2.25	2.15	3.01
Transport, storage and communication		6.16	5.51	6.92	5.16
Financial intermediation		6.24	5.61	4.69	4.84
Real estate, renting, business activities		9.01	8.46	10.5	11.99
Public administration and defence		9.17	6.99	10.08	12.03
Education		6.08	4.27	13.44	11.25
Health and social work		14.13	12.45	12.62	14.77
Other		6.71	5.65	3.93	4.77
Number of observations			8588		6609

Notes: This table reports information on our sample’s job characteristics (average wage, % of middle managers, % of individuals with a permanent position, a full-time position), their individual characteristics (average age, % of males, marital status, local status, education achieved, skill level) and the firm’s characteristics (% with more than 10 employees, economic sector). It also shows the number of observations in Germany and the UK. ISCO-88: International Standard Classification of Occupations.

The data indicate that middle managers are younger than other employees in the UK, but older in Germany. They also showed more men in middle management positions in Germany, and smaller differences in education and skills between middle managers and other employees. Finally, most individuals were employed in firms with more than 10 employees. By sector, German middle managers were relatively concentrated in manufacturing, mining and electricity, while their sectoral distribution in the UK was more uniform.

The distribution of wages in Germany and the UK

The differences between the wages of middle managers and other employees were also evident in the wage distributions of the two economies (Figure 1). These distributions were estimated in a fully nonparametric framework, which allowed for analysis without imposing any shape at the outset; this approach is particularly effective in describing the characteristics of the sample, letting the data speak for themselves.

Figure 1.

Wage distribution in the UK and Germany.

The wage distribution of middle managers proves to dominate that of other employees, in both economies and at all wage levels. This does not differ greatly from the findings of studies based on average wages: middle managers earn more than other employees, and the difference is greater at higher deciles of the distribution.

Measuring the national WPS

The differences between the distributions shown in Figure 1 cannot be taken as a measurement of the WPS for middle management. They were constructed using a single characteristic as discriminant, namely ‘being a middle manager’, but these results also capture other characteristics likely to differ between middle managers and other employees, such as skills, gender, education and sector of activity. Thus, the difference between the two distributions in Figure 1 cannot be ascribed solely to the middle manager position, which is the focus of this study.

What is needed is a decomposition method to gauge the effect of the middle managerial position only, keeping other variables constant. A number of methods have been developed to decompose changes or differences in the mean of an outcome variable with many possible independent variables. The most important is probably their extension to distributional parameters other than mean and variance. These techniques are of interest here, as the premium will presumably be different in the two economies and at different quantiles of the earnings distribution for each, depending importantly on the context.

DiNardo et al. (1996) suggest comparing the actual distribution of wages with the distribution that would prevail if, all things being equal, none of the individuals was a middle manager.² There are different methods to obtain this distribution. This article adopts Inverse Probability Weighting (IPW), first proposed by DiNardo et al. (1996). The procedure for decomposing changes in the density of wages was a generalisation of Oaxaca’s decomposition of changes in means. The decompositions were based on simple counterfactual densities such as ‘what would the density of wages have been if no employee was managing others, other things equal?’. This ‘counterfactual’ density can be determined by a ‘reweighting’ function that estimates the probability of being a manager as a function of all the other characteristics to be kept constant. The difference between the actual and the counterfactual density of wages is exactly the amount that the economy pays simply for being employed as a middle manager, defined here as the WPS.

It is worth highlighting some limitations of this approach. The version of the EU-SILC dataset we have adopted is cross-sectional and, therefore, it lacks variation over time, which would be of help in assessing the direction of causality. Another limitation is that the method adopted here is preferable if the aim is to decompose the overall difference in the wage distributions into the explained and unexplained components. This suggests a limitation of the methodology relating to the aggregate nature of the measure of the role of context in the UK and Germany. In other words, even holding the large set of covariates considered constant, if any other relevant variable is missed its effect will end up in the WPS. To get a measure of the WPS that can be regarded as robust to the absence of potentially important confounders, a rich set of covariates has been developed, and the results are checked for robustness using a full Instrumental Variables (IV) approach.

Comparing WPS in different countries

Comparing Germany and Britain required the same specifications as the probit model used to reweight the observations. Hence, the general-to-specific approach was not applied, as this would have made the set of regressors economy-specific. Instead, the joint significance of four sets of variables was tested:

individual characteristics: education (four categories: lower secondary or less, upper secondary, post-secondary, at least tertiary); work experience (and its square, cube and quartic); gender; marital status; and citizenship (two dummies: national/non-national, European/non-European)

job characteristics (part time, full time, fixed-term, permanent)

firm characteristics (size measured by three dummies, 13 economic sector dummies)

individual skills (four dummies measuring the skills required for the task).

The variables described in (i), (ii), (iii) and (iv) help deal with data heterogeneity, and control the results for education and work experience, gender, marital status, citizenship, job characteristics, firm characteristics and skills of the employee. The rationale for these sets of variables consists in the need to check for selection mechanisms into supervisory jobs, which Marsden (1990) among others suggests may be present to differing extents in the British and German job markets. This is a crucial point. If, for example, education, experience or the individual skills of supervisors and other employees differ systematically, the former will self-select into more rewarding tasks. Hence, if these variables are not appropriately controlled for, the measure of the WPS applied here would be a combination of the reward for individual education, experience and skills, and of the WPS (Cameron and Heckman, 1998).

More specifically, the variables in (i) control the estimated probabilities for selection mechanisms associated with work experience. It is known that job regulations in Germany emphasise work experience, and seniority is typically rewarded with career advancement (Eyraud et al., 1990). Germany is an example of an occupational labour market, while the UK accords greater importance to generic tertiary skills and occupational mobility. The variables in (ii) help control the estimates for different job characteristics. The share of temporary employment and that of part-time employment relative to overall employment are known to be two of the most relevant variables for identifying VoC typologies (Lallement, 2011). The variables in (iii) are introduced as differentiating variables, as in Goergen et al. (2012), allowing to control for firm size and sector. Individual skills are also controlled for using the variable in (iv), as labour mobility between firms is greater in countries like the UK than in Germany, where workers find it harder to transfer their skills to another firm, so that career advancement is gained mostly within rather than between firms. In Britain, by contrast, job regulations are expected to emphasise workers’ skills and the inter-firm labour market. Such differences in mobility are likely to affect advancement in supervisory roles, so it has been checked whether individual skills, not context, are responsible for international differences in the WPS. Following Picchio and Mussida (2011), to control for individual skills, the present study uses the International Standard Classification of Occupations (ISCO-88). These variables are associated with the type of job chosen by the individual.³ The categories range from relatively low-skilled jobs, such as plant and machine operators and assemblers, to higher-skilled jobs, such as professionals, legislators and senior officials, and CEO/non-CEO positions. The variables refer explicitly to the skill level:

The basis for the classification in the ISCO-88 scheme is the nature of the job itself and the level of skills required. A job is defined as the set of tasks and duties to be performed. Skills are the abilities to carry out the tasks and duties of a job. Skills consist of two dimensions: skills level and domain specialization. (EU-SILC, 2009: 183)

These variables have been adopted in empirical research and refer explicitly to the skill level required for the job (Böckerman and Maliranta, 2013; Ortega, 2009; Pemner and Lawrence, 2004), ranging from the relatively low-level skills needed to perform simple and routine physical or manual tasks (level 1) to those necessary to perform such tasks as operating machinery and electronic equipment (level 2) to higher-level skills required for professionals, legislators and senior officials (level 3) and, finally, high-level skills such as literacy, numeracy and excellent communication (level 4).

Measuring the effect of the context on the WPS

The theoretical literature sees the WPS as influenced by context variables (Acemoglu and Newman, 2002). To study the extent to which context shapes the wage distribution, one needs a measurement of how much a German middle manager would earn, everything else equal, if he or she were doing the same job in the UK. The measurement selected is the difference between actual earnings of a German middle manager and potential earnings in the UK. The procedure begins with an estimate of the distribution that would have prevailed if, all other things equal, all German employees had been working in the UK.

The key element was the reweighting function for the German observations, as before, but taking ‘being a German employee’ as the dependent variable. The second step was estimating how much a German middle manager would earn in the UK. These weights were derived from the interaction between those used in measuring the WPS for Germany and those for the probability of being a German employee. This gave the appropriate reweighting function. Applied to the sample of German employees, this would yield the premium that German middle managers would have received in the UK. The difference between the actual WPS and that obtained using the counterfactual distribution gives the effect of the context. Note that because this is taken as the difference between the WPS actually earned and the theoretical WPS earned in the UK, the effect of potential self-selection into management positions is likely to be further attenuated.

Empirical results

Table 2 presents the results of the auxiliary probit regression. Column (a) refers to Germany, with, as independent variables, individual, job and firm characteristics, plus variables controlling for individual skills, added to the model reported in column (b). The joint significance of variable groups was tested for, using the F-statistic (p-values in brackets).

Table 2.

Results with joint exclusion for auxiliary probit regressions.

Joint exclusion of the following characteristics:	Germany		UK
	(a)	(b)	(c)	(d)
i. Individual (gender, marital status, local, education, exp, exp², exp³, exp⁴)	112.2(0.000)	142.32(0.000)	90.61(0.000)	57.63(0.000)
ii. Job (part/full-time, temp/perm)	166.09(0.000)	150.36(0.000)	229.10(0.000)	150.58(0.000)
iii. Firm (4 dummies for the firm size, 13 dummies for the economic sector)	73.13(0.000)	97.55(0.000)	84.87(0.000)	101.81(0.000)
iv. Skills (4 dummies for the skills associated with the type of occupation)		76.87(0.000)		408.26(0.000)
Pseudo-R²	0.090	0.105	0.094	0.166
Correct predictions (%)	62.1	73.9	66.6	71.0

Note: The table reports the results from the joint exclusion for the probit model’s estimation that an employee is a middle manager for both Germany and the UK.

The model adapted reasonably well to the data, and all three groups of variables were statistically significant. The pseudo-R² is about 9%, not greatly different from other studies using similar datasets. More than 60% of the predictions turned out to be correct. Column (b) shows that the set of variables controlling for individual skills was statistically significant. The pseudo-R² increases to 10.5% and the percentage of correct predictions to 73.9%. Columns (c) and (d) report the results of the same analyses for the UK. Again, the model fits the data well. Added to the set of regressors, the variables proxying for skills also raised the pseudo-R² (from 9.4% to 16.6%) and the percentage of correct predictions (from 66.6% to 71.0%). This specification has been preferred in calculating the set of weights and performing the exercise.

Does the WPS differ between Germany and the UK?

Figure 2 reports both the actual and the counterfactual wage distributions for the UK and for Germany. Some statistics based on these distributions are reported in Table 3. The Kolmogorov–Smirnov test (top panel) rejects the hypothesis of equality of actual and counterfactual distributions for both economies. This implies that the WPS does indeed affect the distribution of wages significantly (Hypothesis 1a). The bottom panel presents the WPS measurement. Figure 3 plots the results at the mean and at different quantiles of the distribution. At the mean wage in Britain, the WPS was nearly 26% (€899.70) compared with 16% in Germany (€467.90). And the WPS also differed at different deciles of the earnings distribution. The WPS curve was U-shaped in both countries, but the minimum was near the 40th percentile in the UK and the 70th in Germany. That is, the WPS for middle managers tended to increase inequality more in Britain than in Germany, where the WPS is lower for all the deciles (Hypothesis 1b). Moreover, the difference in WPS for the two economies tended to increase over all the deciles. The evidence supports Hypothesis 1c, namely that the difference between the two countries is sharper for middle managers at higher grades.

Table 3.

Wage premium for middle managers in the UK and Germany.

Country	Germany	United Kingdom
Kolgomorov–Smirnov statistic	0.0625	0.0833
p-value	(0.018)	(0.000)
Wage premium at:			UK / Germany
Mean	0.160	0.259	0.100
Decile
0.1	0.231	0.265	0.034
0.2	0.195	0.277	0.081
0.3	0.154	0.239	0.084
0.4	0.148	0.221	0.073
0.5	0.135	0.226	0.091
0.6	0.120	0.246	0.125
0.7	0.118	0.259	0.141
0.8	0.130	0.262	0.131
0.9	0.164	0.284	0.120

Notes: This table reports the Kolgomorov–Smirnov statistic for equality of actual and counterfactual distributions of wages, and the WPS measured at the mean, and at the deciles of the wage distribution. The p-values were associated with the null hypothesis of equality of distributions.

Figure 2.

Actual and counterfactual wage distributions for the UK and for Germany.

Figure 3.

Wage premium for middle managers in the UK and Germany.

How much of the difference between the WPS is due to context (type of capitalism)?

To answer this question, a probability model was estimated, with probability of being a German employee as the dependent variable. Table 4 reports the results of an auxiliary regression showing that, as above, the preferred model included skills as explanatory variables. This model was used to recover the set of weights with the results for the distribution presented in Figure 4. Panel 1 reports the distribution of wages that would have prevailed if German employees had been working in the UK. Panel 2 reports the distribution with no middle managers and the distribution with no middle managers and with German employees working in the UK.

Table 4.

Results from joint exclusion for auxiliary probit regressions.

Joint exclusion of the following characteristics:	All individuals
	(a)	(b)
i. Individual (gender, marital status, national or EU citizenship, education, exp, exp², exp³, exp⁴)	1234.9(0.000)	1220.6(0.000)
ii. Job (part/full-time, fixed-temp/perm)	234.7(0.000)	259.4(0.000)
iii. Firm (4 dummies for the firm size, 13 dummies for the economic sector)	268.3(0.000)	246.7(0.000)
iv. Skills (4 dummies for the skills associated with the type of occupation)		97.6(0.000)
Pseudo-R²	0.189	0.197
Correct predictions (%)	58.9	59.9

Note: This table reports results from the joint exclusion for the probit model’s estimation that an employee is German.

Figure 4.

The impact of the UK context on the WPS in Germany.

These distributions allowed calculation of the effect of the context at different wage levels (Table 5). On average, German middle managers, given their characteristics, would earn 7.9% more working in the UK. Hence, the data suggest that 50% of the WPS in Germany depended directly on the context. The decile-by-decile analysis shows that context affects WPS throughout the distribution, but less strongly at the higher deciles (Hypothesis 2a). This accords with the thesis that the German context moderates wage inequality, an impression reinforced by comparison with the British context (Hypothesis 2b). Note that up to the 40th percentile German middle managers would have had a higher WPS than their British counterparts had they been working in the UK.

Table 5.

The impact of the UK context on the WCS in Germany.

Sample	Germany	Germanycounterfactual	Impact of the UK context in Germany	Impact of the UK context in Germany(% of the WPS)
Average compensation	0.160	0.239	0.079	49.4
Wage premium at decile:
0.1	0.231	0.406	0.175	75.8
0.2	0.195	0.287	0.092	47.2
0.3	0.154	0.264	0.110	71.4
0.4	0.148	0.237	0.089	60.1
0.5	0.135	0.205	0.070	51.9
0.6	0.120	0.174	0.054	45.0
0.7	0.118	0.168	0.050	42.4
0.8	0.130	0.189	0.059	45.4
0.9	0.164	0.228	0.064	39.0

Notes: This table reports the wage compensation to management found for middle managers measured at the mean and at the deciles of the wage distribution. WPS: wage premium to supervision

As noted, the control variables serve to deal with the problem of data heterogeneity and self-selection. However, the decision to supervise other employees may also depend on confounders that could be omitted; above all, the extra pay remunerating supervisory responsibilities. That is, another possible control for self-selection and omitted-variable bias is simply the wage attached to the supervisory role. The effect of wages on the forecasting ability of the reweighting functions, either taken as predetermined or, as suggested by Currie and Madrian (1999), instrumented using individual health, has been estimated. The results do not alter the conclusions on the impact of the context on WPS. (To save space results are available only in the online Appendix.)

Discussion

The significant empirical findings here contribute to the literature on VoC and their impact on the wage premium for supervision, with implications for theory and policy. The data corroborate the thesis that the remuneration of middle managers differs substantially between types of economy, reflecting key contextual characteristics. Some contend that country classifications by VoC category may not fit the real-world data (Amable, 2008). This inquiry identifies two stylised facts showing that Britain and Germany do correspond to the LME and CME ideal-types (Hall and Soskice, 2001) and, more, it provides strong empirical evidence, extending our understanding of how wage compensation practices depend on institutional context. The data indicate that the WPS for middle managers differs between the two economies both in magnitude and in the shape of the curve, owing in part to the context. The British WPS increases quite steadily from the bottom to the top of the wage distribution, producing considerable inequality, whereas the German WPS has a more balanced impact. In keeping with the VoC hypothesis, these differences reflect the divergent models of LMEs and CMEs. In Britain, the WPS was greater at higher earnings deciles, in harmony with the description of British capitalism as incentive-based, while for German middle managers it was greater at the lower end and increased less sharply, producing a less unequal distribution that could be interpreted as protecting middle managers early in their careers.

The findings make it clear that one paradigm prevails in Germany, another in the UK. There is evidence of some diffusion of market liberalisation in Germany, corresponding more to the LME than the CME model (Jackson and Sorge, 2012); overall, however, the data show that managerial remuneration practices differ significantly between the two countries, with implications for the mobility of skilled workers and countries’ ability to attract them.

Some interesting policy implications emerge. The German economy is confirmed as more protective, as argued by Dore (2000). Workers at early career stages enjoy a certain degree of job security, in keeping with models of political economy that see mitigation of inequality as a virtue of modern democracy (Iversen and Soskice, 2006). However, this result could be seen in the light of the work of Streeck (1997, 2008), who posits the universal evolution of capitalistic society, in particular Germany, towards disorganisation. He points to the transformation of German capitalism, now far removed from the original model of pure coordinated market economy, having moved towards ever greater earnings differentiation. In his view (Streeck, 2014), a dogmatic view of the various capitalisms as non-converging cannot grasp the complex dynamics that are re-shaping European labour markets. The British economy, by contrast, rewards management careers more generously, with higher earnings premiums for managers at the higher deciles.

To curb the ‘brain drain’ towards LMEs, CME policy-makers could encourage higher remuneration for middle managers in the top income quantiles. However, the mobility of skilled workers has become a controversial, political issue. While migration carries clear systemic benefits in terms of human and financial capital, it generates discontent among the locals who compete for the same jobs. This competition has triggered social tensions that policy-makers have countered by erecting barriers to mobility.

The study also contributes methodologically, developing a new method for estimating the effects of context in determining WPS, validating Blau and Kahn (1996), and extending the analysis of the international difference in the average wage distribution to differences in the entire distribution. The hypothesis examined is: What would be the result in Germany if its middle managers were working in the UK? This question is successfully answered, but the analysis is cross-sectional, which prevents any inference concerning changes in either the German or the British context over time. For example, Streeck and Thelen (2005) discuss the transformation of the institutional context in developed economies in recent years. Thelen (2014) describes recent changes that make the German model less egalitarian, notwithstanding the persistence of such practices as offering greater job security in exchange for lower wages (Hall and Thelen, 2009). Thelen also highlights the trend towards diversity within national systems (Palier and Thelen, 2010) with the institutionalisation of new forms of dualism. Data either having greater cross-sectional scope or allowing a historical review would provide more insight.

The findings also carry implications for the possible impact of Brexit on the UK’s ability to retain or attract skilled foreigners, suggesting that there will not necessarily be a diaspora of supervisors: other conditions equal, the British labour market offers them greater incentives. However, whether Britain’s WPS edge over Germany will be sufficient to retain present supervisors or attract new ones depends on a series of tangible and intangible factors. The former are the extent to which immigration policy favours their entry and the ability of the major economic actors to influence political choices towards social inclusiveness. The latter are the shared social values that could make foreigners perceive Britain as open and welcoming.

This analysis raises questions for further research. First, the comparison here is between ideal-types of CME and LME. But data for all the EU economies are available, so if the difficulties of comparing such a heterogeneous set of economies can be overcome, the analysis could be extended to all the types of economy within the EU, interpreting the results within the VoC framework. Second, this analysis could be replicated also using longitudinal datasets, to study the impact of contextual changes on the WPS. The joint presence of time-varying data, cross-sectional EU data and data on change in British immigration policy would be invaluable. If Brexit eventually comes about, then once its terms and conditions are established and recorded in the EU-SILC data, an inquiry along the present lines will shed light on the impact on the WPS and the subsequent attractiveness of the British system.

These are not the only unexplored aspects. Some questions not considered here suggest potential avenues for future research. For instance, different forms of capitalism should presumably produce different forms of wealth and different societal structures. While the results here indicate that German middle managers would earn higher WPS if they worked in the UK, it is impossible to speculate on the degree of satisfaction or happiness of a German-raised person working in Britain, or vice versa. Finally, the results cannot be readily generalised to other European countries: the ideal-types may fit the British and German economies fairly well, but they are not necessarily applicable elsewhere. Research is needed on other economic settings and frameworks, such as the emerging market economy model of Eastern Europe.

Conclusions

Empirical research on VoC has made substantial progress, with interesting results that corroborate this approach (Witt and Jackson, 2016). Most of the work bears on the relationship between context and firms’ comparative advantage (Schneider and Paunescu, 2012). This article has sought to advance our knowledge of the state employment relationship in different contexts, focusing on the labour force component of middle managers. Very little work has tried to determine whether the portion of the difference in the wage premium to supervision between Britain and Germany depends on the institutional context. The data help to account for national differences in remuneration while also highlighting some contrasting patterns.

Supplemental Material

WES902983_Appendix – Supplemental material for Estimating the Wage Premium to Supervision for Middle Managers in Different Contexts: Evidence from Germany and the UK

Supplemental material, WES902983_Appendix for Estimating the Wage Premium to Supervision for Middle Managers in Different Contexts: Evidence from Germany and the UK by Leone Leonida, Marianna Marra, Sergio Scicchitano, Antonio Giangreco and Marco Biagetti in Work, Employment and Society

Footnotes

Acknowledgements

The authors would like to thank the editor of WES, Dr Uracha Chatrakul Na Ayudhya, Andreas Kornelakis, three anonymous reviewers and participants at the BSA WES Conference, Belfast, 12–14 September 2018, for their insightful and constructive comments and suggestions, as a result of which the article has been updated to embrace the latest developments.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Sergio Scicchitano

Supplementary material

The supplementary material is available online with the article.

Notes

Leone Leonida (PhD Finance, York; PhD Economics and Econometrics, Naples) is a reader in Economics and Finance at the King’s Business School, King’s College London. His main research interests are in the area of forecasting banking crises, corporate investment, management compensation, growth econometrics and economics of crime. He has published articles in leading international journals such as The Journal of Applied Econometrics, The Journal of Banking and Finance, The Journal of Business Ethics, The Global Strategy Journal, The Journal of Empirical Finance, Physics of Life Reviews, Public Choice, The Oxford Bulletin of Economics and Statistics, The International Review of Financial Analysis, and Economics Letters.

Marianna Marra is a senior lecturer in International Business at the University of Sussex (UK). She holds a PhD from Aston Business School (Birmingham, UK). Her research interests include comparative institutional analysis and the study of institutional context and firm’s management of innovation. She is also active in research on the evolution of science and technology. She has published methodological and theoretical articles in journals like Journal of Corporate Finance, International Journal of Productive Economics, and Journal of Production Research.

Sergio Scicchitano (PhD) is Senior Researcher at National Institute for the Analysis of Public Policies (INAPP), Rome, Italy. He is qualified as Associate Professor in Economic Policy in Italy. He is Fellow of the Global Labor Organization (GLO). His main research interests are in the area of applied economics, economic sociology, labour economics and evaluation of public policies. He is a member of the Editorial Board for Economies. He has published several scientific papers, both theoretical and empirical, in international peer-reviewed journals such as Applied Economics, Acta Oeconomica, Applied Economics Letters (2), Economic Modelling, Economics Bulletin (4), Empirica, European Research Studies Journal, International Journal of Manpower and Telecommunications Policy.

Antonio Giangreco (PhD) is a full professor in Human Resource Management and Associate Dean for International Relations at IESEG School of Management (LEM-CNRS UMR 9221), Catholic University of Lille, France. His main research interests are in the area of wellbeing, compensation, performance assessment and resistance to change. He has published articles and contributions in leading international journals such as Human Resources Management, The International Journal of HRM, European Journal of Operational Research, Personnel Review, European Management Review and European Management Journal.

Marco Biagetti (PhD) is a senior economist statistician at the Italian Presidency of the Council of Ministers, Department for EU affairs. He is also adjunct professor in Economics and Industrial Organization at the Tuscia University in Viterbo and Civitavecchia (Italy). His expertise ranges from macroeconomic modelling to microeconometric techniques, from non-parametric statistics to multivariate analysis. In microeconometrics, his research interests are focused on labour, particularly on wage differences related to gender and different occupations. His has published articles on this topic on reviews of the likes of Applied Economics, Applied Economics Letters and Acta Oeconomica.

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