Wage, Structure, Turnover and Working Conditions: A Public Finance Perspective

We explore the formation of a wage structure within a competitive firm that provides improved working conditions in order to reduce turnover within its labor force. The competitive firm must raise the funds required to pay for workplace improvements by, in effect, taxing its own employees.  A wage structure emerges from the analysis of the firm's problem of paying workers according to (hard to observe) individual skill levels, while reducing each person's wage to provide the funds required to pay for a better working environment. Because of information and administration costs associated with implementing wage differentiation according to skill, costs which act as a wedge betweeen the value of wage reductions and the provision of workplace improvements, employees of similar but different skill levels are grouped into a finite number of wage brackets within which all individuals are paid alike. In this model, the formation of a wage structure is analogous to the sorting of economic activities into tax bases and taxpayers into tax rate bands that is conducted by government in the course of raising tax revenues to provide for public services.