Why do more productive firms pay workers more? Evidence from Egypt

Purpose This paper aims to investigate the wage-productivity relationship at the firm level in Egypt. It quantifies the relative role of factors related to the use of efficiency wages (paying higher than market wages to improve worker quality, effort and retention) on the part of employers versus ones associated with rent sharing (sharing profits due to market power) in the context of imperfectly competitive product markets. Design/methodology/approach The paper uses the 2017/18 Egypt Economic Census firm-level data to estimate multivariate regressions quantifying the relationship between wages and productivity, as well as what firm, industry and worker characteristics mediate that relationship. Analyses use a Shapley decomposition to estimate the relative contributions of imperfect competition versus efficiency wage explanations. Findings Results indicate that the positive wage-productivity association is more so due to the use of efficiency wages by employers, but imperfect competition still plays an important role. Originality/value Understanding the drivers of the wage-productivity relationship is critical for designing effective economic policy in Egypt and other low- and middle-income countries. The findings indicate increasing competition among firms and addressing incentive and information issues are therefore both important components to creating a more dynamic labor market and efficient economy.