"Twisted" Wages Make Hiring Of Young Women and Older Job Hunters Unattractive

Some firms in Germany still prefer hiring young male applicants to young women; and they hardly hire older job hunters either. The main reason for this personnel strategy, which is not very sustainable in view of the demographic change and the feared shortage of skilled workers, are strong seniority wage increases in these firms. These result from the fact that in the first few years in the firm employees are paid below their productivity and in the last few years above their productivity. These "twisted" wages lead to a strong and long loyalty of motivated employees to the firm, but simultaneously make the hiring of young women and older job hunters unattractive. These are the findings of a survey conducted by the Centre for European Economic Research (ZEW) in Mannheim.

"To make the recruitment of young women and older employees easier in the future, it is necessary to correct the strong seniority wage increases in the German firms," says Thomas Zwick, ZEW Research Associate and Professor at LMU Munich. Zwick holds the opinion that by hiring young women and elderly firms can brace themselves, especially on short notice, to the emerging shortage of skilled workers as the employment of these mostly well-educated and motivated groups can still be further increased.

Many firms rely on experienced staff to be loyal to their employer. Thus, they pay professional newcomers significantly smaller wages which rise disproportionally strongly with increasing seniority. Remaining with one firm is consequently rewarded with a high bonus. By means of this “twisted” wages structure, firms bind the employees longer to themselves than their competitors. This is the case because employees are highly interested in reaching the employment phase where the wages rise while the productivity does not increase to the same extent.

However, this efficient way of long-term loyalty of employees creates problems when it comes to the hiring young women and older job hunters. For instance, young women frequently take a break from work due to family reasons or do not re-enter the firm after their parental leave. Thus, they consider the smaller wages in the first few years of employment in firms with twisted wages unattractive as they do not know if they will benefit from this payment structure later. The firms on the other hand recoil from young women’s employment period which is difficult to calculate and expected to be short-term. Moreover, firms do not benefit from hiring older employees either because due to a uniform structure of wages they are paid the same wages as long-term employees of the same age. Thus, they receive higher wages than their productivity without having gone through the phase with lower starting salaries in the firm.

To reduce the obstacles to employment for young women and older employees and, thus, access skilled personnel, which is important for the future, the firms have various possibilities. They can reduce the "loyalty bonuses" and, at the same time, increase the wages for all young employees or increase wages especially for the groups that up till now had disadvantages in the recruitment process. “This means, however, that instead of strong seniority wage increases new and possibly expensive tools for hiring new employees have to be used, e.g. individual incentive wages and competitions for promotions,” Zwick explains.

The ZEW study is based on representative data reflecting the whole German private sector. The study analysed increases in wages of more than five million employees in about 6,000 firms during a period of a maximum of seven years.

For further information please contact

Prof. Dr. Thomas Zwick, Phone +49 (0)89/2180-5616, E-mail zwick@bwl.lmu.de