_L. Fox and A.M. Oviedo_ _Are Skills Rewarded in Sub-Saharan Africa?_ force, and they are also more likely to have been privatized. We will return to this issue in the analysis below, on the role of unions in wage setting processes.

# **IV. Determinants of wages**

We now turn to the analysis of the determinants of wages. In particular, we are interested in testing several hypotheses of labor market frictions that potentially affect the wage determination process. In a perfectly competitive labor market, workers’ wages equal their marginal productivity, and provided that there are sufficient outside options and that labor supply is unlimited at any productivity level, wages should strictly reflect a worker’s ability, that is, firm characteristics or worker characteristics unrelated to ability should not be significantly associated to wages. In practice, the labor market is highly imperfect, since the supply of qualified workers is limited, and there are relatively few job opportunities for unskilled workers. More able managers might also want to attract more able workers, hence offering them a premium above their productivity.<sup>24</sup> In addition, legal restrictions on hiring and firing, minimum wages, unions, and other societal arrangements might interfere with the wage-setting process.

In our estimations we concentrate on measuring how wages are affected by workers’ age, education, experience, occupation in the firm, bargaining power, and whether the firm is likely to pay efficiency wages to attract more able workers. We use in turn a pooled sample of all workers across countries, and segmented samples for common-law (Anglophone) and civil-law (Franco- and Lusophone) countries. First, we construct a worker’s monthly wages using the worker questionnaire, which contains two questions regarding current wages and allowances, namely the unit of payment (hourly, weekly, monthly, etc.) and the amount in current local currency units. We compute the monthly wage by multiplying the hourly rate obtained from the questionnaire, by the number of hours worked per week (where available) times four.<sup>25</sup> In order to compare wages across workers and countries, we converted the nominal wages to PPPUS dollars by using the exchange rate corresponding to the year prior to the survey and the 2005 PPPs from the International Comparison Group (2008).<sup>26</sup> Table 13 shows annual wages by country,

> 24 See Abowd _et al._ (1999) a detailed study of this phenomenon in France.

> 25 If the hours worked were not available we assumed the employee works 40 hours on average. In many cases there were inconsistencies in the answers of workers. In particular, many workers reported a payment unit different than monthly (say, hourly), but reported the amount corresponding to the payment frequency (usually monthly). This created an unusual number of outliers, so nominal wages were subsequently corrected by taking into account education, occupation, and payment frequency. This reduced the number of outliers considerably, however, it is still possible that some measurement error remains. If this error is randomly distributed, it should not affect our results.

> 26 Using the official exchange rate only is misleading as it does not take into account difference in the cost of living across countries. In order to reduce measurement errors, we also tried normalizing the nominal monthly wage by taking the ratio of the monthly wage to the median wage of the unskilled production worker category

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