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BEM 146: Pay & ILM (ch 14) Colin Camerer, Fall 03

BEM 146: Pay & ILM (ch 14) Colin Camerer, Fall 03. Competitive model All workers & firms the same (e.g. migrant farm worker picking) Marginal revenue product of a worker (MRP) is easily measured Market wage=MRP If wages too low, workers quit & firms raise wage

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BEM 146: Pay & ILM (ch 14) Colin Camerer, Fall 03

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  1. BEM 146: Pay & ILM (ch 14)Colin Camerer, Fall 03 • Competitive model • All workers & firms the same (e.g. migrant farm worker picking) • Marginal revenue product of a worker (MRP) is easily measured • Market wage=MRP • If wages too low, workers quit & firms raise wage • If wages too high, firms lose money and go bankrupt • This is stylized, only observed in “McJobs” unskilled labor. Useful as a benchmark.

  2. Complications to wage=MRP competitive model • 1. Skill & compensating differentials • 2. Discrimination • 2.5 is “beauty premium” skill or discrimination? • 3. Upward-sloping wage profiles • 4. Wage compression (wage-MPR too flat) • 5. Internal labor markets • 5+ gift-exchange & efficiency wages

  3. 1. Wage equations • Pay depends on skills & compensating differentials • W_it= a+b_e(Educ_it)+b_p(Prod_it)+... • Residual is unobserved human capital (tautology?) • General human capital: • Language, computer skills, friendliness, meanness… • Other examples? • Firm-specific human capital: • Knowing people, specialized customers, “culture”… • Is this really large?? (Or is it invented to explain upward-sloping wage profiles?) • Compensating differentials • Negative: Safety ( value of a life, NYC taxi night premium), health (mines), “combat pay” (high malpractice medicine, teaching MBAs) • Positive: Fun (interning in TV/radio), volunteering ($=0),… • Other examples?

  4. Estimate returns to education from wages (b_e) • Appear to be large, country-specific… • (Is there an upward bias in measurement?)

  5. 2. Discrimination • Large gender, race gaps in wages & hiring: Why? • Tastes of employers (or customers) • E.g. “audit” studies of restaurants, “resume” study •  performance of discriminated-against employees should be *better* than average • Fact: Black NFL coaches • 1986-00 67% black, 29% white made playoffs black coaches win 1.1 more games/season • But…firms who are color-blind should earn more $... • Discrimination “traps” • Workers must invest in unobservable skills • Discrim’d workers don’t invest, don’t get hired… • Does this explain gender & race gaps? • Easy to “break” with affirmative action (“role models”) • Statistical discrimination • Race, gender are proxies for unobservable skill • e.g., risk of women quitting to have children lower wages • NYC cab drivers won’t pick up black customers (safety) • Fact: Amygdala (fear area) lights up with unfamiliar other-race faces. Is this a taste or a mistake?

  6. Jamal vs Emily in resume study (Bertrand & Mullainathan, 03) (black/white names)

  7. 2.5 Beauty premia: Skill or discrimination?

  8. 2.5 Beauty premia: Skill or discrimination?

  9. 3. Upward-sloping wages are the norm • Seniority and pay • Pay tends to rise even when productivity does not • Workers take pay cuts to quit • Why? • Ties workers to the firm to protect firm’s investment in general & firm-specific human capital (expensive for workers • Firms “save” on behalf of workers. • E.g. taking 9-month prof. salary in 12-month payments •  laying off older (“overpaid”) workers breaches social contract (e.g. 1980s downsizing & LBOs)?

  10. 4. Wage compression • Wage compression: Wages flatter than MRP • Why? • Status: People like being paid more, dislike being paid less • E.g. interindustry wage differentials— Why does a janitor who mops floors earn more at a fancy law firm? • Influence costs: Underpaid workers bug management • Measurement error (MPR is *very* hard to measure) • Exception: In professions where MRP is easy to measure (sports, sales, market trading)  less wage compression

  11. 5. Internal labor markets (ILM) • Many labor markets are “internal” • Promotion/search from within • Clear plateaus with job requirements tied to $ • E.g., Caltech staff, army, professional firms • Why? • Capture private info about skills • Repeated-game provides incentives • Provides incentives (“tournaments”) • tournaments predict convexity of salary, e.g. CEO jump

  12. 5+ Gift-exchange vs efficiency wages • Two puzzles: • Why do firms pay “too much” and lay workers off rather than cut wages in downturns? • Why is there involuntary unemployment? • Why don’t workers underbid to get jobs? • Resolution: • Gift-exchange: Pay “too much” to buy worker morale. Wage cutting is betrayal. • Efficiency wages: Firms pay too much, fire bad workers. Workers work hard to avoid being unemployed. • But why not cut wages in a downturn? • Why don’t’ firms “sell (scarce) jobs” to capture supramarginal wage they are overpaying?

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