Transcript BEM 146: Pay & ILM (ch 14) - California Institute of

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.
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
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?
Estimate returns to education from wages (b_e)
• Appear to be large, country-specific…
• (Is there an upward bias in measurement?)
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”
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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?
Jamal vs Emily in resume study (Bertrand &
Mullainathan, 03) (black/white names)
2.5 Beauty premia: Skill or discrimination?
2.5 Beauty premia: Skill or discrimination?
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)?
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
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
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?