Transcript Labor economics - California Institute of Technology

Labor economics
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Why is labor behaviorally interesting?
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Important in scale
What people sell is themselves (identity, appreciation)
Natural social comparison with others
Quality assurance problem + room for rationalization
Firms’ problem is endogenous sorting & incentive
Behavioral effects in labor markets:
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“Gift exchange” and supra-marginal wages
Crowding out
Critique of the single-activity agency model
Labor supply: Cabs
1. Too-high wages and unemployment
Efficiency wages vs gift exchange
Price P
supply
Wage w
demand
Quantity Q
unemployment at w
Why are wages too high?
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Efficiency wages (Stiglitz et al)
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Pay “too much” so workers have something to
lose if they shirk
Why don’t workers bid for jobs?
 Role for nepotism, social networks, “hiring
bonusses” ($5k consulting firm “bounties”)
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“Gift exchange” (Akerlof-Yellen)
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Pay “too much” so workers reciprocate with
high (uncontractible) effort
Consistent with resistance to wage cuts (Bewley)
 Experimental evidence (Fehr et al, PJ Healy,…)
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Moral hazard in contracting:
Theory and experimental evidence
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Fehr setup:
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Firms offer w
Firms earn 10e-w
Workers choose e
Workers earn w-c(e)
No reputations (cf.
PJ Healy)
Competition does not drive wages down…firms
choose high wage offer workers & expect reciprocity
2. Crowding out
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Do extrinsic ($) incentives crowd out
intrinsic motivation?
Do puzzles for $ or no-$. After $ removed, no$ group does more puzzles (Deci et al)
 Female tennis players: Play for fun as kids…
…later on tour, quit after getting appearance fee
 Q: Is it a “strike” or permanent decrease in
incentive?
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Benabou-Tirole REStud 03
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Workers infer task difficulty or skill from wage
offer (“overjustification”, “self-perception”,
“looking glass self”)
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Worker exerts effort 0,1, cost is c in [c*,c*]
Worker gets signal σ correlated with c
Success pays V to agent, W to firm
Θ is probability of success given effort
Firm offers bonus b
Worker exerts effort c(σ,b)<Θ(V+b) works if
σ>σ*(b)
Prop 1: In equilibrium
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Bonus is short-term reinforcer: b1<b2  σ*(b1)>σ*(b2)
Rewards are bad news: b1<b2E[c|σ1,b1] < E[c|σ2,b2]
Empirical leverage: Negative effect occurs only if
firm knows more about task difficulty or worker skill
than the worker knows
3.Critiques of standard agency model
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Standard model (one activity)
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Firms pay wage package w=f+b(e+θ)
Workers choose hidden effort e
b is “piece rate”, θ is “luck”
Risk-neutral firms earn Π(e)-w
Risk-averse workers earn w-c(e)-var(w)
Tradeoff:
“High powered incentive” b increases motivation…
 …but creates bad variance in wages
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Behavioral critiques
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Workers don’t know c(e) (prefs constructed)
U(W-r) depends on reference point
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Previous wages, wages of others
Workers care about procedures or income source
Psychic income: meaning and appreciation
Crowding out of intrinsic motivatoin
Biases in separating e and θ
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Hindsight bias (agents should have known)
Diffusion of responsibility in group production (credit-blame)
Attribution error (blame agent skill, not situation difficulty)
Workers overconfident about luck or productivity
4. Labor supply
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Basic questions:
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Does supply rise with wage w?
Participation (days worked) vs hours
 A: Very low + supply elasticities for males
 …but most data from fixed-hours
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Intertemporal substitution
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Do workers work long hours during temporary
wage increases (e.g. Alaska oil pipeline)? (Mulligan
JPE 98?)
Alternative: Amateur “income targeting”
Cab driver “income targeting” (Camerer et al QJE 97)
Cab driver instrumental variables
(IV) showing experience effect
Farber (JPE 04) hazard rate estimation: Do hrs
worked or accumulated income predict quitting?
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Note: If workers are
targetting, why isn’t
the income
distribution more
spiky?
Do they quit because of hours or $?
Getting tired is a stronger regularity than targetting
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Note: Which has
more measurement
error, hours or $?
Big tip experiment!