Labor economics
Why is labor behaviorally interesting?
Important in scale People sell themselves (identity, appreciation) Natural social comparison with others Quality assurance problem + room for rationalization Firms’ problem is endogenous sorting & incentive “Gift exchange” and supra-marginal wages Crowding out Critique of the single-activity agency model Labor supply: Cabs
Behavioral effects in labor markets:
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?
Efficiency wages (Stiglitz et al)
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” ($5k consulting firm “bounties”)
“Gift exchange” (Akerlof-Yellen)
Pay “too much” so workers reciprocate with high (uncontractible) effort
Consistent with resistance to wage cuts (Bewley) Experimental evidence (Fehr et al, PJ Healy,…)
Moral hazard in contracting: Theory and experimental evidence
Fehr setup:
Firms offer w Firms earn 10e-w Workers choose e Workers earn w-c(e) No reputations (cf. PJ Healy)
Competition does not drive wages down…firms choose high wage offer workers & expect reciprocity
2. Crowding out
Do extrinsic ($) 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?
Benabou-Tirole REStud 03
Workers infer task difficulty or skill from wage offer (“overjustification”, “self-perception”, “looking glass self”)
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
Empirical leverage: Negative effect occurs only if firm knows more about task difficulty or worker skill than the worker knows
Bonus is short-term reinforcer: b1σ*(b2) Rewards are bad news: b1