Labor economics

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Labor economics

• Why is labor behaviorally interesting?
• 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
• Gift exchange and supra-marginal wages
• Crowding out
• Critique of the single-activity agency model
• Labor supply Cabs

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1. Too-high wages and unemploymentEfficiency
wages vs gift exchange
Price P
supply
Wage w
demand
Quantity Q
unemployment at w
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Why are wages too high?

• Efficiency wages (Stiglitz et al)
• Pay too much so workers have something to lose
  if they shirk
• Why dont 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,)

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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)

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Competition does not drive wages downfirms
choose high wage offer workers expect
reciprocity
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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?

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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 s correlated with c
• Success pays V to agent, W to firm
• T is probability of success given effort
• Firm offers bonus b
• Worker exerts effort c(s,b)ltT(Vb)? works if
  sgts(b)
• Prop 1 In equilibrium
• Bonus is short-term reinforcer b1ltb2 ?
  s(b1)gts(b2)
• Rewards are bad news b1ltb2?Ecs1,b1 lt
  Ecs2,b2
• Empirical leverage Negative effect occurs only
  if firm knows more about task difficulty or
  worker skill than the worker knows

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3.Critiques of standard agency model

• Standard model (one activity)
• Firms pay wage package wfb(e?)
• Workers choose hidden effort e
• b is piece rate, ? is luck
• Risk-neutral firms earn ?(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

• Workers dont know c(e) (prefs constructed)
• U(W-r) depends on reference point
• 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 ?
• 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

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4. Labor supply

• Basic questions
• Does supply rise with wage w?
• Participation (days worked) vs hours
• A Very low supply elasticities for males
• but most data from fixed-hours
• Intertemporal substitution
• Do workers work long hours during temporary wage
  increases (e.g. Alaska oil pipeline)? (Mulligan
  JPE 98?)
• Alternative Amateur income targeting

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Cab driver income targeting (Camerer et al QJE
97)
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Cab driver instrumental variables (IV) showing
experience effect
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Farber (JPE 04) hazard rate estimation Do hrs
worked or accumulated income predict quitting?

• Note If workers are targetting, why isnt the
  income distribution more spiky?

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Do they quit because of hours or ?Getting tired
is a stronger regularity than targetting

• Note Which has more measurement error, hours or
  ?
• Big tip experiment!