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Labor economics

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

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Labor economics

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  1. 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

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

  3. 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,…)

  4. Fehr setup: Firms offer w Firms earn 10e-w Workers choose e Workers earn w-c(e) No reputations (cf. PJ Healy) Moral hazard in contracting: Theory and experimental evidence

  5. Competition does not drive wages down…firms choose high wage offer workers & expect reciprocity

  6. 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?

  7. 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 • 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

  8. 3.Critiques of standard agency model • Standard model (one activity) • 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

  9. Behavioral critiques • Workers don’t 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 θ • 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

  10. 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”

  11. Cab driver “income targeting” (Camerer et al QJE 97)

  12. Cab driver instrumental variables (IV) showing experience effect

  13. Note: If workers are targetting, why isn’t the income distribution more spiky? Farber (JPE 04) hazard rate estimation: Do hrs worked or accumulated income predict quitting?

  14. Note: Which has more measurement error, hours or $? Big tip experiment! Do they quit because of hours or $?Getting tired is a stronger regularity than targetting

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