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Econ Articles


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Lazear (1991) Personnel Economics and Organizational Psychology

a)pay as motivator (1+2)
b) Pay Compression (why is it used)(3+4+5)
c) Up-or-out Hierarchies (ex +6+7+8)

Pay Compression:
How much difference should there be between wages within the same firm?

too much: low pay workers demotivated
too little: most productive workers demotivated.

Argument 1:
Psychological perspective:

Employees don’t just work for a pay cheque; they do so for intrinsic satisfaction.

Using extrinsic rewards can signal to the worker that the principle believes the worker morale is low. The worker reduces morale, so when the extrinsic reward is withdrawn the effort was lower than before.

Argument 2:
Distorted Incentives for Semi Observable Output.

If some but not other job attributes are observable Pay on the basis of easily observed attributes may get the worker to focus on those aspects to the exclusion of others.

in a similar vein, managers cannot observe output perfectly, subordinates will therefore wasting resources proving worth to manager.

Pay Compression:

Argument 3:
Pay Compression Ensures Cooperation/Pay

Differentiation Ensures Individual Performance
if jobs and salaries are awarded at least in part on a relative basis, as described above, then workers do well not only by performing well, but also by assuring rivals perform badly. Means they are disinclined toward cooperation.
thus compressed pay structure furthers cooperation

Production technologies that require cooperation should have more compressed wage structures. Sales workers would not need a compressed wage structure.

Arguement 4: Differentiation Can Be Unsatisfactory to lower level employees

Another possible explanation is that workers have distaste for being lower ranked within their firm. They must be compensated for having below average ability, knowing it and having to work with those who are better.

Argument 5: Output is Difficult to Measure (less likely to differentiate).

if effort and pay are hard to connect, then less likely

ex. firms cannot monitor output perfectly, then workers have the incentive to exaggerate their output to lobby for higher wages

Up-or-out Definition
Argument 6: Morale Effects

workers, who are denied promotion, harbor ill will and have adverse effect on moral.

Argument 7: Firm Cheating

that up or out promotion system is visabile and thus easily verified.

if the employer had the option of merely announcing a lower wage for a less productive worker, the employers might behave opportunistically and claim that workers were worse off than they actually were.

Explanation 8 : Forces honesty
up or our forces honest performance evaluation rather than regression to the mean. Workers perfor truthful behave of employer.

Burgess, Lane and Stevens 1998: Hiring Risky Workers: Some Evidence

(1) Assumptions (4)
(2) Churning Definition
(3) Hypothesis
(4) Results
(5) Regression


1. longer a firm is expected to be around the more profitable it is to hire a risky worker (longer time to reap productivity of those found to be high productivity)

2. short lived firms will have less risky workers.

3. risky workers command a wage premium above market rate (because downside risk is truncated because of ability to fire.)

4. model requires industry growth be good correlate for expected firm horizon.

the fraction of workers who enter and exit the firm after controlling for expansion and contraction.

1. churning will be positively related to industry growth rate (expected horizon).
2. churning will be positively related to age of industry


Hypothesis 1 supported in 5-8 industry groups and on aggregate.

Hypothesis 2:
slightly negative relationship between industry age and churning, lazears second hypothesis not supported.


Churning = bo + .001Industrygrowth

“for every increase 1% industry growth, churning goes up by 1%”

Churning = b0 +-.002industry average age (not stat significant)

Bollinger and Hotchkiss (2003): The Upside Potenital of Hiring Risky Workers: Evidence from Baseball Industry

(1) Assumptions (3)
(2) Definitions (4)
(3) Hypothesis (2)
(4) Results
(5) Regression


1. Risky Workers earn wage premium
2. Risk premium length of workers of workers work life (longer expected horizon to reap benefits).
3. firms require mobility costs or asymmetric information to benefit from mobility costs.


1) Reserve Clause sample: new players tied to the team - immobile

2) non-traded sub sample: reserve clause players who are not traded in a given year.(ROI on risk should be highest)

3) Free Agent - should not earn risk premium.

4) Seasonal variance - variability in an aggregate of baseball performance stats. (measure of the degree to which the worker is risky).

1. Performance variance should increase pay for reserve clause players but not free agents.
2. Players with a longer expected career (measured by current longevity in majors) should have higher risk premiums

H1 (supported): significant positive relationship between stat var and pay for reserve clause and not free agents.

Riskpay= bo +(b1)statvar(reserve clause)

H2(supported): those who have been around longer get paid larger risk premiums.

Riskpay= bo+ Statvar + statvar x career length

Autor and Scarborough (2008): Does Job Testing Harm Minority Workers? Evidence from Retail Establishments.

(1) Assumptions (5)
(2) Hypothesis
(3) Results
(4) Regression


1. job testing can improve match between workers and firms thereby improving (efficiency)

2. job tests have the potential to deferentially impact minority hiring.

3. If job tests are RELATIVELY unbiased (relative to interviews), they do not pose an equality efficiency trade off

4. if Job tests are bias reducing (relative to interviews)- efficiency gains accrue in part from reduced hiring of groups favored by pre-existing biases.

5. If job tests are bias enhancing - testing raises hiring of groups favored by bias and does not necessarily increase efficiency.

Job testing is not more biased then informal methods meaning implementation will not adversely effect minority hires.


1. minority workers performed sig worse on test
2. Tests increased general efficiency, those who took it, worked 8 days longer.

3. after testing job spell duration was not significantly different among racial groups

Job-spell= White*Tested

4. after controls, no stat significant difference in hiring racial composition post test implementation.

Breen, Hannan, and O’Leary (1995): Returns to Education: Taking Account of Employers Perceptions and Use of Educational Credentials

(1) Educational Definitions (2)
(2) Assumptions (1)

(3) Regressions (2)

(4) Results (5)

Irish Educational System
- single national curriculum (GHC)
- Educational Level Tests
1) Junior-Cycle(JC) at 15
2) Leaving Certificate (LC) at 18


1) firm specific skills developed on job - grades as differentiation (GPS)


Ln(Pr(having-job))= Bo +b1(GPA) + d1(JC) + d2 (LS)

Ln(wage) = Bo + b1(GPA) + d1(JC) + d2 (LS) + b2 (LC*GPS)

1. Those who write leaving exam, high GPA assoc. with higher income.
2. In general GPA in JC and LS are assoc with higher wages and increase prob of having a job.
3. Male students who leave school with a high GPA but in JC period, actually do worse?
GPA*JC: students who leave school when they are 15 and have high GPA are integrated into trades in which they have low starting apprenticeship wages. (relationship true for men but not women)
4. Staying but doing poorly on LC is WORSE than doing well on JC and leaving.
5. Coming from urban area is linked to higher pay, lower social class linked to lower pay.

Last Comments

1. Uniform curriculum and exams are cheap screening mechanism for firms.
2. Evidence for signalling hypothesis of education.

Frazis (2002): Human Capital, Signaling, and the Pattern of Returns to Education

1. Define Diploma Effects + signalling hypothesis

2.Two Factor Model of Human Capital

3. Signalling Model Basic

4. Signalling Model: Extended
2) Summary of model:

1. we pay for a certain amount of education depending on our ability to acquire human capital + innate ability - costs of acquiring human capital.

2. we see under estimates and over estimates of returns to human capital because of selection effects of both innate ability and ability to acquire human capital.

Example: At first, unobserved ability factors create underestimation of human capital in 15th year. Then same unobserved ability factors create over estimation of human capital in the 16th year.

3. clusters in educational attainment are due to an increased cost for S>SG

Signalling Model Basic

1. individuals want to maximize bennefit (future income) - costs of school
- more education incrementally increases cost.
- more able students have lower incremental costs to schooling
- better educated workers earn more because it signals that theya re productive.
- if firms observe a non-equilibrium level of schooling , they push the worker to the lower level.
- individuals cluster at SG to show they are not the next low type
- creates significant clustering at SG.

4. Signalling Model Extended
- need an extended model of signaling because signalling model (basic) does not explain why individuals below SG have such low returns.
a) individuals don't know their ability B when they start school.
b) dropping out occurs if they find out that they dont have a level of ability for them to be profitable to continue through to graduation. when B drops the cost of school gets too high
c) Larger the probability that an individual is type 2, the more likley he is to get additional gain form attending level 2, therefore the more likely he is to attend level 1, even if level 1 has negative returns.
d) this pattern can mirror returns found in data.


is it realistic that it takes 15 years to figure out your ability?

Autor (2001): Why do Temporary Help Firms Provide Free General Skills Training?

1. Back-round on Temp Help Industry
2. Model (4)
3. Hypothesis test of Model (3)
4. Conclusions

(1) provide training even though 350% turnover. Training upfront and non conditional. economic logic dictates we should not see this.

(2) Model


Assume three time periods + training
Assume HA and LA workers.

1. Only workers who believe that they are high ability will apply to training firms.
- LA to training firms and HA to non training firms providing asymmetric information.

2. At P1, firms offer higher wages to HA, but not to productivity.

3. At outset of P2, a % of workers quit incumbent firm, they receive a low ability wage in the exogenous market. Firms offer remaining workers W2, which may differ between HA, LA workers.

4. Competition Increases Training wages more at training firms.
a) Competitive pressures force all other firms to offer the same wage and training programs dissipating some of the gains from asymmetric information.
b) competition increases wages at training firms by more than that at non training firms because:
a) why???

Hypothesis Tests of Model

H1. Wages are lower at training firms to make self selection possible.

Log hourly wage (THS) = bo+b1training
- HI:Supported.
- negative relationship between wage and training provided.

H2. the more competition, the more training provided.

-H2 supported

3. Wage gains due to competition are higher at training firms.

Wage = Herfendahl X Training > Wage= Herfendahl x No Training

H3: Supported


a) training provided, despite GHC because of ability to high ability candidates + screening high v. low ability workers via test.
b) temp help firms gather and self information about worker ability to cleints.

Blundell, Duncan and Meghir (1998) + Blundell, Reed and Stoker (2003) (Labor Supply)

1. Assumptions and Definitions (3)
2. Findings on Male Participation Elasticity (4)
3. Findings female participation elasticity (1)
4. Exogenous v. Endog
Assumptions and Definitions

1. Examined trade off between non-work income (subsidy) and income when working on budget constraint
2. Static model: life cycle based or change in human capital based decisions.
3. Spouses earnings taken as exogenous.

Findings on Male Participation Elasticity (4)
1. In-work income is corr with working more.
2. Out-of-Work income (gov sub) are corr with working less.
3. Married Men v. Single men have higher participation elasticizes to in-work income compared to single men, because they take into account cost and benefits of income distribution across genders.
4. Lower education means more responsiveness to out-of-work income. (more likely to lay back with entitlements).

Female Hours & Participation Elasticity

Hours of work and participation elasticity for women w/ young children particularly lone mothers are quite sensitive to work incentives

Exogenous v. Endogenous Income

Assuming that income is exogenous to the model means you do not take into account changing labor supply when determining income.

this model accounts for endogenous effects of labor supply on income by averaging income over many workers.

Simulation of Tax (reform)

Pre-Simulation System: non taxable earnings allowance, marginal tax rates of 21%, 33% AND 41%

child care + tax credits (working tax credits)

- Flat tax reform of 31% (36.65% for married men) on all income exceeding increased personal allowance. Removal of UEL and national insurance contributions. Tax credit not taperd away at additional rate.
- Single Men: Marginal tax rate of 42%
- Cohabitating Men: 47.65% marginal tax rate

- The flat tax has distinctly different impacts upon the net-income of the single v. cohabitating man.
- Because of the differing entitlements of tax credits which are fully integrated and tapered away part of a standard income tax payment in this formed system.
i. single man, eligible only for WTC, faces higher tax rate implying lower net income at hours less than 30, as well as above 55, when working tax credit has been tapered away
ii. Cohabitating man, on the other hand, the new system invovles higher transfer income in the form of a more generous working tax credit couples + child tax credit. Below 35 hours, marginal tax rate is lower because tax credits are no longer being tapered away. Despite a 47.65% marginal tax rate, universal tax credits ensure that 10 hr wage
iii. reform is financed by individuals with higher wages
- Overall reforms reduce the income of those entitled to tax credits and increases incomes of those eligible. , particularly those in couples and children.
- the reform provides a modest positive impact on employment probability, with this being more notable for men with partners.
- reform predicts substantial positive employment effect for low wage cohabiting men, with some small negative effect for higher wage individual’s

Take Away:

- The size of the elasticity is not sufficient to give us a complete view of LS effects on tax and benefit reforms – magnitude of effect will depend on the whole structure of budget constraint (kinks and all).

Fehr and Goette (2007): Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment (Bike Messenger Study)

(1) Methodology in nutshell
(2) Why bike messengers?(3)
(3) IV and DV's
(4) Results
(5) Conclusions
Methodology in nutshell

1.Cross Sectional Study: pre/post - implementing temp 25% wage increase in Group A - t1 4 weeks then group Group B- t2 4 weeks - with a control company.

Why Bike Messengers
1. Commission structure
2. optional shifts
3. can increase effort through riding faster, working longer hours find more efficient routes

IV's and DV


salary increase


Mean revenues
Mean shifts

1. Mean shifts and revenue goes up during treatment groups. (t2, group B earns 1000 more)
2. immediately after the experience they worked less
3. during the experiment, they increased total hours but reduced hours per effort consistent with: - 2.

Loss aversion: daily incomes below some reference level are expected as a loss and the marginal utility of income is large in the loss domain. In contrast, the marginal utility of income at, and above the reference level decreases discontinuously at a lower level

Conclusions and Impact

(1) evidence for wage effort idea.
(2) bike messengers much less situational constraints than other workers. Not necessarily externally valid

Bloom and Van Reenen 2010: Why do Management Practices differ across Firms and Countries

1. Productivity Differences Across Countries
2. Survey Design (BRIEF)
3. Who is good at what (3).
4. Ways to Increase average management quality (
Productivity Differences

There are differences across countries in productivity that can not be summed up by labor and capital. explained by additional factor A in
Y = A x K x L. this can only be explained through technological innovation or differential management practices.

Survey Methodology
- Double blind interviews of 18 management practices.
- monitoring/targeting/incentives
- Look at management practice impact on performance.

Who is good at what
Sweden - monitoring
America (best overall) - good at incentive pay
Japan - Target management

Ways to Increase Average Management Quality

1. shift the whole distribution - by increasing management know how. (education)
2. Create the regulatory environment in which poorly managed firms cannot survive


Log(sales/employee) = bo + .208Management + Industry Control
"sales per employee increase 20.8% with good management practices. Management practices coded 1-5.

Causes of different management practices

1. Product market competition increases MP
2. tough labor market regulations related to worse MP (incentives)
3. Owned and self runned firms bad
4. Multi-Nationals and exporters are better managed.
5. better human capital better managed.
6. Information on management best practices diffuse slowly from rich to poor countries.
7. Countries specialize in different mangement practices.
8. Government-owned firms suck

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