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
• Behavioral effects in labor markets:
– “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?
• 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
• 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
• 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
 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
Zink et al (Neuron 04): Earned money more
rewarding than unearned money
 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”
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?

• 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

• Note: Which has

more measurement
error, hours or $?
• Big tip experiment!
 Farber is puzzled…
• Why do drivers
lose $?
• A: Experienced
do not
• Why be
puzzled? Results
were
predicted…

• Calendar date
effects? Let’s
look…
Date Range: TodayPast 7 DaysPast 30 DaysPast 90 DaysPast
YearSince 1981Custom Date Range 1851-1980
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1. FASHION; In New York, Easy Dressing Is the Rule for Spring
... Easy Dressing Is the Rule for Spring ...View free preview
November 8, 1988 - By BERNADINE MORRIS (NYT) - Fashion and Style - News - 774 words
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... Be Weapon In the Battle Against PCB's ...
November 8, 1988 - (NYT) - Science - News - 391 words
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4.Quotation of the Day
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 Possibility of Poisoning Is Raised In the Death of a Haitian Colonel
27 ... Is Raised In the Death of a Haitian Colonel ...
November 8, 1988 - AP (NYT) - International - News - 431 words

Critic's Notebook; Tokyo, City of the $12 Movie

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Save the Catskills Also

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November 8, 1988 - (NYT) - Editorials and Op-Ed - Letter - 121 words
43
 Interviews: Great idea!

• Q: From passage above, do you think others

did interviews too? Were they more or less
systematic than Farber’s? (his are admittedly
“not systematic”)
 Farber on experience effect
• “Overall”?
• TRIP
sample
only
• CBLT have
2 other
samples
 Alan Krueger 6/26/03 NYTimes column

• Now their findings are being debated. First, Gerald S. Oettinger of the
University of Texas at Austin published a paper in the Journal of Political
Economy on the daily work decisions of food and beverage vendors at a
major-league baseball stadium. The vendors were independent
contractors, required to work until the seventh inning, but they could
choose which games to work. Vendors make more when the number of
fans is high and the number of other vendors is low. Professor Oettinger
found that vendors were more likely to go to work when the expected
payoff was higher -- for example, on days when a larger crowd was
expected because of a pivotal game or a quality opponent. The decision of
whether to work at all on a high-payoff day -- as opposed to how much to
work -- was not considered in the cabdriver study.
A: YES IT WAS. PERHAPS KRUEGER DID NOT READ OUR PAPER.
• And most recently, my Princeton colleague Henry S. Farber revisited the
question of cabdrivers, studying a different set of drivers. He found that
cabdrivers quit after they work a lot of hours and grow weary. How much
they have earned to that point has little or nothing to do with their
decision. Moreover, the amount the drivers earn varies substantially from
day to day, suggesting that their target income levels, if they have them,
fluctuate wildly. He suggests that the earlier findings possibly resulted
from reporting errors in the data: because daily wages were derived by
dividing total revenue by hours worked, any mistake in reported hours
would cause a mistake in the opposite direction in the calculated wage,
inducing a negative correlation between wages and hours worked.

• A: REPORTING ERRORS ARE NOT ENOUGH BECAUSE WE USED IV

ESTIMATION. MUST BE REPORTING ERRORS *AND* SPECIFIC-DATE SHOCKS
TO LABOR SUPPLY.
 Big tip experiment
• Prediction of reference-dependent model:
– A large windfall will lead to lower labor supply
– Example: Give drivers a big surprising tip…
predict they will quit early (or street musicians etc)
– Tip must not be an indication of wage shift
– Do it? Only if it would convince true-believer labor
economists
– Thaler asked Kevin Murphy:
• “They might just go home to celebrate”
– Implication: Some labor economists will not commit to
reputational bets about whether theories are true
Goette and Huffman: Early windfall
increases work, then decreases
 A misleading abstract
• No test of
intertemporal
substitution
• What are
“problems with
conception and
measurement”?