Effort, trade, and unemployment

Abstract.  This paper incorporates equilibrium unemployment caused by efficiency wages into a monopolistic competition model of trade. Worker effort is treated as an endogenous variable that depends on the optimizing behaviour of firms and workers. Opening up trade induces firms to demand greater worker effort and to cut the size of their workforce. This counteracts the positive employment effect due to entry of firms. Circumstances are indicated in which the two effects just balance, leaving aggregate employment unchanged. Trade unambiguously increases worker effort, thereby enhancing within-firm productivity.     

Firm ownership and internal labour practices in a transition economy

One feature common to many post‐socialist transition economies is a relatively compressed wage structure in the state‐owned sector. We conjecture that this compressed wage structure creates weak incentives for work effort and worker skill acquisition and thus presents adverse consequences for the entire transition economy if a substantial portion of the labour force works in the state sector. We explore firm wage incentives and worker training, as well as other labour practices and outcomes, in a transition setting with matched firm and worker data collected in one of the largest provinces of Vietnam – Ho Chi Minh City. The Vietnamese state sector exhibits a compressed wage distribution in relation to privately owned firms with foreign ownership. State wage practices stress tenure over worker productivity and their wage policies result in flatter wage–experience profiles and lower returns to education. The state work force is in greater need of formal training, a need that is in part met through direct government financing. In spite of the opportunities for government financed training and at least partly due to inefficient worker incentives, state firms, by certain measures, exhibit lower levels of labour productivity. The private sector comparison group to state firms for all of these findings is foreign owned firms. The internal labour practices of foreign firms are more consistent with a view of profit‐maximizing firms operating with no political constraints. This is not the case for Vietnamese de novo private firms that exhibit much more idiosyncratic behaviour and whose labour practices are often indistinguishable from state firms. The exact reasons for this remain a topic of on‐going research yet we conjecture that various private sector constraints, including limited access to formal capital, play an important role.     

Unobserved Heterogeneity,Exit Rates,and Re‐Employment Wages

Exit rates from unemployment and re‐employment wages decline over a period of unemployment, after controlling for worker observable characteristics. We study the role of unobserved heterogeneity in an economy with asymmetric information and directed search. We show that the unique equilibrium is separating and that skilled workers have more job opportunities and higher wages. The composition of the unemployed varies with the duration of unemployment, so average exit rates and wages fall with time. The separating equilibrium relies on performance‐related pay schemes and the ability of firms to commit to renting an input that is complementary to worker skills.     

COMPETITIVE SEARCH,EFFICIENCY, AND MULTIWORKER FIRMS*

I study competitive search equilibrium in an environment where firms operate a decreasing‐returns production technology and hire multiple workers simultaneously. Firms post wages, possibly several of them. The equilibrium can feature wage dispersion even though all firms and workers are ex ante identical. Unlike the benchmark where firms hire a single worker, hiring is constrained inefficient. Efficiency requires that firms commit to the number of hires, pay all applicants, or pay wages that depend on the number of applicants. Under wage‐posting, the inefficiency is highest at intermediate levels of labor market tightness.     

RESIDUAL WAGE DISPERSION WITH EFFICIENCY WAGES

This article extends a classic on‐the‐job search model of homogeneous workers and firms by introducing a shirking problem. Workers choose their effort levels and search on the job. Firms elicit effort through wages and monitoring; an inverse relationship between wages and monitoring rates is derived. Wages play a dual role by allocating labor supply and motivating employee effort. This gives rise to an equilibrium wage distribution that contrasts with existing literature. In particular, I show that a hump‐shaped and positively skewed wage distribution, as observed empirically, can be derived even when firms and workers are, respectively, identical.     

Wage Bargaining Versus Efficiency Wages: A Synthesis

We construct a model integrating the efficiency wage model of Shapiro–Stiglitz (1984) (SS), with an individual wage bargaining model in the Diamond–Mortensen–Pissarides (DMP) tradition where firms and workers form pairwise matches. We show that when workers may threaten to shirk on the job and there is individual wage bargaining, the wage is always higher and employment lower than in either the SS model, or the (appropriately modified) DMP model. When firms determine workers' efforts unilaterally, efforts are set inefficiently low in the SS model. In the bargaining model, effort is higher, and is first best when the worker non–shirking constraint does not bind. The overall equilibrium allocation may then be more or less efficient than in the SS model, but is always less efficient than in a pure bargaining model with no moral hazard.     

The Layoff Rat Race*

We investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs. After investments are made, firms may have to lay off workers, and will do so in inverse order of the profit that each worker generates. Greater skill investments, especially in specific human capital, contribute more to a firm's bottom line, so that workers who make those investments will be laid off last. We show that as long as workers' bargaining positions are not too weak, workers invest in specific human capital in order to reduce layoff probabilities. Indeed, workers over‐invest in skill acquisition from a social perspective whenever their bargaining power is strong enough, even though they only receive a share of any investment. More generally, we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms, the probability that a firm will downsize, and the distribution of employment opportunities in the economy.     

A MATCHING MODEL WITH ENDOGENOUS SKILL REQUIREMENTS>*

We consider a labor market in which workers differ in their abilities and jobs differ in their skill requirements. The distribution of worker abilities is exogenous, but we model the choice of skill requirements by firms. High‐skill jobs produce more output than low‐skill jobs, but high‐skill jobs require high‐skill workers and thus are more difficult to fill. We use a matching model together with a Nash bargaining approach to wage setting to determine the equilibrium mix of job types, along with the equilibrium relationship between worker and job characteristics, wages, and unemployment.     

PRODUCTIVITY GROWTH AND WORKER REALLOCATION*

Productivity dispersion across firms is large and persistent, and worker reallocation among firms is an important source of productivity growth. An equilibrium model of growth and firm evolution designed to clarify the role of worker reallocation in the growth process is studied. We show that it explains the correlations between size measures and labor productivity found in Danish firm data. Conditions under which the reallocation of workers from less to more productive firms contributes to aggregate productivity growth in the economy modeled are derived. Finally, a proof of existence of an equilibrium solution to the model is also provided.     

ON THE INFORMATIONAL CONTENT OF WAGE OFFERS*

This article investigates signaling and screening roles of wage offers in a single‐play matching model with two‐sided unobservable characteristics. It generates the following predictions as matching equilibrium outcomes: (i) “good” jobs offer premia if “high‐quality” worker population is large; (ii) “bad” jobs pay compensating differentials if the proportion of “good” jobs to “low‐quality” workers is large; (iii) all firms may offer a pooling wage in markets dominated by “high‐quality” workers and firms; or (iv) Gresham's Law prevails: “good” types withdraw if “bad” types dominate the population. The screening/signaling motive thus has the potential of explaining a variety of wage patterns.     

International Trade,Offshoring and Heterogeneous Firms

Recent trade models determine the equilibrium distribution of firm‐level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity because of entry and exit of firms. These models ignore the possibility that freer trade also alters the firm‐size distribution via international firm migration (offshoring); firms must, by assumption, produce in their “birth nation.” We show that when firms are allowed to switch locations, new productivity effects arise. Freer trade induces the most efficient small‐nation firms to move to the large nation. The large country gets an “extra helping” of the most efficient firms while the small nation's firm‐size distribution is truncated on both ends. This reinforces the large‐nation productivity gain while reducing or even reversing the small‐nation productivity gain. The small nation is nevertheless better off allowing firm migration.     

Wage and Technology Dispersion

This paper explains why firms with identical opportunities may use different technologies and offer different wages. Our key assumption is that workers must engage in costly search in order to gather information about jobs (Stigler (1961)). In equilibrium, some firms adopt high fixed cost, high productivity technologies, offer high wages, and fill job openings quickly. Other firms adopt less capital-intensive technologies and offer low wages, hiring mostly uninformed workers. In equilibrium, the amount of wage dispersion leaves workers indifferent about whether to gather information, and the fraction of informed workers leaves firms indifferent about their wage and technology choice. We show that worker search, which would appear to be a rent-seeking activity in partial equilibrium, may be efficiency-enhancing in general equilibrium.     

The Political Economy of the "Minimum-Wage Institution" in an Internationally Integrated Market

The paper explores the political economy of the “minimum‐wage institution (MWI)” in an internationally integrated product market. The authors consider a two‐sector Economic Union (EU) with a perfectly competitive agricultural sector and a unionized oligopolistic manufacturing sector in which there exist productivity asymmetries across firms. It is shown that efficient firms have an incentive to strategically opt for intercountry minimum‐wage agreements high enough to raise their inefficient rivals’ costs and thus gain business in equilibrium. The unions of workers in all countries also find these agreements in their best interest. As a consequence, the MWI may emerge as the equilibrium institutional resolution of alternative political processes (i.e., an EU‐wide referendum or special‐interest politics), despite its negative effect on aggregate employment.     

POSITIVE SELF‐IMAGE IN TOURNAMENTS*

This article analyzes the implications of worker overestimation of productivity for firms in which incentives take the form of tournaments. Each worker overestimates his productivity but is aware of the bias in his opponent's self‐assessment. The manager of the firm, on the other hand, correctly assesses workers' productivities and self‐beliefs when setting tournament prizes. The article shows that, under a variety of circumstances, firms can benefit from worker positive self‐image. The article also shows that worker positive self‐image can improve welfare in tournaments. In contrast, workers' utility declines due to their own misguided choices.     

Wage/tenure contracts with heterogeneous firms

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster “promotion” rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.     

Minimum safety standards with asymmetric safety costs

We explore the welfare effect of minimum safety standards, focusing on the case where duopoly firms are asymmetric in that they have different safety effort costs. If duopoly firms are symmetric, they do not provide enough safety to be socially efficient, and so imposing minimum safety standards can resolve this problem. We show, however, that imposing minimum safety standards may reduce the social welfare when there is a large asymmetry in the safety effort costs. In the unregulated equilibrium, the high-cost firm’s safety effort is smaller than that of the low-cost firm, and the high-cost firm is more likely to provide a larger safety effort than is needed to have a socially efficient level with larger asymmetry in the safety effort costs. If safety standards raise the high-cost firm’s safety effort, both firms’ safety efforts may end up further away from the socially efficient level: the low-cost firm reduces its safety effort when the rival’s effort increases because safety efforts are strategic substitutes.     

Participation,Recruitment Selection,and the Minimum Wage

In this paper, we re‐examine the efficiency of participation with heterogeneous workers in a search‐matching model with bargained wages and free entry. Assuming that firms hire their best applicants, we show that participation is always too low. The reason for this is a hold‐up phenomenon: to be active, a worker must pay the entire search cost whereas part of the gain from this investment goes to the firm. As a consequence, introducing a (small) minimum wage raises participation, job creation, and employment. Therefore, net aggregate income of the economy is increased.     

SKILL REQUIREMENTS,SEARCH FRICTIONS,AND WAGE INEQUALITY*

We analyze wage inequality, extending the Burdett and Mortensen (International Economic Review 39 (1998), 257–73) model by incorporating worker heterogeneity through skill requirements. We provide sufficient conditions for existence of an equilibrium where more productive firms offer higher wages. The unique such equilibrium is characterized in a closed form solution. Both within‐ and between‐group inequality are explicitly calculated. We then calibrate the model to explain the joint movement of both within‐ and between‐group inequality in the late 1980s and 1990s, an explanation that has been elusive in the literature so far.     

Welfare‐improving adverse selection in credit markets*

A model of simultaneous adverse selection and moral hazard in a competitive credit market is developed and used to show that aggregate borrower welfare may be higher in the combined case than in the moral‐hazard‐only case. Adverse selection can be welfare improving because in the pooling equilibrium of the combined model, high‐quality borrowers cross subsidize low‐quality borrowers. The cross subsidization reduces the overall moral hazard effort effects, and the resulting gain in welfare may more than offset the welfare loss stemming from distorted investment choices. The analysis focuses on pooling equilibria because model structure precludes separating equilibria.     

Team production,endogenous learning about abilities and career concerns

This paper studies career concerns in teams where the support a worker receives depends on fellow team members׳ efforts and abilities. In this setting, by exerting effort and providing support, a worker can influence her own and her teammates׳ project outputs in order to bias the learning process in her favor. To manipulate the market׳s assessment, we argue that in equilibrium, a worker has incentives to help or even sabotage her colleagues in order to signal that she is of higher ability. In a multiperiod stationary framework, we show that the stationary level of work effort is above and help effort is below their efficient levels.