THE BROTHER‐IN‐LAW EFFECT*

When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the brother‐in‐law effect. This article analyzes its consequences. When the brother‐in‐law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization. We also identify cases in which nepotism improves efficiency.     

Realitic and Analytic Syntheses of Macro- and Microeconomics

We study the impact of employer's opportunism on wage rigidity in capitalist companies by arguing that the need to fix wages is crucially influenced by the asymmetric distribution of decision-making power and information in favor of the stronger contractual party — the employer, and against the weaker contractual party — employees. The capitalist entrepreneur can make decisions, whose negative consequences are borne by workers in terms of lower wages and more intense work pace. Excessive wage reductions in the face of negative exogenous shocks or too risky investment decisions represent the main instances of such opportunistic behavior. Fixed wages can represent workers' best response to the emerging risk of the employer moral hazard, but this implies a heightened risk of layoffs since wages and employment levels cannot be fixed at the same time. Besides discussing piece rate contracts, profit-sharing and codetermination as counterexamples, we observe worker cooperatives which depart from the presence of contrasting interests and private information in the principal-agent framework. Indeed, several empirical studies have shown greater employment stability and wage flexibility in worker cooperatives vis-à-vis the capitalist firm.     

MONOPOLY INSURANCE AND ENDOGENOUS INFORMATION

We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance, which discourages information gathering. We identify a missorting effect that explains why the insurer wants to discourage information acquisition. Moreover, lower information gathering costs can hurt both consumer and insurer.     

Unobserved Heterogeneity,Job Training and the Employer Size–Wage Effect in Australia

This study attempts to clarify the nature of the employer size–wage effect in Australia by determining the extent to which it can be explained by observed and unobserved quality differences of workers. Our empirical results show that, for men, quality‐adjusted employer size–wage effects are quite small and are mostly driven by lower wages for workers in the smallest firms (fewer than 20 workers). For women, size–wage effects disappear when unobserved quality differences are accounted for. We also find that accounting for differences in the incidence of job training has no effect on the structure of wage differences by employer size.     

Consumption Commitments and Employment Contracts

We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.     

Piece rates, time rates, and teams: Explaining patterns in the employment relation

This paper illustrates how the economics of internal organization can be used to explain patterns in agricultural labor contracts. Piece rates tend to be chosen over time rates for tasks when shirking is easy monitor by ex post inspection. The incidence of piece rates is also higher where the work force is more heterogeneous, where high opportunity wages prevail and where some agricultural operations are done by specialized teams. These relationships are implied by the proposition that contracts minimize excess burden in the face of enforcement and information costs.     

CAREER CONCERNS,MATCHING, AND OPTIMAL DISCLOSURE POLICY*

Raiders may suffer from information disadvantage since the current employer is often better informed about his workers' quality. When workers have career concerns and matching influences productivity, the initial employer can strategically disclose information to influence incentives and matching efficiency. Long‐term complete contracts induce full disclosure when raiders are perfectly competitive. The optimal short‐term contract induces full disclosure if raiders are perfectly competitive, and the workers are risk neutral and are not liquidity constrained. These conditions are not only sufficient but also “almost necessary” for full disclosure. Partial disclosure may be optimal if any of these conditions is relaxed.     

Earnings, Education, and Fixed-Term Contracts

We explore the relationship between earnings, education, and fixed‐term contracts using data from the 1997 British Social Attitudes Survey. We find that the log hourly wage of workers employed under such contracts is approximately 13% lower than that of their ‘permanent’ counterparts, even after controlling for a plethora of personal and job characteristics. Standard decompositions indicate that the vast majority of this differential (more than 70%) is attributable to price effects, which may reflect discrimination on the part of the employer. Such findings may, therefore, suggest that employment protection is appropriate for individuals employed under fixed‐term contracts.     

Migrants as second-class workers in urban China? A decomposition analysis

In urban China, urban resident annual earnings are 1.3 times larger than long-term rural migrant earnings as observed in a nationally representative sample in 2002. Using microsimulation, we decompose this difference into four sources, with particular attention to path-dependence and statistical distribution of the estimated effects: (1) different allocation to sectors that pay different wages (sectoral effect); (2) hourly wage disparities across the two populations within sectors (wage effect); (3) different working times within sectors (working time effect); and (4) different population structures (population effect). Although sector allocation is extremely contrasted, with very few migrants in the public sector and very few urban residents working as self-employed, this has no clear impact on earnings differentials, because the sectoral effect is not robust to the path followed for the decomposition. The second main finding is that the population effect is robust and significantly more important than wage or working time effects. This implies that the main source of disparity between the two populations is pre-market (education opportunities) rather than on-market.     

Fair wages survive multiple sources of income inequality

When an employee in a gift exchange game earns significantly less than the employer, the source of employer income does not affect effort choices. However, to induce one unit of effort, the employer has to pay higher wages than in a game without payoff inequality.     

Effort and wages: Evidence from the payroll tax

I show that under a canonical efficiency-wage model, a per capita employment tax levied on the employer raises the wage. In contrast, under market clearing, wages fall regardless of whether effort is contractible. I examine the effect of increases in the earnings base for the payroll tax in the United States on wages of high-wage workers for whom the change represents an increase in a per capita tax. In most specifications, the results suggest that wages rose, consistent with the efficiency-wage model, but they are generally too imprecise to rule out large effects of wages on non-contractible productivity that are insufficient to prevent market clearing. Provided labour demand is inelastic, the results are inconsistent with a model of contractible effort.     

IMMIGRANT RELATIVE WAGES AT THE GREAT RECESSION: EVIDENCE WITH MATCHED EMPLOYER‐EMPLOYEE DATA FOR SPAIN

The article examines relative wages of immigrants in Spain, with a particular focus on the impact of the Great Recession. The empirical analysis is restricted to men and is based on matched employer‐employee microdata and the decomposition techniques of Juhn et al. (1991, 1993) and Fortin et al. (2011). Our results show that the significant native‐immigrant wage gap that exists both in terms of average wages and of differentials along the wage distribution is essentially explained by differences in the endowments of observed characteristics so that, in general, immigrants tend to receive a similar wage treatment than Spaniards with analogous observed attributes. On the other hand, the Great Recession has had a noticeable impact on the relative wages of immigrants, given that the significant increase of the native‐immigrant wage gap observed during the previous expansionary period was mitigated during the economic downturn due to composition effects arising from the severe employment destruction pattern.     

GROWTH AND WELFARE EFFECTS OF WORLD MIGRATION

Using a two‐bloc endogenous growth model calibrated to two generic sending and receiving countries of equal size, we assess the growth and welfare impact of world migration flows of different skill compositions. The sending country (East) has a lower total factor productivity and a lower endowment of skilled labour. Migration can induce two growth‐enhancing effects: an efficiency effect from the more efficient use of labour in the receiving country (West) and a sectoral reallocation effect from a fall in the host country skilled–unskilled wage rates. Despite growth gains, there are both winners (migrants, the representative Western non‐migrant household) and losers (the representative Eastern household remaining). Remittances can see the latter group joining the winners.     

Group insurance and lending with endogenous social collateral

We construct a dynamic model of self-enforcing insurance provision and lending to a community of borrowers who are connected by risk-sharing arrangements that are themselves subject to enforcement problems, as in Kocherlakota (1996). We show that an outside lender offering constant-consumption contracts can earn a higher profit if he conditions his repeated interactions with each borrower on the history of his interactions with all the group members (a joint liability contract), rather than on his history with that borrower only (individual liability contracts). This result holds even in the absence of informational asymmetries. The observation driving it is that with individual liability contracts, a joint welfare-maximizing group may prefer to have one or more group members default on their contracts, so that the group can consume a mix of outside funds and the defaulters' stochastic income. One contribution of our work is to give precise economic content to the concept of “social collateral” as the per-agent surplus from group risk-sharing over autarky. The group can deter its members from defaulting on their contracts with the principal by threatening to reduce that surplus.     

Striking a balance: Optimal tax policy with labor market duality

We develop a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers “secondary contracts.” When calibrated using aggregate tax revenue data, the model delivers estimates of secondary “off the books” employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.     

Why is there Corporate Taxation? The Role of Limited Liability Revisited

Most economists reject the idea that corporate taxation should be interpreted as a price for the privilege of limited liability. In this paper, we reconsider this idea and show that limited liability can lead to overinvestment if information is incomplete. In this setting, introducing an additional tax on limited liability contracts is welfare-enhancing. Our model thus offers an explanation for the nexus between double taxation and limited liability observed in many existing tax systems.      

Privatization and efficiency wages

The impact of privatization is investigated in a shirking model of efficiency wages. Without trade unions, privatization — modeled as a stricter control of employees — lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion. However, for a utilitarian monopoly union, facing a company characterized by a constant-elasticity labor-demand schedule, privatization raises efficiency wages. If privatization is modeled as a stronger profit orientation, wages, effort, and labor productivity will rise, while employment will shrink in a wage-setting firm. Again, wage and employment effects can be reversed in the case of wage negotiations.     

Employer and Employee Ignorance in Developing Countries: The Case of Trinidad and Tobago

The authors examine the degree of employer and employee ignorance about reservation and offer wages in Trinidad and Tobago and find this to be considerable. On average employers pay more than 26% above workers’ reservation wages, while employees earn 22% less than the maximum wage on offer, ceteris paribus. However, there are some differences across sub‐groups of jobs, particularly with regard to individuals’ lack of information about the best wage offers. Some differences are also found compared to previous results for developed nations, although the level of ignorance does not appear to be higher in Trinidad and Tobago.     

Pareto-improving firing costs?

We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.     

The impact of disembodied technological progress on unemployment

This paper studies the relationship between disembodied technological progress and unemployment in a standard search-matching model. We find that the sign of the correlation crucially depends on the degree of idiosyncratic uncertainty. The analysis uncovers a new effect whereby an increase in growth intensifies the endogenous rate of job separation because it raises the workers' outside option. For plausible parameter values, the outside option effect outweighs the capitalization effect, so that disembodied technological progress increases the rate of unemployment.