Labor economics
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Why is labor behaviorally interesting?
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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:
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“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?
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Efficiency wages (Stiglitz et al)
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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” ($5k consulting firm “bounties”)
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“Gift exchange” (Akerlof-Yellen)
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Pay “too much” so workers reciprocate with
high (uncontractible) effort
Consistent with resistance to wage cuts (Bewley)
 Experimental evidence (Fehr et al, PJ Healy,…)
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Moral hazard in contracting:
Theory and experimental evidence
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Fehr setup:
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Firms offer w
Firms earn 10e-w
Workers choose e
Workers earn w-c(e)
No reputations (cf.
PJ Healy)
Competition does not drive wages down…firms
choose high wage offer workers & expect reciprocity
2. Crowding out
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Do extrinsic ($) 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?
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Benabou-Tirole REStud 03
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Workers infer task difficulty or skill from wage
offer (“overjustification”, “self-perception”,
“looking glass self”)
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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
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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
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Standard model (one activity)
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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
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Behavioral critiques
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Workers don’t know c(e) (prefs constructed)
U(W-r) depends on reference point
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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
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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
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Basic questions:
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Does supply rise with wage w?
Participation (days worked) vs hours
 A: Very low + supply elasticities for males
 …but most data from fixed-hours
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Intertemporal substitution
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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?
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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
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Note: Which has
more measurement
error, hours or $?
Big tip experiment!
Farber is puzzled…
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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
2.SCIENCE WATCH; Bacteria May Be Weapon In the Battle Against PCB's
... Be Weapon In the Battle Against PCB's ...
November 8, 1988 - (NYT) - Science - News - 391 words
3.
CAMPAIGN TRAIL; Perhaps He Pruned The Wrong Stop
... Perhaps He Pruned The Wrong Stop ...View free preview
November 8, 1988 - By Bernard Weinraub (NYT) - National - News - 211 words
4.Quotation of the Day
... Quotation of the Day ...
November 8, 1988 - (NYT) - New York and Region - News - 27 words
5.THE MEDIA BUSINESS: Advertising; Time Agrees to Set Up Fortune, Italian Style
... THE MEDIA BUSINESS: Advertising; ...
November 8, 1988 - By RANDALL ROTHENBERG (NYT) - News - 119 words
6.THE MEDIA BUSINESS: Advertising; Wrestling Federation To Introduce Fragrance
... THE MEDIA BUSINESS: Advertising; ...
November 8, 1988 - By RANDALL ROTHENBERG (NYT) - News - 168 words
7.THE MEDIA BUSINESS: Advertising; Kornhauser & Calene Loses Vice Chairman
... THE MEDIA BUSINESS: Advertising; ...
November 8, 1988 - By RANDALL ROTHENBERG (NYT) - News - 171 words
8.
Sports of The Times; Some Extra Sugar in the Punch
... Sports of The Times; Some Extra Sugar ... Extra Sugar in the Punch ...View free preview
November 8, 1988 - By DAVE ANDERSON (NYT) - Sports - News - 918 words
9.Dixville Notch Gives Bush the Lead, 34-3
... Notch Gives Bush the Lead, 34-3 ...
November 8, 1988 - AP (NYT) - National - News - 105 words
10.
Living With the Computer Whiz Kids
... Living With the Computer Whiz Kids ...View free preview
November 8, 1988 - By JOHN MARKOFF (NYT) - National - An Analysis - 974 words
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Possibility of Poisoning Is Raised In the Death of a Haitian Colonel
... 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
... , City of the $12 Movie ...View free preview
November 8, 1988 - By VINCENT CANBY, Special to the New York Times (NYT) Movies - News - 1250 words
Save the Catskills Also
... Save the Catskills Also ...
November 8, 1988 - (NYT) - Editorials and Op-Ed - Letter - 121 words
Interviews: Great idea!
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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
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“Overall”?
TRIP
sample
only
CBLT have
2 other
samples
Alan Krueger 6/26/03 NYTimes column
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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.
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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* SPECIFICDATE SHOCKS TO LABOR SUPPLY.
Big tip experiment
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Prediction of reference-dependent model:
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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:
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“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
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No test of
intertemporal
substitution
What are
“problems with
conception and
measurement”?