Labor economics Why is labor behaviorally interesting? Important in scale What people sell is 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

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 $ 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!