Putting Behavioral Economics to Work: Testing for Gift Exchange in Labor Markets Using Field Experiments

Recent discoveries in behavioral economics have led scholars to question the underpinnings of neoclassical economics. We use insights gained from one of the most influential lines of behavioral research—gift exchange—in an attempt to maximize worker effort in two quite distinct tasks: data entry for a university library and door‐to‐door fundraising for a research center. In support of the received literature, our field evidence suggests that worker effort in the first few hours on the job is considerably higher in the “gift” treatment than in the “nongift” treatment. After the initial few hours, however, no difference in outcomes is observed, and overall the gift treatment yielded inferior aggregate outcomes for the employer: with the same budget we would have logged more data for our library and raised more money for our research center by using the market‐clearing wage rather than by trying to induce greater effort with a gift of higher wages.     

Efficiency Wages: Signals or Incentives An Empirical Study of the Relationship between Wage and Commitment

Efficiency wage theories arguethat firms induce their employees to work in a moredisciplined way by paying high wages. Two basicmechanisms have been pointed out in economics about how these wage premia motivate employees.The incentives-driven `shirking model' impliesthat employees who have a highly paid job workin a more disciplined way so as to avoid beingdismissed. The ``gift exchange' model is basedon the assumption that high wages change therelationship between employer and employee.Empirical evidence on the incentives approachis mixed and a thorough competitive testingagainst the gift exchange model was notpossible due to the fact that the latter wasnot worked out enough. However, there is a relational theory of efficiency wages which isworked out in detail in order to allow directcompetitive testing. This relationalsignaling approach, as it is called, is basedon framing effects and comes to specifichypotheses about the conditions under whichefficiency wages work. These hypothesescontrast sharply with predictions from theincentives approach. The paper presents anempirical test of the theories and shows thatthe data clearly reject the incentive-basedpredictions and confirm the relationalsignaling predictions.     

WHERE THE MINIMUM WAGE BITES HARD: INTRODUCTION OF MINIMUM WAGES TO A LOW WAGE SECTOR

Between 1993 and April 1999 there was no minimum wage in the United Kingdom (except in agriculture). In this paper we study the effects of the introduction of a National Minimum Wage (NMW) in April 1999 on one heavily affected sector, the residential care homes industry. This sector contains a large number of low paid workers and as such can be viewed as being very vulnerable to minimum wage legislation. We look at the impact on both wages and employment. Our results suggest that the minimum wage raised the wages of a large number of care home workers, causing a very big wage compression of the lower end of the wage distribution, thereby strongly reducing wage inequality. There is some evidence of employment and hours reductions after the minimum wage introduction, though the estimated effects are not that sizable given how heavily the wage structure was affected. (JEL: J4, J8)     

SOCIAL COMPARISON AND EFFORT PROVISION: EVIDENCE FROM A FIELD EXPERIMENT

Social comparison has potentially far reaching consequences in many economic domains. We conducted a field experiment to examine how social comparison affects workers' effort provision if their own wage or that of a co‐worker is cut. Workers were assigned to groups of two, performed identical individual tasks, and received the same performance‐independent hourly wage. Cutting both group members' wages caused a decrease in performance. But when only one group member's wage was cut, the affected workers decreased their performance more than twice as much as when both workers' wages were cut. This finding indicates that social comparison among workers affects effort provision because the only difference between the two wage‐cut treatments is the other group member's wage level. In contrast, workers whose wage was not cut but who witnessed their group member's pay being cut displayed no change in performance relative to the baseline treatment in which both workers' wages remained unchanged. This indicates that social comparison exerts asymmetric effects on effort.     

Does Industrial Composition Matter for Wages? A Test of Search and Bargaining Theory

Does switching the composition of jobs between low‐paying and high‐paying industries have important effects on wages in other sectors? In this paper, we build on search and bargaining theory to clarify a key general equilibrium channel through which changes in industrial composition could have substantial effects on wages in all sectors. In this class of models, wage determination takes the form of a social interaction problem and we illustrate how the implied sectoral linkages can be empirically explored using U.S. Census data. We find that sector‐level wages interact as implied by the model and that the predicted general equilibrium effects are present and substantial. We interpret our results as highlighting the relevance of search and bargaining theory for understanding the determination of wages, and we argue that the results provide support for the view that industrial composition is important for understanding wage outcomes.     

CROSS‐COUNTRY VARIATION IN THE IMPACT OF INTERNATIONAL MIGRATION: CANADA,MEXICO, AND THE UNITED STATES

Using data drawn from the Canadian, Mexican, and U.S. censuses, we find a numerically comparable and statistically significant inverse relation between immigrant‐induced shifts in labor supply and wages in each of the three countries: A 10% labor supply shift is associated with a 3%–4% opposite‐signed change in wages. Despite the similarity in the wage response, the impact of migration on the wage structure differs significantly across countries. International migration narrowed wage inequality in Canada; increased it in the United States; and reduced the relative wage of workers at the bottom of the skill distribution in Mexico. (JEL: J31, J61)     

GETTING IT DONE: DYNAMIC INCENTIVES TO COMPLETE A PROJECT

A principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterize the contracts that the principal sets, with and without commitment. With full commitment, the contract involves the agent's value and wage declining over time, in order to give the agent incentives to exert effort. The best sequentially rational equilibrium for the principal also involves the agent's wage declining over time, while the worst sequentially rational equilibrium for the principal has a constant wage (and is in fact the unique stationary equilibrium). The best (weakly) renegotiation‐proof equilibrium for the principal is achieved by a constant wage that maximizes the principal's payoff, conditional on wages being constant. We compare these solutions to the efficient outcome.     

Empathy wages?: Gratitude and gift exchange in employment relationships

Economists have argued that employers sometimes pay above-market premiums (efficiency wages) in order to attract, motivate, and/or retain valued personnel. Drawing on recent work examining reciprocity and gift exchange, this paper proposes the notion of “empathy wages,” in which the effect of the premium paid depends on the extent to which it elicits gratitude from recipients. We argue that a particular gift (monetary or otherwise) offered by an employer is likely to elicit more gratitude among “non-stars”: workers who are relatively disadvantaged and in the lower part of the performance distribution. In contrast to “stars,” “non-stars” are likely to compare the treatment they receive to the inferior opportunities or treatment they (might) have received outside of their present employment situation. Star workers, in contrast, are likely to believe that they are worth whatever they can command. The economic viability of such “empathy wages” thus depends on how much star versus non-star workers vary in gratitude, relative to how they differ in output and compensation. We explore a variety of data bearing on how much stars differ from non-stars in their respective output and earnings (in star contexts such as professional sports and real estate sales). We then review or reanalyze some prior studies on gift exchange, documenting that those who are relatively disadvantaged and/or low performers do appear more grateful (or inclined to reciprocate gifts) than stars. Indeed, the magnitude of the difference is sufficiently large that it could offset quite marked differences in productivity or quite small differences in compensation (both of which would make stars relatively more attractive to employers). We suggest some conditions under which gratitude-based employment systems are more likely to flourish in real-world settings, as well as some fruitful lines for future research on these topics.     

Gift Exchange in the Field

This study reports evidence from a field experiment that was conducted to investigate the relevance of gift exchange in a natural setting. In collaboration with a charitable organization, we sent roughly 10,000 solicitation letters to potential donors. One‐third of the letters contained no gift, one‐third contained a small gift, and one‐third contained a large gift. Treatment assignment was random. The results confirm the economic importance of gift exchange. Compared to the no gift condition, the relative frequency of donations increased by 17 percent if a small gift was included and by 75 percent for a large gift. The study extends the current body of research on gift exchange, which is almost exclusively confined to laboratory studies.     

The Effect of Legislated Minimum Wage Increases on Employment and Hours: A Dynamic Analysis

We present a dynamic policy simulation analysing what would have happened to wages, employment, and total hours had the federal minimum wage increased in September 1998, a year after the last actual increase in our data. Prior work suggests that employment responses take 6 years to play out. Using a time‐series model for 23 low‐wage industries, we find a positive response of average wages over 54 months following an increase in the minimum wage, but neither employment nor hours can be distinguished from random noise. Ignoring confidence intervals, the adjustment of hours is complete after 1 year, the adjustment of employment after no more than two and one half years.     

Minimum Wages as a Barrier to Entry: Evidence from Germany

This study analyses employers' support for the introduction of industry‐specific minimum wages as a cost‐raising strategy in order to deter market entry. Using a unique data set consisting of 800 firms in the German service sector, we show that high‐productivity employers support minimum wages. We further find some evidence that minimum wage support is higher in industries and regions with low barriers to entry. This is particularly the case in East Germany, where the perceived threat of low‐wage competition from Central and Eastern European countries is relatively high. In addition, firms paying collectively agreed wages are more strongly in favour of minimum wages.     

THE WELL‐BEING OF THE ELDERLY AND WAGE ARREARS IN RUSSIA

About one‐third of households with elderly were not paid their wages during the mid‐1990s in Russia. Applying matching estimations to a nationally representative survey, the study shows that wage arrears had detrimental effects on the well‐being of the elderly in these families. Salaries in households with wage arrears dropped by almost two‐thirds, income fell by more than one‐third, and poverty doubled. Behavioral responses were only partly effective. The net revenue loss amounted to five‐sixths of the wage shock for men, and nine‐tenths of the wage shock for women. The elderly cut back on food expenses by reducing food purchases and adjusting their diet towards cheaper calories, economising on expenses equal to around one‐quarter of the wage reduction. Caloric and protein intakes dropped, although less than income, and the nutritional content of food consumption with regard to vitamins and minerals deteriorated. Wage arrears worsened male health more than female health, even though the decline in income was comparable. Functional limitations rose by 8% for men and 3% for women, and self‐rated health declined by 2.5% for men and 0.5% for women. Old‐age men with arrears were almost twice as likely to die before the next survey round, and functional limitations of surviving men rose by more than 10%. By contrast, there was no impact on the next round's health status of old‐age women. A rich data set is used to discount alternative explanations, including feedback from health to income, other economic factors, health service access, health behavior, and environmental conditions. (JEL: I12, I30, J14, J30)     

The Role of Profit Sharing in Dual Labour Markets with Flexible Outsourcing

We combine profit sharing for high‐skilled workers and outsourcing of low‐skilled tasks in a partly imperfect dual domestic labour market, which means that only low‐skilled labour is represented by a labour union. In that framework we analyse how the implementation of profit sharing for high‐skilled workers influences the amount of outsourcing and the labour market outcome for low‐skilled worker. By doing this, we use some specific assumptions, e.g. exponentially increasing outsourcing costs or the wage for low‐skilled workers will be determined by a union whereas the wage for high‐skilled workers is given. Assuming that low‐skilled labour and outsourcing are interchangeable we show that profit sharing has a positive effect on the wage for low‐skilled workers and helps to decrease wage dispersion. However, under these circumstances, profit sharing enhances outsourcing. Concerning the employment effects for high‐ and low‐skilled workers, we show that there is an employment reducing effect due to higher wages for low‐skilled work, which can be offset by higher productivity of highly skilled workers, as the domestic labour inputs complement each other.     

Wage Bargaining with On‐the‐Job Search: Theory and Evidence

Most applications of Nash bargaining over wages ignore between‐employer competition for labor services and attribute all of the workers' rent to their bargaining power. In this paper, we write and estimate an equilibrium model with strategic wage bargaining and on‐the‐job search and use it to take another look at the determinants of wages in France. There are three essential determinants of wages in our model: productivity, competition between employers resulting from on‐the‐job search, and the workers' bargaining power. We find that between‐firm competition matters a lot in the determination of wages, because it is quantitatively more important than wage bargaining à la Nash in raising wages above the workers' “reservation wages,” defined as out‐of‐work income. In particular, we detect no significant bargaining power for intermediate‐ and low‐skilled workers, and a modestly positive bargaining power for high‐skilled workers.     

Profit Sharing and the Firm‐Size Wage Premium

This study analyzes the relationships among wages, firm size, and profit sharing schemes. We develop a simple theoretical model and explore the relationship empirically using high‐quality panel data. The theoretical model shows that the firm‐size wage premium decreases in the presence of profit sharing. The empirical results based on rich matched employee‐employer data for private sector wage earners in Finland show that the firm‐size wage premium is modest, and it becomes negligible when we account for profit sharing and covariates describing assortative matching and monopsony behavior. The analysis suggests that profit sharing schemes embody effects of firm‐specific unobservables that raise productivity, support rent sharing, and boost wages.     

Technology Effects on Wages in Finnish Manufacturing

In this paper we study the effect of technology on establishment‐level wages using a classification of manufacturing industries based on four technology levels. The technology wage premiums are estimated separately for non‐manual and manual workers using wage equations with available control variables for plant and workforce characteristics (human capital) over the time period 1974–93. The results do not show a straightforward increasing relationship between a plant’s average wages and its technology at higher technology levels. However, establishments with the lowest technology level paid the lowest wages during the whole period. We also find that the relative non‐manual to manual wage ratio increased over the time period in the highest technology levels. These findings are consistent with technology wage premiums and skill‐biased technological change found in studies for other countries     

Wage and Productivity Differentials in Japan: The Role of Labor Market Mechanisms

This paper aims at explaining two stylized facts of the Lost Decade in Japan: rising wage inequalities and increasing firm‐level productivity differentials. We build a model where firms can choose between efficiency wages with endogenous effort and competitive wages, and show that it can replicate those facts. Using Japanese microeconomic data, we find support for the existence of efficiency wages in one group of firms and competitive wages in the other group. Based on those results, a simulation shows that the share of firms using efficiency wages has declined, within sectors, during the Lost Decade, as predicted by the model.     

Minimum Wage Effects on Labor Market Outcomes under Search,Matching, and Endogenous Contact Rates

Building upon a continuous‐time model of search with Nash bargaining in a stationary environment, we analyze the effect of changes in minimum wages on labor market outcomes and welfare. Although minimum wage increases may or may not lead to increases in unemployment in our model, they can be welfare‐improving to labor market participants on both the supply and demand sides of the labor market. We discuss identification of the model using Current Population Survey data on accepted wages and unemployment durations, and show that by incorporating a limited amount of information from the demand side of the market it is possible to obtain credible and precise estimates of all primitive parameters. We show that the optimal minimum wage in 1996 depends critically on whether or not contact rates can be considered to be exogenous and we note that the limited variation in minimum wages makes testing this assumption problematic.     

In Search of Workers' Real Effort Reciprocity—a Field and a Laboratory Experiment

We present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages. Work effort neither reacts to an increase of the own wage, nor to a positive or negative peer comparison. This result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort. In an additional real‐effort laboratory experiment we show that explicit cost and surplus information that enables an exact calculation of an employer's surplus from the work contract is a crucial prerequisite for a positive wage–effort relation. This demonstrates that an employee's reciprocity requires a clear assessment of the surplus at stake. (JEL: C91, C92, J41)