Wage Inequality and Performance in Nonprofit and For‐Profit Organizations

This article examines the effects of several forms of wage inequality on service quality and employee effort. We suggest that two popular theories, tournament and fair wage/equity, are not necessarily competing. Each theory accurately describes aspects of employee behavior, but because of sectoral differences in organizational objectives and employee attitudes, tournament theory's predictions are relatively stronger in the for‐profit sector, while fair wage/equity theory's predictions are relatively stronger in the nonprofit sector. Using an employer–employee matched data set of nursing homes linked to a federal regulatory database and a resident survey, we found that ownership moderates the relationship between wage inequality and service quality. Although wage inequality positively affects service quality in the for‐profit sector, the reverse is true among nonprofit organizations. We also found that overall wage inequality in the workplace has a more pronounced influence on employee discretionary effort than does the employee's place in the distribution of wages.     

Workers’ participation in wage setting: A gift-exchange experiment

This study analyzes the consequences of workers’ participation in the wage setting process on effort exertion. The experimental design is based on a modified gift-exchange game with firms specifying contract alternatives and workers deciding about the finally implemented alternative. The experimental data reveals that workers with participation rights are more sensitive to differences in wage offers: Low wage offers trigger negative reciprocity which dominates the positive incentive effects from high wage offers. On average, participation in the wage setting process leads to a decline in effort exertion.     

Gender differences in tournament and flat-wage schemes: An experimental study

We present a new experiment that explores gender differences in both performance and compensation choices. While most of the previous studies have focused on tournament vs. piece-rate schemes, the originality of our study consists in examining the gender gap in the context of a flat wage scheme. Our data indicate that females exert a significantly higher effort than men in fixed payment schemes. We find however no gender difference in performance under the tournament scheme, due to a combination of two effects. On the one hand, men more significantly increase their effort when switching from a flat wage to a tournament scheme. On the other hand, when switching from the flat wage to a tournament scheme, women have less margin to increase performance since their effort was already relatively high with a flat wage. We also find that females are more likely than males to choose a flat-wage scheme than a tournament. This gap however narrows dramatically when feedback on previous experience is provided.     

PAY SECRECY AND EFFORT PROVISION

Pay secrecy is often justified on the ground of concerns about the detrimental consequences of intra‐firm pay comparisons for work morale and performance. Surprisingly, however, there is only limited empirical evidence that the availability of pay comparison information is detrimental for effort provision. In this paper, I study pay comparison effects in a gift‐exchange game laboratory experiment where an employer is matched with two symmetric employees. I compare effort choices made by employees in a “pay secrecy” treatment and in two “public wages” treatments where employees are informed of the wage paid to the co‐worker. In one “public wages” treatment the employer can choose both wages she pays to the employees, while in the other treatment the wage paid to one employee is regulated exogenously. I show that pay disclosure can be detrimental for effort provision if employees are treated unequally. (JEL A13, C92, J31)     

Can a minimum wage increase have an adverse impact on inequality? Evidence from two Latin American economies

This paper uses a semiparametric model to analyze the impact of an increase in the real minimum wage on inequality in Colombia between 1995 and 1999 and in Paraguay between 1993 and 2000–2001. Simulations suggest that if the employment effects of the minimum wage increase are ignored, the underlying policies would contribute to reduce earnings inequality in Colombia and would be inequality neutral in Paraguay. By considering the drop in wages of those who lost their jobs, simulations suggest that in both countries the policy in question would increase earnings inequality under some assumptions about the employment elasticity of the minimum wage and the new level of earnings unemployed workers rely upon. While these findings do not mean that minimum wage increases in LDCs (Less Developed Countries) necessarily have adverse distributional affects, they suggest that minimum wage policy should be implemented with care depending on how sensitive employment is to wage increases. An erratum to this article can be found at     

Decomposition of Changes in Korean Wage Inequality, 1998–2007

South Korea experienced a steep increase in wage inequality between the Asian financial crisis in 1997 and the global financial crisis in 2008. This paper investigates the causes of the sharp change during that time period by looking at the contributions of changes in the distributions of schooling and unionization. The effects are estimated applying two robust distributional function based decomposition methods on Korean Labor and Panel Survey data for the time period 1998–2007. The results suggest changes in the distribution of schooling can explain about 10 % of the changes in the 90/50 percentile wage gap. The declining unionization rate does not have much impact on the upward trend of Korean wage inequality. In addition, aggregate decomposition results suggest that changes in labor force composition can explain a significant proportion of the total wage changes in the upper-tail of the distribution. Based on our findings we provide a list of policy recommendations to address the wage inequality issue in Korea.     

Skill-biased technical change, educational choice, and labor market polarization: the U.S. versus Europe

This paper analyzes the effect of recent technical change on the labor market and explains the observed differences in wage inequality among advanced countries. In particular, we focus on the difference between the inequality in the U.S. and in continental Europe. Many studies have indicated a rise in wage inequality in the U.S. over the past three decades. On the other hand, there has been little change in wage inequality in continental Europe. By introducing human capital investment into the model by Acemoglu (Am Econ Rev 89:1259–1278, 1999), we show that ex ante homogeneous economies would have distinct ex post wage distribution. The strategic complementarity between human capital investment and firms’ hiring strategies yields the possibility that multiple equilibria exist, which explains the difference in wage distribution between the U.S. and Europe. In addition, we show that differences in tax or education systems can explain the difference in wage distribution between the U.S. and Europe.     

Reducing poverty and inequality through tax-benefit reform and the minimum wage: the UK as a case-study

Atkinson’s book Inequality: What Can Be Done? (Harvard University Press, 2015) sets out a range of concrete proposals aimed at reducing income inequality, which cover a very broad span but include major changes to the income tax and social transfers system and the minimum wage. These are framed with specific reference to the UK but have much broader relevance in demonstrating how substantial the impact on inequality of such measures could be. This paper assesses the first-round effects of these tax, transfer and minimum wage reforms on income inequality and poverty based on a microsimulation approach using EUROMOD. The reforms involve a significantly more progressive income tax structure, a major increase in the minimum wage to the level which is estimated to represent the ‘Living Wage’, and alternative routes to reforming social transfers – either to strengthen the social insurance element or to restructure the entire system as a Participation Income (a variant of Basic/Citizen’s Income). The results show how the first-round effects of either set of tax and transfer proposals would be to substantially reduce the extent of income inequality and relative income poverty and the paper draws out how the two approaches differ in their effects. The additional impact of raising the minimum wage to the Living Wage is modest, reflecting in particular the position of beneficiaries in the household income distribution and the offsetting effects on household income of the withdrawal of means-tested cash transfers.     

Explaining the Wage Gap: Intra-Industry Trade, Services Linkages and Falling Transportation Costs

In the debate on globalisation and wage inequality within countries, Heckscher–Ohlin theory has featured prominently, yet fails to take into account that globalisation comprises much more than increased trade between advanced and less-advanced countries. This paper develops a framework that takes better heed of the many aspects of globalisation and thereby addresses a new channel through which globalisation might influence wage inequality. Our results indicate that to understand the impact of globalisation on wage inequality, one needs insight in the nature and stage of globalisation and the relative size of a country.     

Effects of positive attitude and optimism on wage and employment: A double selection approach

Using two samples from the 1979 National Longitudinal Survey of Youth (NLSY79), a longitudinal data set from the United States, and following a double selection approach, the current study estimates the worker's employment and wage equations simultaneously with positive attitude and optimism as additional explanatory variables. Modeling employment as a bivariate decision process, the study examines different factors that influence the worker's labor market participation decision, the employer's hiring decision and the wage rate. The study finds the evidence that the worker's positive attitude and optimism affect the worker's employment probability from different angles: the former through the participation decision and the latter through the hiring decision. Following an alternative approach, this study also provides strong support to the earlier finding that positive attitude affects the worker's wage positively. Interestingly, the effects of attitude variables on the worker's wage are found to be quite comparable in magnitude to the wage effects of the traditional human capital variables.     

LABOR SUPPLY ESTIMATION BIASES FROM DISREGARDING NONWAGE BENEFITS

Labor supply models and research underpinned by labor supply decisions often assume that workers' choices are functions of wage and wage offers. However, the literature shows evidence that such decisions at least partly depend on nonwage benefits encompassed in jobs and occupations. In this paper, I develop and estimate a stochastic dynamic model of occupation and job choice, where nonwage benefits are directly incorporated into the decision alongside wages (a full model). Nested within the full model is a wage model, which represents the common practice in the literature of basing selection solely on wages and disregarding nonwage benefits. I separately estimate the full model and the nested wage model to compare the implications (biases) of omitting nonwage benefits. I compare the two models' estimates of elasticities and an inequality reduction intervention policy. I find that disregarding nonwage benefits generally causes biases. There are cases when the two models predict very similar outcomes and have close estimates, such as in occupation‐specific elasticities and job transition elasticities. But these special cases are products of canceling biases. In most cases, ignoring nonwage benefits will bias estimates by overestimating the importance of wage in the selection process and by disregarding changes in relative prices between wage and nonwage benefits. (JEL J20, J32, D91)     

RECIPROCITY UNDER BRIEF AND LONG-TIME DELAYS

We report the results from three experiments embedded in the same overarching design, which extends the Gift Exchange paradigm for the study of worker–employer relationships. We focus on the effect of the length of the delay, between the time at which workers learn their wage and when they choose an effort level, on the relationship between wage and effort. We compare effort choices made within a few hours with those made several weeks afterward. We find that the strength of the wage-effort relationship decreases over time, and this change appears to be driven by workers who receive low wages. (JEL C91, J33, M52)     

Dynamics of earnings inequality among female-headed households in the United States

The labor market in the United States has gone through a number of noticeable changes, one of which is a rise participation of women in the labor force. A number of studies have investigated the consequences of these changes on wage, income, or earnings inequality in a static framework. This study investigated the consequences of these changes on earnings inequality over time. The earnings inequality among male- and female-headed households is compared. I further considered the factors that might have influenced the earnings inequality among female-headed households. Short-term and long-term inequality was measured from 1978–1986. It was found that short-term inequalities generally have a rising trend and contain transitory components; long-term inequalities declined in the early years because of a smoothing of transitory components; and within-group inequalities are the principle determinant of overall inequality. Education, race, age, and marital status were considered as possible contributors to the overall inequality. Education and race were shown to be the most influential factor explaining inequality among female-headed households and explained a third of the observed inequality. Earnings stability profiles reveal the existence of permanent and chronic inequality.     

Job turnover, wage rates, and marital stability: How are they related?

This study examines the interplay between job stability, wage rates, and marital stability. We use a Dynamic Selection Control model in which young men make sequential choices about work and family and estimate the model using an approach that takes account of self-selection, simultaneity and unobserved heterogeneity. The results quantify how job stability affects wage rates, how both affect marital status, and how marital status affects earnings and job stability. The study reveals robust evidence that job changes lower wages and the likelihood of getting married and remaining married. At the same time, marriage raises wage rates and job stability. To project the sequential effects linking job change, marital status, and earnings, we simulate the impacts of shocks that raise preferences for marriage and that increase education. Feedback effects cause the simulated wage gains from marriage to cumulate over time, indicating that long-run marriage wage premiums exceed conventional short-run estimates.     

Market hours,household work,child care,and wage rates of partners: an empirical analysis

The aim of this paper is to provide new evidence on the effect of partners’ wages on partners’ allocation of time. Earlier studies concluded that wage rates are an important determinant of partners’ hours of market and non-market work and also that house work may lower married women’s wage rates. However, the bulk of earlier literature in this area failed to account for the endogeneity of wages or the simultaneity of partners’ time allocation choices. Here we take a reduced form approach and specify a ten simultaneous equations model of wage rates, employment and hours of market work, house work and childcare of parents. Non-participants are included in the model. We exploit a rich time use dataset for France to estimate the model. We find that the own wage affects positively own market hours and negatively own house work and childcare hours. The wage of the father has a significantly negative effect on the mother’s market hours while her wage rate has a significantly positive effect on his house work hours.     

It does (not) get better: Reference income violation and altruism

We experimentally test whether the gap between reference and actual income impacts subsequent altruism. Participants first perform a real-effort task for a fixed wage and then play a dictator game. Between conditions, we vary the level and the timing of the revelation of the wage. In some conditions, participants know the wage before the real effort task and are not informed of the other potential levels. In some other conditions, they are informed of the distribution of wages before the real effort task, but the actual wage is only revealed afterward. Participants in the latter conditions can form references that may be higher or lower than their actual wage. Our hypothesis is that the gap between the reference and the actual wage impacts transfers in the subsequent dictator game, either because participants want to compensate their recent losses, or because of the emotional reaction to gains and losses. The results support this hypothesis: participants who get the low wage transfer less and are less likely to transfer when they are informed of the other potential levels than when they are not. Conversely, participants who get the high wage are more likely to transfer positive amounts when they are informed of the other potential levels. We use physiological (skin conductance response) and declarative data to discuss the role of emotions in our treatment effects.     

How information technology affects wages: Evidence using internet usage as a proxy for IT skills

Many research studies have found a positive link between information technology (IT) in the work place and wages. Using data from the December, 1998 Current Population Survey, we examine the impact of IT, as proxied by on-the-job Internet usage, on wages. After controlling for selectivity bias, we estimate an average wage gain of 13.5 percent for on-the- job Internet usage. This wage advantage is consistent with estimates from studies based on data collected earlier in the 1990s examining the impact of computers in the workplace. We also tested for differences across industries in the manufacturing sector. We conclude that industries marked by less intensive use of technology offered significantly higher wage premiums than industries characterized by more intensive use of technology. This finding undermines the argument that higher wages go to those working in high-tech firms, not to those with high IT skills. We also find evidence that high-tech firms sort workers by skill level, which is also consistent with earlier studies.     

Sex Inequality at Higher Levels in the Hierarchy: An Intraorganizational Perspective

The relationship of sex-based wage inequality to level in the hierarchy is investigated for 2,631 employees of a large financial services organization. As hypothesized, men earned more than women overall, and the wage gap between men and women was greater at higher levels in the hierarchy than at lower levels in the hierarchy. The effects of performance ratings on salary also differed by level. At higher levels, the impact of each increase in performance rating was greater for men than women, whereas at lower levels the impact was similar between men and women.     

Gender inequality in wage earnings and female self-employment selection

Female self-employment has risen strongly over the last few decades and has become an important labor market development. The few studies that have examined women’s decision to become self-employed indicate that this decision is complex. Women are more likely than men to shoulder family-related obligations, especially child rearing, and there is evidence that this affects some women’s propensity to become self-employed. Also, women have yet to achieve full economic parity with men in wage employment. This paper specifically examines how gender inequality in wage earnings may precipitate some women’s selection out of wage employment and into self-employment. We find that women’s lower wage returns to observed worker characteristics have a positive and significant effect on women’s decision to switch from wage employment to self-employment.     

Inequality of opportunity in the land of opportunities, 1968–2001

We measure inequality of opportunity for earnings acquisition in the U.S. between 1968 and 2001. Following recent theories of social justice, earnings determinants are divided into two parts: Circumstances, which are characteristics outside individual control and effort representing factors impacting earnings but under individuals’ responsibility. Equality of opportunity requires that inequality of circumstances must be corrected while differences of effort must remain unaltered. Circumstances are represented by parental education and occupation, ethnic origin, place of birth and age. Effort is modeled with schooling choices and labour supply decisions. Using the PSID from 1968 to 2001, we provide two alternative assessments of inequality of opportunity using counterfactual distributions. The statistical framework is semi-parametric and builds on duration models. Finally, we conclude that inequality of opportunity represents between 20 and 43% of earnings inequality, but decreases all over the period reaching around 18% in 2001.