Strategic behavior and the impact of unions on wage incentive plans

This paper analyzes optimal wage incentive plans in situations in which firms make capital investments and employees supply work effort. An efficient contract will take workers’ response into account in its design, leading to a competitive contract that takes the form of a lump sum penalty and full marginal rewards to workers, or equivalently, a base wage and a piece rate above a quota. A union optimizing worker welfare will alter this lump sum amount rather than attempt to control worker effort or the marginal rewards for additional output. The greater utilization of piece rate systems in capital-intensive industries is correctly predicted by the analysis.     

Does the Minimum Wage Bite into Fast-Food Prices?

We study the effect of increases in effective minimum wages on the prices of several fast-food items using quarterly city-level data from 1993–2014, a period during much of which the federal minimum wage declined in real value while state-level legislation flourished. For one product, a burger, we find a robust price elasticity of 9 % with respect to the minimum wage. This estimate indicates substantial cost pass-through when contextualized by the effect of minimum-wage increases on restaurant wage bills. Our estimate for pizza is suggestive of a similarly large pass-through rate but is less precisely estimated, and our estimate for fried chicken is near zero, but estimated even less precisely. Taken as a whole, our estimates point toward sizable cost pass-through of minimum wage increases to consumer prices. These results contribute to a mixed literature on the consumer burden of minimum wage increases.     

BUYERS' STRATEGIES, ENTRY BARRIERS, and COMPETITION

In markets where sellers have customer-specific investments, and buyers can make credible, but costly, commitments to switch suppliers, buyers' strategies attenuate the market power of sellers. Furthermore, since current prices and a buyer's decision to switch suppliers are related, limit pricing becomes an equilibrium. Limit prices increase with the time it takes a buyer to switch suppliers, and with buyers' switching costs, but fall with the level of sunk investments. Thus, sunk investments may restrain the sellers' ability to exert market power. The paper questions, then, the standard inverse relationship between market performance and sunk investments.     

INCOMPLETE CONTRACTING: A LABORATORY EXPERIMENTAL ANALYSIS

Incomplete contracts are motivated by difficulties in specifying contingent responses to unforeseen change in long-term trading relationships. The issues can be parsimoniously represented in a two-period model. Parties first make transaction-specific investment that enhances value or reduces cost. Surplus is then realized, and bargaining divides the surplus and completes the contract. The testable hypothesis is that realized surplus shares are independent of sunk investments. This is strongly rejected using laboratory experimental methods. Failure of the prediction affects the expected profitability of contracts.     

The minimum wage and productivity differentials

A firm’s ability to adjust its production process to economize on low-skilled labor when faced with a minimum wage increase will differ greatly depending on industry or occupation. For example, more capital-intensive means of cleaning hotel rooms or serving customers at restaurants may not be readily available without degrading service quality. In such situations, the productivity of labor is essentially capped, and firms have few options when the minimum wage increases. This simple observation has implications for studies that rely on microdata to examine the effects of minimum wage increases. If firms only increase prices in response to a minimum wage increase, employment effects are likely small. If the goal of the minimum wage is to redistribute income from firms and consumers to workers, minimum-wage increases targeted at industries and occupations where such rigidities result in an inelastic demand for labor may achieve the desired goal at a lower cost than across-the-board increases. However, such a scheme causes an inefficient allocation of labor and would be subjected to substantial political pressures that may lead to anomalous results. Additionally, it is unreasonable to conclude that policy makers have the necessary information to skillfully set the minimum wage. I thank Brian E. Chezum and Jeff Waddoups for helpful comments. All mistakes, of course, are my own.     

A reverse sunk cost effect in risky decision making: Sometimes we have too much invested to gamble

The sunk cost effect refers to the empirical finding that people tend to let their decisions be influenced by costs made at an earlier time in such a way that they are more risk seeking than they would be had they not made these costs. This finding seems to be in conflict with economic theory which implies that only incremental costs and benefits should affect decisions. The effect is often explained in terms of prospect theory of (Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263–291), suggesting that sunk costs may induce a ‘loss frame,’ consequently causing risk seeking behavior. We argue that sunk costs may also result in risk aversion. In the present study we investigated the effect of time and effort investments (Behavioral Sunk Costs) on risky decision making in gain and loss situations. The results show that, in agreement with prospect theory, participants were more risk averse in gain situations than in loss situations. Moreover, incurring Behavioral Sunk Costs appeared to increase risk aversive choices, i.e., a reverse sunk cost effect. Furthermore, the results suggest that, in loss situations, Behavioral Sunk Costs mainly lead to risk aversive behavior if opting for the ‘safe’ alternative is not accompanied by an increased possibility to regret the decision.     

Hours,Scheduling and Flexibility for Women in the US Low‐Wage Labour Force

Research on women's experiences with work schedules and flexibility tends to focus on professional women in high‐paying careers, despite women's far greater prevalence in low‐wage jobs. This paper seeks to contribute to our understanding of the work‐hours problems faced by women precariously employed in low‐wage jobs by addressing how work‐on‐demand scheduling and other features of part‐time labour in the neoliberal economy limit women's ability to make ends meet. Using data from 17 in‐depth interviews, we identify four themes — unpredictable schedules, inadequate hours, time theft and punishment‐and‐control via hours‐reduction — and the problems they present. Results suggest that much‐championed flexible work policies that seek to encourage women's career advancement may have little bearing on the work‐hours dilemmas faced by low‐wage women workers. We conclude that social change efforts need to encompass work policies geared to low‐wage workers, such as guaranteed minimum hours and increases in the minimum wage.     

WHY DO WORKERS JOIN UNIONS? THE IMPORTANCE OF RENT SEEKING

Union status models ignore the fact that rent-seeking prospective members have an incentive to bid up entry costs so that higher union wage gains make union jobs more costly to obtain. The standard presumption that higher union wages cause firms to substitute toward higher quality workers is shown to be incorrect under most plausible assumptions; the observed positive correlation between wage gains and the propensity to join a union underestimates the size of the true supply response. The union/nonunion wage differential reveals more about the social cost of unions than the gain to an individual worker from union membership.     

Fixing minimum wage levels in developing countries: Common failures and remedies

Some developing countries have set their minimum wages too high or too low to constitute a meaningful constraint on employers. The article compares minimum wages worldwide, proposes several ways of measuring them in developing countries and discusses whether they are effective thresholds in those countries. The second part of the article considers the institutional factors leading countries to set minimum wages at extreme levels. The author concludes that the minimum wage is used as a policy instrument to several ends – wage negotiation, deflation and social dialogue – which results in the absence of a wage floor, weak collective bargaining, or non‐compliance.     

The minimum wage can harm workers by reducing unemployment

Economists may disagree over how much raising the minimum wage increases unemployment, though few argue that the unemployment effect is zero. According to the standard model, the less the unemployment caused by a minimum wage increase, the less the harm (or greater the good) that results. But by recognizing that minimum wage workers receive fringe benefits, I show that increasing the minimum wage may not cause any unemployment and harms workers because it doesn 't. Furthermore, when there is lumpiness in providing fringe benefits, a minimum wage increase may harm workers by     

THE EVOLUTIONARY LOGIC OF HONORING SUNK COSTS

Although economics claims that sunk costs should not figure in current decision‐making, there is ample evidence to suggest that people squander resources by honoring bygones. We argue that such wastage of resources was tolerated in our evolutionary past by Nature because it served fitness‐enhancing functions. In this study, we propose and model one such function. We demonstrate how the honoring of sunk costs could have arisen as a commitment device that Nature found expedient for scenarios where conflicts over temptations between the emotional and rational centers of the brain might sabotage long‐term investments. By applying this idea to the self‐concept, we argue that this model provides a rationale for cognitive dissonance, a well‐established phenomenon in social psychology. (JEL D01, D03)     

MINIMUM WAGES,IMPORT STATUS,AND FIRMS' INNOVATION: THEORY AND EVIDENCE FROM CHINA

This study explores the heterogeneous effects of minimum wage on innovation of different types of firms. We develop an open‐economy R&D‐based growth model and obtain the following result: raising the minimum wage reduces innovation of firms that use domestic inputs but increases innovation of firms that import foreign inputs. We test this result using city‐level data on minimum wages and firm‐level patent data in China. In accordance with our theory, we find that raising the minimum wage is associated with more innovation by importing firms and less by non‐importing firms. This result survives a battery of robustness checks. (JEL E24, F43, O31)     

Minimum wages and poverty with income-sharing

Textbook analysis tells us that in a competitive labor market, the introduction of a minimum wage above the competitive equilibrium wage will cause unemployment. This paper makes three contributions to the basic theory of the minimum wage. First, we analyze the effects of a higher minimum wage in terms of poverty rather than in terms of unemployment. Second, we extend the standard textbook model to allow for income-sharing between employed and unemployed persons in society. Third, we extend the basic model to deal with income sharing within families. We find that there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others in which poverty is unchanged. We characterize precisely how the poverty effect depends on four parameters: the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum wage to the poverty line, and the extent of income-sharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage.      

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.     

LOBBYING FOR MINIMUM WAGES

Using a common agency lobbying framework, this paper illustrates how the minimum wage set reflects the interaction between economic and political factors and under what circumstances will the policymaker be induced, through lobbying, to change the minimum wage. Specifically, when the labor demand elasticity is large, lobbying is successful in inducing the policymaker to set the minimum wage in accordance with her political ideology. However, the paper also shows the conditions under which lobbying will reverse the ideological preference and induce a business‐friendly government to increase the minimum wage. Empirical analysis on a panel data for ten Canadian provinces gives considerable support for theoretical predictions. The real minimum wage decreases in skill‐adjusted union density and political ideology, while larger labor demand elasticity reinforces the influence of political ideology in the presence of lobbying. (JEL J38, D72, D78)     

The Ross-Dunlop debate and union wage concessions: A median voter analysis

The Ross-Dunlop debate concerns the extent to which unions take into account the trade-off between wages and employment in formulating their wage demands. This paper develops a median voter model of union behavior that offers a new approach to resolving the Ross-Dunlop debate. The model shows that when the binding constraint on the median union member in the seniority distribution is the threat of layoff, the union will behave as a “Dunlop-type” union; when the binding constraint is the cost of striking, the union will behave as a “Ross-type” union. The model is then applied to the related issue of union wage concessions. Two questions are examined: Under what conditions will a union agree to wage concessions? How large a cut in wages will be accepted?     

Economic growth and inequality in Singapore: The case for a minimum wage

In the context of Singapore's ageing population, the employment of large numbers of low‐skilled foreign workers is proving to be a major challenge to inclusive growth because of the stagnation of low‐wage workers' incomes. In order to address this problem, the author makes the case for introducing a minimum wage to complement existing in‐work benefit schemes. After addressing the commonly voiced objections to a minimum wage system, he suggests ways in which a minimum wage could be implemented in Singapore. New measures to enhance the social safety net and foster more sustainable economic growth are also proposed.     

The impact of the minimum wage in West Virginia: A test of the low-wage-area theory

VI. Conclusions West Virginia counties do provide evidence of significant dis-employment due to the minimum wage, a finding that supports the theory that low-wage areas are more susceptible to employment losses when the legislated minimum wage is increased. My results show that a 10 percent increase in the minimum wage will reduce total employment in the average West Virginia county by 1.1 percent. The most rural counties may also respond more severely, up to 1.4 percent for the same minimum wage change. I thank Clifford Hawley, Sudeshna Bandypadhyay, George Hammond, Stratford Douglass, Brian Cushing, Tom Garrett, Victor Claar, Gary Wagner, and an anonymous referee for helpful comments.     

Developing Social Firms in the UK: a contribution to identifying good practice

Social firms and related enterprises are developing rapidly in the UK as a means of providing employment for disabled people. This study examined the kind of enterprise that will best meet the aspirations of disabled people. A telephone survey identified the range of enterprises describing themselves as social firms, and examined their develop ment and operation. Alongside the survey, focus groups with disabled people and interviews with carers explored perspectives on the values that should underpin social firms. The results suggest that indicators of good practice include: user/worker participation in the firm's development and operation; the availability of expert advice to enable informed choice about payment, with payment at the minimum wage rates or higher for those who choose this; opportunities for workers to develop to their full potential; a workforce comprising disabled and non-disabled workers; the involvement of carers and local socio-economic agencies in developing the social firm.     

家庭社会资本对大学生农村就业意愿的影响

家庭是影响大学生农村就业的一个重要因素,因而家庭社会资本与大学生农村就业行为有密切的关系。家庭社会资本对大学生去农村的就业意愿、最低工资价位和职业选择的影响显著。母亲的受教育程度、家庭年收入越高,大学生去农村的就业意愿越高,大学生去农村的最低心理工资价位越高;父母的受教育程度越高,大学生去农村更愿意选择从政。