Career and Non-Career Jobs: Dangling the Carrot

Abstract

Using a novel theoretical framework for a model economy with career and non- career jobs, this study investigates the effects on the labor market when the payment structure is according to rank which divides the workers into different classes based on merit, with higher reward per unit of effort for the higher ranks. Labor effort in the lower ranks thus depends not only on the wage but also on the probability to get promoted to the higher positions. Therefore, the labor supply implies that the wage is lower than the marginal rate of substitution. Firms take advantage of the workers' ambition to climb the company's employment hierarchy and manage to offer a wage to the lower (higher) ranks that is lower (higher) than the marginal product. The framework can provide interesting insights into various puzzles such as the wage gap between men and women, the cyclicality of the labor wedge and the low volatility of the real wage relative to hours and output along the business cycle without imposing ad-hoc nominal wage rigidities.