Worker's Marginal Product Research Articles

Non-exclusive dynamic contracts, competition, and the limits of insurance

We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive). Contracts specify both labor and savings requirements. Firms have no restriction on the contracts they can offer and interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, and the marginal rate of substitution between consumption and leisure is equated to the worker's marginal productivity. Also, each agent receives zero net present value of transfers. These conditions imply the equilibrium allocation is equivalent to a standard incomplete markets model. To sustain this equilibrium, more than one firm must be active and must also offer latent contracts to deter deviations to more profitable contingent contracts. In this environment, the non-observability of contracts removes the possibility of additional insurance beyond self-insurance.

Modern Models of Monopsony in Labor Markets: A Brief Survey

This brief survey contains a review of several new empirical papers that attempt to measure the extent of monopsony in labor markets. As noted originally by Joan Robinson, monopsonistic exploitation represents the gap between the value of a worker's marginal product and the worker's wage, and it represents both a distortion in the allocation of resources and an income transfer away from workers. The evidence surveyed from a fairly broad range of labor markets suggests that monopsony may be far more pervasive than is sometimes suggested.

Spillovers, Complementarities, and Sorting in Labor Markets with an Application to Professional Sports

Spillovers to productivity across workers may exist when workers produce in teams. Under certain conditions, these spillovers may cause a worker's marginal product to differ across different firms. Empirical examination of professional basketball finds significant spillovers to offensive productivity but finds relatively little evidence for market sorting based on spillovers. Thus, while teammate composition is important to a player's success, there is no evidence for complementarity.

Spillovers, Complementarities, and Sorting in Labor Markets with an Application to Professional Sports

Spillovers to productivity across workers may exist when workers produce in teams. Under certain conditions, these spillovers may cause a worker's marginal product to differ across different firms. Empirical examination of professional basketball finds significant spillovers to offensive productivity but finds relatively little evidence for market sorting based on spillovers. Thus, while teammate composition is important to a player's success, there is no evidence for complementarity.

Comparable Worth versus the Free Market: A Case Study

In principle, comparable worth means simply equal pay for work of comparable value.1 In practice, it has been used to argue that job categories filled predominantly by women should be paid the same as those filled mainly by men if their work is of equal value to the employer-and thus to challenge an underlying cultural assumption that women's work is worth less than men's. The devaluation of women's work has historically been tied to the sexual division of labor, which, under industrial capitalism, is maintained through the segregation of the labor force. The sex-segregated labor market squeezes women into relatively few, female-typed jobs, such as clerical work, nursing, and teaching, which are presumed to be ancillary to the real work performed by men. Women's lower wages are thereby justified by their secondary labor force status and by their occupying jobs with a presumably large supply of potential workers.2 Unlike affirmative action, comparable worth does not oppose occupational sex segregation itself; it seeks rather to correct the sex bias of wage hierarchies. In arguing that certain femaletyped jobs are just as valuable as comparable jobs held primarily by men, proponents of comparable worth are paradoxically both modest and radical. They are modest to the extent that they accept a hierarchal ordering of the worth of jobs, an ordering that actually maintains some male privilege. In Lemons v. the City and County of Denver,3 for example, publicly employed nurses argued not that they should be paid as much as doctors or that all hospital employees should be paid the same, but that they should be paid as much as other similar medical professionals in male-dominated fields. For example, at the time, laboratory technicians and environmental health officers (as well as tree-trimmers) were all earning more than the nurses. The more radical component of comparable worth is its challenge to the ideal of the free market. Neoclassical economists argue that wages are a function of both marginal productivity and the laws of supply and demand. A worker's marginal productivity, i.e., the value her labor adds to the productivity of the firm, is a function of the experience and education, i.e., capital4 that she brings to the job. Theoretically, the more education or experience required for a job, the greater the value that the worker in that job adds to the productivity of the firm. If a particular job carries a high marginal productivity, the employer is presumably willing to pay a high salary to the laborer who fills it. However, if many laborers are competing for a particular type of job, then the employer can easily replace workers and thus can reduce the going wage. Conversely, if few workers are available, the employer will have to pay higher wages, but only up to the point that the wages still allow the employer a profit. Thus, the neoclassical argument contends, if women receive low wages, the reason is that, because of family obligations, they choose jobs that require relatively little human capital and for which there is an abundant supply of workers.5 The advocates of comparable worth reply that the marketplace does not operate exclusively according to these so-called free market principles, as if it were an element of an objective natural law, such as supply and demand. Rather, it has developed historically within the context of gender discrimination and male prerogative, which marketplace practices reflect and perpetuate.6 Furthermore, the free market principles of marginal productivity and supply and demand are contradicted by the facts of women's participation in the labor force. Nurses earn less than tree-trimmers not because their profession requires fewer skills and less education or because they are in

Specific Human Capital and Sorting Mechanisms in Labor Markets

Three major avenues of research on employment contracts which incorporate asymmetric information have been pursued. First, researchers have considered contracts in which the supply of employee effort is costly to monitor [3; 8; 9; 12]. Second, the allocation of labor has been examined when innate person-specific characteristics are unobservable [4; 5; 14; 15]. Third, employment contracts have been designed when economic agents are uncertain about the state of nature concerning the worker's marginal product and the employee's reservation wage [6; 7]. This research agenda has provided an elaborate array of models which yield employment contracts that reduce the distortionary effects of asymmetric information. However, these models have two major short-comings. First, under uncertainty concerning personspecific information, employers have an incentive to screen employees. The existing literature has analyzed two distinct screening mechanisms. Guasch and Weiss [4; 5] consider screening through wages, while White [15] has considered screening through specific human capital. However, each mechanism has been analyzed in isolation. The present paper combines these screening mechanisms and examines the impact of each upon the optimal employment contract. Second, although the existing literature on employment contracts offers a general framework for analysis, it is not directly amenable to empirical verification. The present paper rectifies these short-comings by developing a model which incorporates both screening mechanisms under asymmetric information, and thereby provides a model conducive to empirical verification. In our analysis three major simplifying assumptions are made. First, because we assume employees have no choice regarding the effort they supply, we abstract from the agency problem discussed in the literature cited above. Second, we assume employees differ in their innate person-specific characteristics. The latter is assumed to be observed by

Why Is There Mandatory Retirement?

This paper offers an explanation of the use of mandatory-retirement clauses in labor contracts. It argues that the date of mandatory retirement is chosen to correspond to the date of voluntary retirement, but the nature of the optimal wage profile results in a discrepancy between spot wage and spot VMP (value of the worker's marginal product). This is because it is preferable to pay workers less than VMP when young and more than VMP when old. By doing so the "agency" problem is solved, so the contract with mandatory retirement is Pareto efficient. A theory of agency is presented and empirical evidence which supports the hypothesis is provided.