Accounting for Worker Well-Being: Volume 23

This volume comprises 12 chapters, each accounting for a particular aspect of worker well-being. Among the issues addressed are: employee compensation, job loss, disability, health, gender, education, contract negotiation, and macroeconomic labor policy. In discussing these issues, the volume provides answers to a number of important questions. For example, why do smaller, newer companies do a better job matching CEO pay to profits than old, established corporations? Why do firms hire outside contractors rather than produce all goods internally? Which demographic groups are most prone to job losses? Can self-reported health predict which workers become disabled? How does AIDS affect the supply of nurses? What does marital status have to do with the glass ceiling? Does retiring from work increase one’s mental health? Does domestic violence drive women to work more? Do higher educational subsidies lead to more schooling than larger educational rates of return? Do different firm and worker discount rates lead to longer contract negotiations? And finally, how robust are estimated effects of public policy to changes in data definition? In short, the volume addresses a number of important policy-related research issues on worker well-being facing labor economists today.

Variable pay, defined as pay that is tied to some measure of a firm’s output, has become more important for executives of the typical American firm. Variable pay is usually touted as a way to provide incentives to managers whose interests may not be perfectly aligned with those of owners. The incentive justification for variable pay has well-known theoretical problems and also appears to be inconsistent with much of the data. Alternative explanations are considered. One that has not received much attention, but is consistent with many of the facts, is selection. Managers and industry specialists may have information about a firm’s prospects that is unavailable to outside investors. In order to induce managers to be truthful about prospects, owners may require managers to “put their money where their mouths are,” forcing them to extract some of their compensation in the form of variable pay. The selection or sorting explanation is consistent with the low elasticities of pay to output that are commonly observed, with the fact that the elasticity is higher in small and new firms, with the fact that variable pay is more prevalent in industries with very technical production technologies, and with the fact that stock and stock options are a larger proportion of total compensation for higher level employees. The explanation fits small firms and start-ups better than larger, well-established firms.

This paper presents a model and evidence regarding the incidence of independent contractors and the self-employed. It focuses on the rights to control the work routine as an important issue distinguishing employee and non-employee workers. The conditions under which it is optimal for the buyer of labor services to control the work routine (and use employees) and when is it desirable for the seller to have control are considered. The model emphasizes the costs of measuring worker output vs. monitoring worker effort, worker expertise, and worker investment and is tested with Current Population Survey data merged with the Dictionary of Occupational Titles. The empirical findings are broadly consistent with the approach. Independent contractors tend to be in jobs that are harder to monitor and having more worker expertise such as jobs involving more intellectual skills, having a greater variety of duties, and requiring more worker expertise and training. This is even more true of the other self-employed. We also review existing empirical research on self-employment, discussing how it fits into our baseline model and evaluating the arguments to explain independent contractors and self-employment. These include a desire to reduce fringe benefits, demand and staffing uncertainty, wanting to avoid lawsuits for wrongful termination, a desire to protect a reputation for not laying-off employees, credit constraints, and worker desire for flexibility. There is strong evidence that credit constraints have a substantial influence on self-employment status and likewise for worker desire for job flexibility. The literature suggests that the desire to avoid payment of fringe benefits, demand and staffing variability, and avoidance of potential wrongful dismissal lawsuits induces firms to use more temporary agency workers but does not seem to affect the use of independent contractors.

I examine changes in the incidence and consequences of job loss between 1981 and 2001 using data from the Displaced Workers Surveys (DWS) from 1984 to 2002. The overall rate of job loss has a strong counter-cyclical component, but the job-loss rate was higher than might have been expected during the mid-1990’s given the strong labor market during that period. While the job-loss rate of more-educated workers increased, less-educated workers continue to have the highest rates of job loss overall. Displaced workers have a substantially reduced probability of employment and an increased probability of part-time employment subsequent to job loss. The more educated have higher post-displacement employment rates and are more likely to be employed full-time. The probabilities of employment and full-time employment among those reemployed subsequent to job loss increased substantially in the late 1990s, suggesting that the strong labor market eased the transition of displaced workers. Reemployment rates dropped sharply in the recession of 2001. Those re-employed, even full-time and regardless of education level, suffer significant earnings declines relative to what they earned before they were displaced. Additionally, foregone earnings growth (the growth in earnings that would have occurred had the workers not been displaced), is an important part of the cost of job loss for re-employed full-time job losers. There is no evidence of a decline during the tight labor market of the 1990s in the earnings loss of displaced workers who were reemployed full-time. In fact, earnings losses of displaced workers have been increasing since the mid 1990s.

Using data from the Survey of Income and Program Participation (SIPP) matched to administrative records, we examine mortality risk and participation in the Disability Insurance (DI) and Supplemental Security Income (SSI) disability programs from a long-term perspective. Over a period of 14 years, we analyze the effect of self-reported health and disability on the probability of death and disability program entry among individuals aged 18–48 in 1984. We also assess DI and SSI programs from a life-cycle perspective. Self-reported poor health and severe disability at baseline are strongly correlated with death over the 14-year follow-up period. These variables also are strong predictors of disability program participation over the follow-up period among non-participants at baseline or before, with increasing marginal probabilities in the out-years. Our cross-sectional models are consistent with recent studies that find that the work-prevented measure is useful in modeling DI entry. However, once self-reported health and functional limitations are accounted for, the longitudinal entry models provide conflicting DI results for the work-prevented measure, suggesting that, contrary to claims based on cross-sectional or short-time horizon application models, the work-prevented measure is an unreliable indicator of severity. The risk of SSI and DI participation is significantly greater for individuals who die, suggesting that future mortality captures the effect of case severity and deterioration of health during the follow-up period. From a life-cycle perspective, a substantially greater proportion of individuals participate in SSI or DI at some point in their lives compared to typical cross-sectional estimates of participation, especially among minorities, people with less than a high school education, and those with early onset of poor health and/or disabilities. Cross-sectional estimates for the Social Security area population indicate SSI and DI participation rates of no more than 5% combined in 2000. In contrast, for individuals aged 43–48 in 1984, we observe a cumulative lifetime SSI and/or DI participation rate of 14%. The corresponding figure is 32% for individuals in that age group who did not graduate from high school, suggesting the need for human capital investments and/or improved work incentives.

This paper analyzes the market for registered nurses in the U.S. during the period from 1978 to 1995, but is specifically concerned with how the prospect of treating patients with HIV or AIDS may have affected the supply of entrants into nursing. Using cross-sectional time-series data, we find that concern about the risk of contracting AIDS reduced admissions to nursing schools by as much as 15%. In states with a higher incidence of AIDS, such as New York, we find a much larger effect. Since the deterrent effect of AIDS was not limited to those considering whether to enter nursing school, our estimates represent a lower bound on the reduction in supply. However, we also find that the deterrent effect declined over time, as it became clear that the disease could not be transmitted by casual contact.

Our findings suggest that substantial welfare costs are imposed by regulations that require all nurses to treat patients with HIV or AIDS.

The Blinder Oaxaca decomposition method for defining wage differentials (generally referred to as discrimination) from the wage equations of two groups has had a wide degree of application. However, the decomposition measures can very dramatically depending on the definition of the non-discriminatory wage chosen for comparison. This paper uses a form of extreme bounds analysis to define the limits on the measure of discrimination that can be obtained from these decompositions. A simple application is presented to demonstrate the use of the bootstrap to define the distributions of the discrimination measure.

Three empirical regularities characterize markets for married workers: (1) productivity and leadership potential are predicted by intelligence; (2) assortative mating based on intelligence characterizes marriages; and (3) labor force participation declines with spouse income more rapidly for married women than for married men. Taken together these characteristics imply that labor force participation will decline for women relative to their husbands as intelligence rises. These three observations suggest a nondiscriminatory explanation for the alleged under-representation of females among corporate leaders. They imply that the women who might be predicted to win the tournament for these positions often do not enter this competition. Instead they choose employment in full time household production. Both the three regularities and the implication concerning labor force participation are empirically examined. The findings of these tests are supportive on all counts.

This paper assesses how retirement – defined as permanent labor force non-participation in a man’s mature years – affects psychological welfare. The raw correlation between retirement and well-being is negative. But this does not imply causation. In particular, people with idiosyncratically low well-being, or people facing transitory shocks which adversely affect well-being might disproportionately select into retirement. Discontinuous retirement incentives in the Social Security System, and changes in laws affecting mandatory retirement and Social Security benefits allows the exogenous effect of retirement on happiness to be estimated. The paper finds that the direct effect of retirement on well-being is positive once the fact that retirement and well-being are simultaneously determined is accounted for.

Domestic violence is a social ill that results in significant social costs. While the employment costs of domestic violence are obvious to victims and advocates for battered women, there is little research that examines the relationship between abuse and women’s employment opportunities. In this paper, we build on existing models of domestic violence by presenting a model that allows for a simultaneous relationship between women’s income and violence. The validity of the model is tested empirically using several different data sets. The results are mixed. While the empirical evidence supports the model’s assumption that violence has a negative impact on the labor market productivity of working women, it also indicates that being a battered woman does not significantly decrease the likelihood that a woman participates in the labor market. In fact, empirical results indicate that after controlling for the simultaneity of violence and work, battered women are more likely to work than women who are not abused. While women who are victims of intimate abuse most likely find it much harder to work outside the home, these negative effects may be offset by strong incentives to increase their economic independence by holding jobs.

We estimate a dynamic programming model of schooling decisions in which the degree of risk aversion can be inferred from schooling decisions. In our model, individuals are heterogeneous with respect to school and market abilities but homogeneous with respect to the degree of risk aversion. We allow endogenous schooling attainments to affect the level of risk experienced in labor market earnings through wage dispersion and employment rate dispersion. We find a low degree of relative risk aversion (0.93) and the estimates indicate that both wage and employment rate dispersions decrease significantly with schooling attainments. We find that a counterfactual increase in risk aversion will increase schooling attainments. Finally, the low degree of risk aversion implies that an increase in earnings dispersion would have little effect on schooling attainments.

In this paper, we build a complete information bargaining model of collective negotiation that can explain delays in reaching agreements. We structurally estimate the model using firm-level data for large Spanish firms. For this type of firm, the assumption of complete information seems a sensible one, and it matches the collective bargaining environment better than the one provided by private information models. The specification of the model with players having different discount factors allows us to measure their relative bargaining power, a recurrent question in the theory of bargaining. Our model replicates the data on delays at the sectoral and aggregate level. We also find that both entrepreneurs and workers have high discount factors, and no evidence that entrepreneurs have greater bargaining power, as usually assumed.

A number of earlier studies have examined whether extensive labour market programmes (ALMPs) contribute to upward wage pressure in the Swedish economy. Most studies on aggregate data have concluded that they actually do. In this paper we look at this issue using more recent data to check whether the extreme conditions in the Swedish labour market in the 1990s and the concomitant high levels of ALMP participation have brought about a change in the previously observed patterns. We also look at the issue using three different estimation methods to check the robustness of the results. Our main finding is that, according to most estimates, ALMPs do not seem to contribute significantly to an increased wage pressure.