Research in Labor Economics: Volume 36

Pay varies across individuals. Some variation is endemic to a country's institutions including a country's level of development and its technological infrastructure. Some variation is based on differences in individual attributes, particularly an individual's ability to acquire human capital. Finally, some variation is based on incentives instigated by the government, by one's employer, or by one's family. These incentives often operate indirectly by influencing educational choices, labor force participation, and even cohabitation and marital arrangements. This volume contains eight articles on aspects of the distribution of income. One deals with technology change and the distribution of earnings, two deal with internal labor markets, four deal with incentives that motivate work related behavior, and finally one deals with immigrant labor market success.

This article studies the evolution of the wage differentials between graduate (skilled) and non-graduate (unskilled) workers in several European countries from the beginning of the 1990s to the beginning of this century. The starting point is that all European countries show a common increase in the relative supply of skilled workers but different evolution of wage differentials. Economics theory usually relates the evolution of wage differentials not only to relative supply but also to skill-biased technological progress. I complement this explanation providing a theoretical model of wage bargaining where wage differentials are determined also by labour market institutions. My empirical findings show that both technological progress and labour market institutions are important in the determination of wage differentials. As for the former, I find that differentials depend on the pace and intensity at which technological progress takes place. As for labour market institutions, their effect, though important, is not always straightforward. In fact, some aspects of institutions, like minimum wage and the duration of unemployment benefits, favour unskilled workers while other aspects, like bargaining power and replacement rates from unemployment benefits, may magnify the differences in outside options and actually increase wage differentials.

We study career and wage dynamics within and between firms using a large linked employer-employee panel dataset spanning 26 years. We construct six-level hierarchies for more than 5,000 firms. We replicate most of the analyses from Baker, Gibbs, and Holmström (1994) and make some extensions. Many of our results corroborate their findings. Careers within firms are important, but the strong version of the theory of internal labor markets does not fit the data. Recent theories of career and wage dynamics explain our findings well.

Some positions within a firm consistently lead to promotion with a higher probability than other positions at the same hierarchical level. Therefore, serial correlation of promotion rates is not indicative merely of individuals with high innate ability, but it is also a feature of organizational structure. I describe these positions as “fast jobs” and present a model in which jobholders acquire human capital in these jobs that is more valuable at the next level. Data from a financial services firm confirm that workers in fast jobs are younger than other workers at the same level, and that transfers from fast to slow jobs are common. Thus, the process of grooming workers for advancement is analogous to more aggressive up-or-out systems. This deliberate grooming of some workers for advancement has income inequality implications, as it may reinforce the effect of small biases or small differences in early apparent ability.

The effect of variable pay schemes on workplace absenteeism is estimated using two cross-sections of private sector British establishments. Establishments that explicitly link pay with individual performance are found to have significantly lower absence rates. The effect is stronger for establishments that offer variable pay schemes to a greater share of their non-managerial workforce. Matched employer–employee data suggest that the effect is robust to a number of sensitivity tests. Establishments that tie a greater proportion of employees’ earnings to variable pay schemes experience lower absence rates. Quintile regressions suggest that the effect is greater among establishments with a higher than average (‘sustainable’) absence rate. Finally, panel data suggest that a feedback mechanism is present; high absenteeism in the past is correlated with a greater future incidence of individual variable pay schemes, which, in turn, is correlated with lower current absence rates.

We evaluate potential determinants of enrollment in an early retirement incentive program for non-tenure-track employees at a large university. Using administrative records on the eligible population of employees not covered by collective bargaining agreements, historical employee count and layoff data by budget units, and public information on unit budgets, we find dips in per-employee finances in a budget unit during the application year, and higher recent per employee layoffs were associated with increased probabilities of eligible employee program enrollment. Our results also suggest that, on average, employees whose salaries are lower than we would predict given their personal characteristics and job titles were more likely to enroll in the early retirement program. To the extent that employees’ compensation reflect their productivity, as it should under a pay system in which annual salary increases are based on merit, this finding suggests that adverse selection was not a problem with the program. That is, we find no evidence that on average the “most productive” employees took the incentive.

In this article we investigate the impact of the 1996 pension crisis in Russia on several measures of subjective well-being (SWB). Using a difference-in-difference strategy and an individual fixed-effects model, we find that an exogenous shock to the redistribution system has a significant negative effect on the SWB of pensioners who fail to receive their pensions. The effect differs across aspects of life evaluation; the shock has a significant negative effect on current life satisfaction (LS), whereas it has no effect on self-assessed health. The effect of the shock extends to non-pensioners who live with pensioners in arrears: they experience an equally strong and significant decline in LS even after accounting for personal income. In addition, we find that the pension crisis leads pensioner households to neither receive more nor send less money to extended family, thus leaving these households to bear alone the entire monetary cost. Lastly, we find suggestive evidence that the crisis, despite being a purely monetary shock, affects well-being in ways that go beyond the monetary size of pension loss. Policies aimed to fully compensate for such disruptions in the redistribution system would need to take these externalities into account.

In this study, we ask whether economic factors that can be directly manipulated by public policy have important effects on the probability that women experience long-lasting unions. Using data from the 1979 National Longitudinal Survey of Youth, we estimate a five-stage sequential choice model for women's transitions between single with no prior unions, cohabiting, first-married, re-single (divorced or separated), and remarried. We control for expected income tax burdens, Aid to Families with Dependent Children (AFDC) or Temporary Assistance for Needy Families (TANF) benefits, Medicaid expenditures, and parameters of state divorce laws, along with an array of demographic, family background, and market factors. We simulate women's sequences of transitions from age 18 to 48 and use the simulated outcomes to predict the probability that a woman with given characteristics (a) forms a first union by age 24 and maintains the union for at least 12 years, and (b) forms a second union by age 36 and maintains it for at least 12 years. While non-policy factors such as race and schooling prove to have important effects on the predicted probabilities of long-term unions, the policy factors have small and/or imprecisely estimated effects; in short, we fail to identify policy mechanisms that could potentially be used to incentivize long-term unions.

Indian immigrants in the United States and other wealthy countries are successful in entrepreneurship. Using Census data from the three largest developed countries receiving Indian immigrants in the world – the United States, the United Kingdom, and Canada – we examine the performance of Indian entrepreneurs and explanations for their success. We find that business income of Indian entrepreneurs in the United States is substantially higher than the national average and is higher than for any other immigrant group. Approximately half of the average difference in income between Indian entrepreneurs and the national average is explained by their high levels of education while industry differences explain an additional 10 percent. In Canada, Indian entrepreneurs have average earnings slightly below the national average but are more likely to hire employees, as are their counterparts in the United States and the United Kingdom. The Indian educational advantage is smaller in Canada and the United Kingdom, contributing less to their entrepreneurial success.