MGT. M259C: Analysis of Labor Markets --PP CM230 Labor Markets and Public Policy Daniel J.B. Mitchell Ho-su Wu Professor Anderson School and School of Public Affairs
MGT. M259C: Analysis of Labor Markets --PS CM230 Labor Markets and Public Policy Daniel J.B. Mitchell Ho-su Wu Professor Anderson School and School of Public Affairs
How Do You Get the Help to Do What You Want?
How Do You Get the Help to Help You Do What You Want?
How Do You Get the Help to Do What you Want or to Help You Do What You Want?
aka The Principal/Agent Problem (Agency Theory)
The floggings will continue until morale improves.
What does the word “decimate” mean?
What does the word “decimate” mean?
“Decimate” originally referred to the killing of every tenth person, a punishment used in the Roman army for mutinous legions.
Hierarchy of Principals and Agents
Shareholders CEO VPs Middle Managers First-Line Supervisors Nonsupervisory Employees
Board Chair Kenneth Lay
Hierarchy of Principals and Agents
CEO Jeff Skilling Shareholders CEO VPs Middle Managers First-Line Supervisors Nonsupervisory Employees
CFO Andrew Fastow
Skilling’s mom on the principal/agent problem
“When you are the CEO and are on the Board of Directors, you are supposed to know what’s going on with the rest of the company.” ---Betty Skilling
How Do You Get the Help to Do What You Want?
Compensate Motivate Monitor
Control
and
Where Does the Enterprise End Up?
Compensate
Where did UK Burger King end up? •Pay level and incentive
•Monitor time standards •Non-cash Compensate motivation
How did these approaches evolve?
Economic Approach
Costs of monitoring and controlling Information costs Supervisory costs
Motivation costs Screening Supervisory training
Compensation system costs Pay premiums System design and control Perverse incentives
Compensation Systems “Traditional” Merit System Supervisor conducts performance appraisal Employee receives merit increase or bonus if appraisal is sufficiently positive No reward or even dismissal if appraisal is negative What are incentives for supervisor under this system?
Welcome to Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average. Garrison Keillor
Compensation Systems
Compensation Systems
Compensation Systems
Compensation Systems
Pay for performance Individual incentive plans Group (team) plans Organizational plans
Tournaments (promotions) Pay premium with potential for loss
Loss of premium Job loss costs
Perfect Information and Contract Enforcement $
Revenue generated by units of individual worker’s effort (with diminishing returns assumed)
0
Units of Effort
Perfect Information and Contract Enforcement $
Marginal revenue from effort = DR/DE = slope of curve
0
Units of Effort
Perfect Information and Contract Enforcement $
Psychological effort cost to individual worker
0
Units of Effort
Perfect Information and Contract Enforcement $
Slope =DC/DE = marginal cost of effort to worker
0
Units of Effort
Perfect Information and Contract Enforcement Set marginal $ revenue of effort = marginal cost of effort
0
E*
Units of Effort
Perfect Information and Contract Enforcement Set marginal $ revenue of effort = marginal cost of effort or DR/DE =DC/DE which occurs at E* effort
0
E*
Units of Effort
Substitute a simple incentive contract where workers gets (say) 25% of revenue Worker $ only wants to put out EW effort (below optimum)
R
.25R
0
EW
E*
Units of Effort
Substitute a simple incentive contract where workers gets 25% of revenue $ Firm wants to maximize 75% of R at EF
0
EW
E* Units of Effort
EF
Moral: Pay for performance system divides worker and firm interests in this case. $
0
EW
E* Units of Effort
EF
More General Moral: Pay for performance systems are always imperfect. $
0
EW
E* Units of Effort
EF
More General Moral: Pay for performance systems are always imperfect. $ since we live in an imperfect world, But such systems may be better under some circumstances than simple pay for time systems!
0
EW
E* Units of Effort
EF
More General Moral: Pay for performance systems are always imperfect. $ since we live in an imperfect world, But such systems may be better under some circumstances than simple pay for time systems!
"The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true."
James Branch Cabell
0
EW
E* Units of Effort
EF
(Many) Other Issues Quantity
over quality Quantity vs. waste of materials and damage to equipment or neglect of safety Lack of incentive to cooperate with other workers Restriction of output to influence establishment of standards
Who is this person?
Alexei Stakhanov
Long Live the Stalinist Order of Heroes and Stakhanovites! (1936)
Employee of the Month
Team Production (interdependent productivity) “…It is divided into a number of branches… One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it… The division of labour… occasions in every art, a proportionable increase in the powers of labour. This separation is generally carried furthest in those countries which enjoy the highest degree of industry…” Adam Smith, The Wealth of Nations (1776), describing pin manufacturing.
Teams
Problem with Group or Organizational Incentives
where N = number of workers aka the free rider problem
Tournament Models
Rewards via Promotion
Ed Lazear
Tournament Models Note that promotions are an “ordinary� element of the HR function (no formula)
Ed Lazear
Tournament Models So virtually any institutional or market arrangement provides some kind of incentive, desirable or not
Ed Lazear
Example: Following language fads or guru
Business Outcome
Example: Following language fads or guru
Success
Failure
Didn’t follow
Followed
No credit for you since you just followed old practice
Reward for you since you kept up with new ideas & the business succeeded
Your fault since you just followed old practice (penalty)
Not your fault; you kept up with new ideas & did what everyone thought best
Business Outcome
Don’t follow and end up with zero or penalty
Success
Failure
Didn’t follow
Followed
No credit for you since you just followed old practice
Reward for you since you kept up with new ideas & the business succeeded
Your fault since you just followed old practice (penalty)
Not your fault; you kept up with new ideas & did what everyone thought best
Business Outcome
Follow and end up with reward or zero
Success
Failure
Didn’t follow
Followed
No credit for you since you just followed old practice
Reward for you since you kept up with new ideas & the business succeeded
Your fault since you just followed old practice (penalty)
Not your fault; you kept up with new ideas & did what everyone thought best
Business Outcome
Follow and end up with reward or zero
Success
Failure
Didn’t follow
Followed
No credit for you since you just followed old practice
Reward for you since you kept up with new ideas & the business succeeded
Your fault since you just followed old practice (penalty)
Not your fault; you kept up with new ideas & did what everyone thought best
Business Outcome
Follow and end up with reward or zero
Success
Failure
Didn’t follow
Followed
No credit for you since you just followed old practice
Reward for you since you kept up with new ideas & the business succeeded
Your fault since you just followed old practice (penalty)
Not your fault; you kept up with new ideas & did what everyone thought best
Efficiency Wages Joseph Stiglitz
Wage Premium Above the Market Average...
Efficiency Wages Joseph Stiglitz
...which can be lost...
Efficiency Wages Joseph Stiglitz
‌due to termination for inadequate performance (as would a performance bond).
Behavioral Response?
Desired behavioral response?
Efficiency Wages Deferred Compensation (Career) Model
$ Pay
Value of individual’s productivity
0
Job Tenure
Efficiency Wages Deferred Compensation (Career) Model
$
Note similarity to defined benefit pension compensation.
Pay
Value of individual’s productivity
0
Job Tenure
Efficiency Wages Deferred Compensation (Career) Model
Note similarity to $ Implication: defined benefit pension Implicit Contract compensation.
Pay
to be “Fair” over a long career period.
Value of individual’s productivity
0
Job Tenure
“We have no mandatory retirement age, Dave, but under certain conditions we do encourage people to die.�
Alternative: Dynamic Approach to Supply at Firm Level
Unfilled Vacancy Rate
Higher wage - relative to market average WM - will attract more applicants per time period and retain more incumbents
0
WM
Firm Wage
Alternative: Dynamic Approach to Supply at Firm Level
Unfilled Vacancy Rate
Higher wage - relative to market average WM - will attract more applicants per time period and retain more incumbents
0
Zone of Queue of Job Seekers
Zero Vacanies
WM
Firm Wage
Alternative: Dynamic Approach to Supply at Firm Level
Unfilled Vacancy Rate
Higher wage - relative to market average WM - will attract more applicants per time period and retain more incumbents
0
WM
Firm Wage
Another Alternative Gift Exchange
George Akerlof
And Yet Another Better Quality Job Applicants for Screening and Job Matching
“Congratulations. You have the skills we’re looking for, and you’ll just fit a cubicle.”
Implications of tournament and deferred efficiency wage models: Ongoing organizations in which capital hires labor Ongoing employment relationships Implicit contracts
The Large Traditional Corporate Model Scientific management Taylor)
(Frederick
Time and motion Professionalized foremen Kinked piece rates Records and systems of control
(Henry) Fordism Assembly line production Efficiency wages Paternalist welfare dept.