Behavioral and personnel economics

Behavioral economics analyzes the emotional and cognitive factors that influence the decisions of actors. Personnel economics analyzes the internal organizational strategy of the firm and the human resource management practices chosen to pursue that strategy.

Subject Editor

Kathryn Shaw Stanford University, USA, and IZA Germany

Associate Editor(s)

Michael Gibbs University of Chicago, USA, and IZA Germany

Benedikt Herrmann University of Nottingham, UK

Peter J. Kuhn University of California, Santa Barbara, USA, and IZA, Germany

Niels C. Westergård-Nielsen Copenhagen Business School, Denmark, and IZA, Germany

  • Articles

  • Opinions

Equal pay legislation and the gender wage gap

Despite major efforts at equal pay legislation, gender pay inequality still exists in the developed economies. How can this be put right?

10.15185/izawol.16 16 Polachek, S

by Solomon W. Polachek

Despite equal pay legislation dating back 50 years, American women still earn 22% less than their male counterparts. In the UK, with its Equal Pay Act of 1970, and France, which legislated in 1972, the gap is 21% and 17% respectively, and in Australia it remains around 17%. Interestingly, the gender pay gap is relatively small for the young but increases as men and women grow older. Similarly, it is large when comparing married men and women, but smaller for singles. Just what can explain these wage patterns? And what can governments do to speed up wage convergence to close the gender pay gap? Clearly, the gender pay gap continues to be an important policy issue.

Do responsible employers attract responsible employees?

The cost of a firm’s commitment to CSR may be offset by its appeal to motivated employees who work harder for lower wages

10.15185/izawol.17 17 Nyborg, K

by Karine Nyborg

Survey and register data indicate that many employees prefer a socially responsible employer and will accept a lower wage to achieve this. Laboratory experiments support the hypothesis that socially responsible groups are more productive than others, partly because they attract cooperative types, partly because initial cooperation is reinforced by group dynamics. Overall, the findings indicate corporate social responsibility may have cost advantages for firms.

Gender diversity in teams

Greater representation of women on decision-making teams may better represent women’s preferences but may not help economic performance

10.15185/izawol.29 29 Azmat, G

by Ghazala Azmat

Women’s representation on corporate boards, political committees, and other teams is increasing, in part because of legal mandates. Understanding the effects of gender diversity in terms of economic performance is important to assess the impact of these changes. Data on team dynamics and gender differences in preferences (risk-taking behavior, taste for competition, prosocial behavior) show how gender composition influences group decision-making and subsequent performance through channels such as investment decisions, internal management, corporate governance, and social responsibility.

Anonymous job applications and hiring discrimination

Anonymous job applications can level the playing field in access to jobs but cannot prevent all forms of discrimination

10.15185/izawol.48 48 Rinne, U

by Ulf Rinne

The use of anonymous job applications to combat hiring discrimination is gaining attention and interest. Results from a number of field experiments in European countries (France, Germany, the Netherlands, and Sweden are considered here) shed light on their potential to reduce some of the discriminatory barriers to hiring for minority and other disadvantaged groups. But although this approach can achieve its primary aims, there are also some cautions to consider.

Correspondence testing studies

What can we learn about discrimination in hiring?

10.15185/izawol.58 58 Rooth, D

by Dan-Olof Rooth

Anti-discrimination policies play an important role in public discussions. However, identifying discriminatory practices in the labor market is not an easy task. Correspondence testing provides a credible way to reveal discrimination in hiring and provide hard facts for policies. The method involves sending matched pairs of identical job applications to employers posting jobs—the only difference being a characteristic that signals membership to a group.

Gender quotas on boards of directors

Little evidence that gender quotas for women on boards of directors improve firm performance

10.15185/izawol.7 7 Smith, N

by Nina Smith

Arguments for increasing gender diversity on boards of directors range from ensuring equal opportunity to improving firm performance, but the empirical results are mixed and often negative. Current research does not justify gender quotas on grounds of economic efficiency. Furthermore, in most countries the number of women qualified to join boards of directors is limited, and it is not clear from the evidence that quotas lead to a larger pool of qualified female candidates in the medium and long term.

Efficient markets, managerial power, and CEO compensation

CEO pay, often contentious, is the product of many forces

10.15185/izawol.34 34 Bognanno, M

by Michael L. Bognanno

The escalation in chief executive officer (CEO) pay over recent decades, both in absolute terms and in relation to the earnings of production workers, has generated considerable attention. The pay of top executives has grown noticeably in relation to overall firm profitability. The pay gap between CEOs in the US and those in other developed countries narrowed substantially during the 2000s, making top executive pay an international concern. Researchers have taken positions on both sides of the debate over whether the level of CEO pay is economically justified or is the result of managerial power.

How should teams be formed and managed?

How teams are chosen and how they are compensated can determine how successfully they solve problems and benefit the firm

10.15185/izawol.83 83 Owan, H

by Hideo Owan

The keys to effective teamwork in firms are (1) carefully designed team-formation policies that take into account what level of diversity of skills, knowledge, and demographics is desirable and (2) balanced team-based incentives. Employers need to choose policies that maximize the gains from teamwork through task coordination, problem solving, peer monitoring, and peer learning. Unions and labor market regulations may facilitate or hinder firms’ attempts at introducing teams and team-based incentives.

Alternative dispute resolution

How different procedures might succeed in settling disputes

10.15185/izawol.71 71 Dickinson, D

by David L. Dickinson

Alternative dispute resolution procedures such as arbitration and mediation are the most common methods for resolving wage, contract, and grievance disputes, but they lead to varying levels of success and acceptability of the outcome depending on their design. Some innovative procedures, not yet implemented in the real world, are predicted to improve on existing procedures in some ways. But controlled tests of several procedures show that the simple addition of a nonbinding stage prior to binding dispute resolution can produce the best results in terms of cost (monetary and “uncertainty” costs) and acceptability.

Fairness and motivation

Fair treatment creates incentives, and is beneficial for workers and the firm

10.15185/izawol.9 9 Falk, A

by Armin Falk

How do firms motivate their employees to be productive? The conventional wisdom is that workers respond to monetary incentives—“Pay them more and they will work harder.” However, a large and growing body of empirical evidence from laboratory and field experiments, surveys, and observational data, as well as neuroeconomic research, suggests that workers’ perceptions of fairness and trust are also key drivers of their work effort. Treating employees with respect is not only ethically warranted, it can create positive economic outcomes for both the worker and the firm.

Unemployment and happiness

Successful policies for helping the unemployed need to confront the adverse effects of unemployment on feelings of life satisfaction

10.15185/izawol.94 94 Winkelmann, R

by Rainer Winkelmann

Many studies document a large negative effect of unemployment on happiness. Recent research has looked into factors related to impacts on happiness, such as adaptation, social work norms, social capital, religious beliefs, and psychological resources. Getting unemployed people back to work can do more for their happiness than compensating them for doing nothing. But not all unemployed people are equally unhappy. Understanding the differences holds the key to designing effective policies, for helping the unemployed back into work, and for more evenly distributing the burden of unemployment resulting from economic restructuring.

Happiness and the emigration decision

Happy people are an asset to society, and happiness may be a determinant of emigration

10.15185/izawol.96 96 Ivlevs, A

by Artjoms Ivlevs

Happy people are healthier and more creative, productive, and sociable. Because of these positive effects of happiness, it is in the interest of countries to attract and retain happy people. With respect to the decision to migrate, the central question becomes whether people who are happier and more satisfied with their lives are more or less likely to migrate. The evidence so far is mixed. Correlational studies find that prospective migrants are less happy than people who are not intending to migrate, while one study controlling for reverse causality suggests that the desire to migrate increases with life satisfaction.

Late-life work and well-being

Flexible retirement may be one solution to the challenges of unemployment, aging populations, and public pension burdens

10.15185/izawol.107 107 Graham, C

by Carol Graham

Flexible work time and retirement options are a potential solution for the challenges of unemployment, aging populations, and unsustainable pensions systems around the world. Voluntary part-time workers in Europe and the US are happier, experience less stress and anger, and are more satisfied with their jobs than other employees. Late-life workers, meanwhile, have higher levels of well-being than retirees. The feasibility of a policy that is based on more flexible work arrangements will vary across economies and sectors, but the ongoing debate about these multi-tiered challenges should at least consider such arrangements.

Sexual orientation and labor market outcomes

Sexual orientation seems to affect job access and satisfaction, earning prospects, and interaction with colleagues

10.15185/izawol.111 111 Drydakis, N

by Nick Drydakis

Studies from countries with laws against discrimination on the basis of sexual orientation suggest that gay and lesbian employees report more incidents of harassment and are more likely to report experiencing unfair treatment in the labor market than are heterosexual employees. Gay men are found to earn less than comparably skilled and experienced heterosexual men. For lesbians, the patterns are ambiguous: in some countries they have been found to earn less than their heterosexual counterparts, while in others they earn the same or more. Both gay men and lesbians tend to be less satisfied with their jobs than their heterosexual counterparts.

Market competition and executive pay

Increased competition affects the pay incentives firms provide to their managers and may also affect overall pay structures

10.15185/izawol.115 115 Ferreira, P

by Priscila Ferreira

Deregulation and managerial compensation are two important topics on the political and academic agenda. The former has been a significant policy recommendation in light of the negative effects associated with overly restrictive regulation on markets and the economy. The latter relates to the sharp increase in top executives’ pay and the nature of the link between pay and performance. To the extent that product-market competition can affect the incentive schemes offered by firms to their executives, the analysis of the effects of competition on the structure of compensation may be informative for policy purposes.

Are workers motivated by the greater good?

Workers care about employers’ social causes, but the public sector does not attract particularly motivated employees

10.15185/izawol.138 138 Tonin, M

by Mirco Tonin

Employees show more commitment to an employer that promotes the greater good, and they work harder too. Moreover, many people are willing to give up some of their compensation to contribute to a social cause. Being able to attract a motivated workforce would be particularly important for the public sector, but this goal remains elusive. Indeed, there is evidence for the public sector that paying people more or underlining the career opportunities (as opposed to the social aspects) associated with public sector jobs is instrumental in attracting a more productive workforce, without having a negative impact on intrinsic motivation.

Relative deprivation and individual well-being

Low status and a feeling of relative deprivation are detrimental to health and happiness

10.15185/izawol.140 140 Chen, X

by Xi Chen

People who are unable to maintain the same standard of living as others around them experience a sense of relative deprivation that has been shown to reduce feelings of 
well-being. Relative deprivation reflects conditions of worsening relative poverty despite striking reductions in absolute poverty. The effects of relative deprivation explain why average happiness has been stagnant over time despite sharp rises in income. Consumption taxes on status-seeking spending, along with official and traditional sanctions on excess consumption and redistributive policies may lessen the negative impact of relative deprivation on well-being.

Who benefits from firm-sponsored training?

Firm-sponsored training benefits both workers and firms through higher wages, increased productivity and innovation

10.15185/izawol.145 145 Dostie, B

by Benoit Dostie

Workers participating in firm-sponsored training receive higher wages as a result. But given that firms pay the majority of costs for training, shouldn’t they also benefit? Empirical evidence shows that this is in fact the case. Firm-sponsored training leads to higher productivity levels and increased innovation, both of which benefit the firm. Training can also be complementary to, and enhance, other types of firm investment, particularly in physical capital, such as information and communication technology (ICT), and in organizational capital, such as the implementation of high-performance workplace practices.

Happiness as a guide to labor market policy

Happiness is key to a productive economy, and a job is key to individual happiness

10.15185/izawol.149 149 Ritzen, J

by Jo Ritzen

Measures of individual happiness, or well-being, can guide labor market policies. Individual unemployment, as well as the rate of unemployment in society, have a negative effect on happiness. In contrast, employment protection and unemployment benefits can contribute to happiness—though when such policies prolong unemployment, the net effect on national happiness is negative. Active labor market policies that create more job opportunities increase happiness, which in turn increases productivity. Measures of individual happiness should therefore guide labor market policy more explicitly.

Performance-related pay and labor productivity

Do pay incentives and financial participation schemes have an effect on a firm’s performance?

10.15185/izawol.152 152 Lucifora, C

by Claudio Lucifora

Many firms offer employees a remuneration package that links pay to performance as a means of motivation. It also improves efficiency and reduces turnover and absenteeism. The effects on productivity depend on the type of scheme employed (individual or group performance) and its design (commissions, piece-rate or sharing schemes). Individual incentives demonstrate the largest effect, while group or team incentives are smaller in magnitude. The case for government intervention through tax breaks and other financial incentives is highly debated due to differences across firms and the potential for economic inefficiencies.

How effective are financial incentives for teachers?

Linking teacher pay to student performance has become popular, but evidence on its effectiveness is mixed

10.15185/izawol.158 158 Imberman, S

by Scott A. Imberman

Concerns about poor student performance have led schools to diverge from traditional teacher compensation and base a portion of pay on student outcomes. In the US, the number of school districts adopting such performance-based financial incentives has increased by more than 40% since 2004. Evidence on individual incentives in developed countries is mixed, with some positive and some negligible impacts. There is less evidence for developing countries, but several studies indicate that incentives can be highly effective and far cheaper to implement. Innovative incentive mechanisms such as incentives based on relative student performance show promise.

High involvement management and employee well-being

Giving employees more discretion at work can boost their satisfaction and well-being

10.15185/izawol.171 171 Böckerman, P

by Petri Böckerman

A wide range of high involvement management practices, such as self-managed teams, incentive pay schemes, and employer-provided training have been shown to boost firms’ productivity and financial performance. However, less is known about whether these practices, which give employees more discretion and autonomy, also benefit employees. Recent empirical research that aims to account for employee self-selection into firms that apply these practices finds generally positive effects on employee health and other important aspects of well-being at work. However, the effects can differ in different institutional settings.

Goal setting and worker motivation

Individual work goals can increase a worker’s performance, but they need to be chosen wisely

10.15185/izawol.178 178 Goerg, S

by Sebastian J. Goerg

Employers want motivated and productive employees. Are there ways to increase employee motivation without relying solely on monetary incentives, such as pay-for-performance schemes? One tool that has shown promise in recent decades for improving worker performance is setting goals, whether they are assigned by management or self-chosen. Goals are powerful motivators for workers, with the potential for boosting productivity in an organization. However, if not chosen carefully or if used in unsuitable situations, goals can have undesired and harmful consequences. Goals are a powerful tool that needs to be applied with caution.

Sexual harassment in the workplace

Despite being illegal, costly, and an affront to dignity, sexual harassment is pervasive and challenging to eliminate

10.15185/izawol.188 188 Hersch, J

by Joni Hersch

Workplace sexual harassment is internationally condemned as sex discrimination and a violation of human rights, and more than 75 countries have enacted legislation prohibiting it. Sexual harassment in the workplace increases absenteeism and turnover and lowers workplace productivity and job satisfaction. Yet it remains pervasive and underreported, and neither legislation nor market incentives have been able to eliminate it. Strong workplace policies prohibiting sexual harassment, workplace training, and a complaints process that protects workers from retaliation seem to offer the most promise in reducing sexual harassment.

What makes a good job? Job quality and job satisfaction

Job satisfaction is important to well-being, but intervention may be needed only if markets are impeded from improving job quality

10.15185/izawol.215 215 Clark, A

by Andrew E. Clark

Many measures of job satisfaction have been trending downward. Because jobs are a key part of most people’s lives, knowing what makes a good job (job quality) is vital to knowing how well society is doing. Integral to worker well-being, job quality also affects the labor market through related decisions on whether to work, whether to quit, and how much effort to put into a job. Empirical work on what constitutes a good job finds that workers value more than wages; they also value job security and interest in their work. Policy to affect job quality requires information on the cost of the different aspects of job quality and how much workers value them.

Should firms allow workers to choose their own wage?

Delegating the choice of wage setting to workers can lead to better outcomes for all involved parties

10.15185/izawol.223 223 Charness, G

by Gary B. Charness

Economists typically predict that people are inherently selfish; however, experimental evidence suggests that this is often not the case. In particular, delegating a choice (such as a wage) to the performing party may imbue this party with a sense of responsibility, leading to improved outcomes for both the delegating entity and the performing party. This strategy can be risky, as some people will still choose to act in a selfish manner, causing adverse consequences for productivity and earnings. An important issue to consider is therefore how to encourage a sense of responsibility in the performing party.

Profit sharing: Consequences for workers

Profit sharing, a formal “bonus” program based on firm profitability, can provide strong employee motivation if properly designed

10.15185/izawol.225 225 Fang, T

by Tony Fang

Profit sharing can lead to higher productivity and thus to higher firm profitability and employee wages. It may also enhance employment stability by enabling firms to adjust wages during downturns rather than lay off workers. While adoption of profit sharing increases earnings fluctuations, it also increases earnings growth in the longer term. As with any group incentive plan, profit sharing may result in some workers benefiting from the effort of others without themselves exerting greater effort (“free-rider problem”). However, there is evidence that in team-based production workplaces, profit sharing may reduce shirking and thus contribute to productivity growth.

Can “happiness data” help evaluate economic policies?

“Happiness data” may help assess the welfare effects of a new labor market policy, like a change in benefit generosity

10.15185/izawol.226 226 MacCulloch, R

by Robert MacCulloch

Imagine a government confronted with a controversial policy question, like whether it should cut the level of unemployment benefits. Will social welfare rise as a result? Will some groups be winners and other groups be losers? Will the welfare gap between the employed and unemployed increase? “Happiness data” offer a new way to make these kinds of evaluations. These data allow us to track the well-being of the whole population, and also sub-groups like the employed and unemployed people, and correlate the results with relevant policy changes.

Working-time autonomy as a management practice

Giving workers control over their working hours increases their commitment and benefits firm performance

10.15185/izawol.230 230 Beckmann, M

by Michael Beckmann

Allowing workers to control their work hours (working-time autonomy) is a controversial policy for worker empowerment, with concerns that range from increased shirking to excessive intensification of work. Empirical evidence, however, supports neither view. Recent studies find that working-time autonomy improves individual and firm performance without promoting overload or exhaustion from work. However, if working-time autonomy is incorporated into a system of family-friendly workplace practices, firms may benefit from the trade-off between (more) fringe benefits and (lower) wages but not from increased productivity.

Employee incentives: Bonuses or penalties?

Penalty contracts lead to higher productivity than performance-based bonuses, but at the cost of employer/staff relations

10.15185/izawol.234 234 Nosenzo, D

by Daniele Nosenzo

Firms regularly use incentives to motivate their employees to be more productive. However, often little attention is paid to the language used in employment contracts to describe these incentives. It may be more effective to present incentives as entitlements that can be lost by failing to reach a performance target, rather than as additional rewards that can be gained by reaching that target. However, emphasizing the potential losses incurred as a result of failure may entail hidden costs for the employer, as it may damage the trust relationship between a firm and its employees.

The labor market consequences of impatience

Some people would be happier if they were required to stay in school longer or search harder for a job while unemployed

10.15185/izawol.233 233 Cadena, B

by Brian C. Cadena

Standard economic theory suggests that individuals know best how to make themselves happy. Thus, policies designed to encourage “better” behaviors will only reduce people’s happiness. Recently, however, economists have explored the role of impatience, especially difficulties with delaying gratification, in several important economic choices. There is strong evidence that some people have trouble following through on investments that best serve their long-term interests. These findings open the door to policies encouraging or requiring better behaviors, which would allow people to commit to the choices they truly want to make.

Gender differences in competitiveness

To what extent can different attitudes towards competition for men and women explain the gender gap in labor markets?

10.15185/izawol.236 236 Lackner, M

by Mario Lackner

Differences in labor market outcomes for women and men are highly persistent. Apart from discrimination, one frequently mentioned explanation could be differences in the attitude towards competition for both genders. Abundant empirical evidence indicates that multiple influences shape attitudes towards competition during different periods of the life cycle. Gender differences in competitiveness will not only influence outcomes during working age, but also during early childhood education. In order to reduce the gender gap in educational and labor market outcomes, it is crucial to understand when and why gender gaps in competitiveness arise and to study their consequences.

Internal hiring or external recruitment?

The efficacy of internal or external hiring hinges on other policies that a firm uses simultaneously

10.15185/izawol.237 237 DeVaro, J

by Jed DeVaro

Hiring is one of a firm’s most important decisions. When an employer fills a vacancy with one of its own workers (through promotion or lateral transfer), it forgoes the opportunity to fill the position with a new hire from outside the firm. Although both internal and external hiring methods are used, firms frequently have a bias favoring insiders. Internal and external hires differ in observable characteristics (such as skill levels), as do the employers making each type of hiring decision. Understanding those differences helps employers design and manage hiring policies that are appropriate for their organizations.

Incentives for prosocial activities

Economic incentives can motivate prosocial behavior, but may shift attention away from valuable altruistic activities

10.15185/izawol.238 238 Lacetera, N

by Nicola Lacetera

Early studies often found that offering economic incentives for undertaking prosocial and intrinsically motivated activities can crowd out motivation to perform these activities. More recent work highlights nuanced and important features related to whether crowding out (or substitution) is likely to occur. In many cases, incentives succeed in encouraging more prosocial behavior and are also cost-effective. However, although the substitution of external incentives for intrinsic motivation may not be a concern in many contexts, the substitution of one prosocial activity for another or shifts in activities over time or location may warrant further attention.

Are part-time workers less productive and underpaid?

The impact of part-time workers on firms’ productivity is unclear, and lower wages depend mainly on occupation and sector

10.15185/izawol.249 249 Garnero, A

by Andrea Garnero

About one in five workers across OECD countries is employed part-time, and the share has been steadily increasing since the beginning of the economic and financial crisis in 2007. Part-time options play an important economic role by providing more flexible working arrangements for both workers and firms. Part-time employment has also contributed substantially to increasing the employment rate, especially among women. However, part-time work comes at a cost of lower wages for workers, mainly because part-time jobs are concentrated in lower paying occupations and sectors, while the impact on firms’ productivity is still not very clear.

Gender differences in risk attitudes

Belief in the existence of gender differences in risk attitudes is stronger than the evidence supporting it

10.15185/izawol.100 100 Filippin, A

by Antonio Filippin

Many experimental studies and surveys have shown that women consistently display more risk-averse behavior than men when confronted with decisions involving risk. These differences in risk preferences, when combined with gender differences in other behavioral traits, such as fondness for competition, have been used to explain important phenomena in labor and financial markets. Recent evidence has challenged this consensus, however, finding gender differences in risk attitudes to be smaller than previously thought and showing greater heterogeneity of results depending on the method used to measure risk aversion.

Labor market policies, unemployment, and identity

Policies to help the unemployed can affect feelings of identity and well-being, so measures need to be evaluated carefully

10.15185/izawol.270 270 Schöb, R

by Ronnie Schöb

Unemployment not only causes material hardship but can also affect an individual’s sense of identity (i.e. their perception of belonging to a specific social group) and, consequently, feelings of personal happiness and subjective well-being. Labor market policies designed to help the unemployed may not overcome their misery: wage subsidies can be stigmatizing, workfare may not provide the intended incentives, and flexicurity (a system that combines a flexible labor market with active policy measures), may increase uncertainty. Policies aimed at bringing people back to work should thus take the subjective well-being of the affected persons more into consideration.

Access to public transport and labor informality

Poor public transport can reduce employment in the formal sector

10.15185/izawol.274 274 Moreno-Monroy, A

by Ana I. Moreno-Monroy

Public transport infrastructure has not kept up with the demands of growing populations in cities in developing countries. Infrastructure provision has historically been biased against less affluent areas, so access to formal jobs is often difficult and costly for a large part of the lower-income population. As a result, low-income workers may be discouraged from commuting to formal jobs, lack information on job opportunities, and face discrimination. Through these channels, constrained accessibility can result in higher rates of job informality. Reducing informality can be a target for well-designed transport policies.

Efficiency wages: Variants and implications

Wages affect productivity and non-wage costs; this carries important labor market and policy implications

10.15185/izawol.275 274 Schlicht, E

by Ekkehart Schlicht

Higher wages increase labor costs but also improve the productivity of the labor force in several ways. If firms take this into account and set their wages accordingly, the resulting wages could fail to adjust demand and supply but may induce phenomena like over-education, discrimination, regional wage differentials, and a tendency for larger firms to pay higher wages. All these phenomena are quantitatively important and well-established empirically. Efficiency wage theory provides an integrated theoretical explanation rather than a sundry list of reasons, and offers an efficiency argument for progressive income taxation.

Does government spending crowd out voluntary labor and donations?

There is little evidence that government spending crowds out private charitable donations of time and money

10.15185/izawol.299 299 Bredtmann, J

by Julia Bredtmann

Private charitable contributions play an essential role in most economies. Despite the existence of welfare states, people contribute money and supply volunteer labor to charity. From a policy perspective, there is concern that comprehensive government spending might crowd out these private charitable donations. If perfect crowding out occurs, then every dollar spent by the government will lead to a one-for-one decrease in private spending, leaving the total level of welfare unaltered. Understanding the magnitude and causes of crowding out is crucial, as it represents a hidden cost to public spending and can thus have significant impacts on public welfare.

The pros and cons of workplace tournaments

Tournaments can outperform other compensation schemes such as piece-rate and fixed wage contracts

10.15185/izawol.302 302 Sheremeta, R

by Roman M. Sheremeta

Tournaments are commonly used in the workplace to determine promotion, assign bonuses, and motivate personal development. Tournament-based contracts can be very effective in eliciting high effort, often outperforming other compensation contracts, but they can also have negative consequences for both managers and workers. The benefits and disadvantages of workplace tournaments have been identified in an explosion of theoretical, empirical, and experimental research over the past 30 years. Based on these findings, suggestions and guidelines can be provided for when it might be beneficial to use tournaments in the workplace.

Gender wage discrimination

Does the extent of competition in labor markets explain why female workers are paid less than men?

10.15185/izawol.310 310 Hirsch, B

by Boris Hirsch

There are pronounced and persistent wage differences between men and women in all parts of the world. A significant element of these wage disparities can be attributed to differences in worker and workplace characteristics, which are likely to mirror differences in worker productivity. However, a large part of these differences remains unexplained, and it is common to attribute them to discrimination by the employer that is rooted in prejudice against female workers. Yet recent empirical evidence suggests that, to a large extent, the gaps reflect “monopsonistic” wage discrimination—that is, employers exploiting their wage-setting power over women—rather than any sort of prejudice.

Do social interactions in the workplace lead to productivity spillover among co-workers?

Peer pressure can affect productivity and explain why workers’ wages and productivity depend on their co-workers’ productivity

10.15185/izawol.314 314 Cornelissen, T

by Thomas Cornelissen

Should one expect a worker’s productivity, and thus wage, to depend on the productivity of his/her co-workers in the same workplace, even if the workers carry out completely independent tasks and do not engage in team work? This may well be the case because social interaction among co-workers can lead to productivity spillover through knowledge spillover or peer pressure. The available empirical evidence suggests that, due to such peer effects, co-worker productivity positively affects a worker’s own productivity and wage, particularly in lower-skilled occupations.

Can lab experiments help design personnel policies?

Employers can use laboratory experiments to structure payment policies and incentive schemes

10.15185/izawol.318 318 Villeval, M

by Marie Claire Villeval

Can a company attract a different type of employee by changing its compensation scheme? Is it sufficient to pay more to increase employees’ motivation? Should a firm provide evaluation feedback to employees based on their absolute or their relative performance? Laboratory experiments can help address these questions by identifying the causal impact of variations in personnel policy on employees’ productivity and mobility. Although they are collected in an artificial environment, the qualitative external validity of findings from the lab is now well recognized.

Does employee ownership improve performance?

Employee ownership generally increases firm performance and worker outcomes

10.15185/izawol.311 311 Kruse, D

by Douglas Kruse

Employee ownership has attracted growing attention for its potential to improve economic outcomes for companies, workers, and the economy in general, and help reduce inequality. Over 100 studies across many countries indicate that employee ownership is generally linked to better productivity, pay, job stability, and firm survival—though the effects are dispersed and causation is difficult to firmly establish. Free-riding often appears to be overcome by worker co-monitoring and reciprocity. Financial risk is an important concern but is generally minimized by higher pay and job stability among employee owners.

Are happy workers more productive?

Firms’ concerns about the well-being of their employees are largely supported by the evidence

10.15185/izawol.315 315 Proto, E

by Eugenio Proto

Recently, large companies like Google have made substantial investments in the well-being of their workers. While evidence shows that better performing companies have happier employees, there has been much less research on whether happy employees contribute to better company performance. Finding causal relations between employee well-being and company performance is important for firms to justify spending corporate resources to provide a happier work environment for their employees. While correlational and laboratory studies do find a positive relationship, the evidence remains sparse.

Inequality and informality in transition and emerging countries

Higher inequality decreases capital accumulation and increases informality, which, in turn, raises the income of the poor

10.15185/izawol.325 325 Dell'Anno, R

by Roberto Dell'Anno

Higher inequality reduces capital accumulation and increases the informal economy, which creates additional employment opportunities for low-skilled and deprived people. Despite this positive feedback, informality raises problems for public finances and biases official statistics, reducing the effectiveness of redistributive policies. Policymakers should consider the links between inequality and informality because badly designed informality-reducing policies may increase inequality. However, convincing empirical evidence is still lacking and is usually limited to correlations rather than causal effects.

Are overhead costs a good guide for charitable giving?

Donors rely on overhead costs to evaluate charities, but that reliance creates disincentives for charities to hire skilled workers

10.15185/izawol.329 329 Meer, J

by Jonathan Meer

Charity rating agencies often focus on overhead cost ratios in evaluating charities, and donors appear to be sensitive to these measures when deciding where to donate. Yet, there appears to be a tenuous connection between this widely-used metric and a charity’s effectiveness. There is evidence that a focus on overhead costs leads charities to underinvest in important functions, especially skilled workers. To evaluate policies that regulate overhead costs, it is necessary to examine whether donors care about overhead costs, whether they are good measures of charity effectiveness, and what effects a focus on overhead costs has on charities.

The economics of employment tribunals

Understanding how employment tribunals make decisions can guide reforms of employment dispute settlement

10.15185/izawol.331 331 Latreille, P

by Paul Latreille

Employment tribunals or labor courts are responsible for enforcing employment protection legislation and adjudicating rights-based disputes between employers and employees. Claim numbers are high and, in Great Britain, have been rising, affecting both administrative costs and economic competitiveness. Reforms have attempted to reduce the number of claims and to improve the speed and efficiency of dealing with them. Balancing employee protection against cost-effectiveness remains difficult, however. Gathering evidence on tribunals, including on claim instigation, resolution, decision making, and post-tribunal outcomes can inform policy efforts.

Can firms oversee more workers with fewer managers?

Firms need to tailor their allocation of talent and responsibility, and their managerial structure, to fit their competitive situation

10.15185/izawol.333 333 Smeets, V

by Valerie Smeets

Managers are supervising more and more workers, and firms are getting flatter. However, not all firms have been keen on increasing the number of subordinates that their bosses manage (referred to as the “span of control” in human resource management), contending that there are limits to leveraging managerial ability. The diversity of firms’ organizational structure suggests that no universal rule can be applied. Identifying the factors behind the choice of firms’ internal organization is crucial and will help firms properly design their hierarchy and efficiently allocate scarce managerial resources within the organization.

Job insecurity is bad for our health

by Francis Green

We live in uncertain times. Eight years on from the Great Recession of 2008, and still one in ten workers across Europe is unemployed—that’s 21 million people. Global growth is faltering a...

Internal hiring vs external recruitment?

by Jed DeVaro

A frequent question in organizations is whether to hire from within or outside the firm when filling job vacancies. The answer matters, because “insiders” and “outsiders” diffe...

Do employees profit from profit sharing?

by Tony Fang

Profit sharing, a formal bonus program based on profitability, has a long history and is a practice that many firms continue to adopt. Recently, there has been considerable debate about whether empl...

How much do we work?

by Daniel S. Hamermesh

Today is Labor Day in the US, a holiday initially scheduled in contradistinction to what was viewed as the socialist labor holiday of May 1. It is a good time for asking how much we really work, since...

Does performance-related pay improve productivity?

by Claudio Lucifora

Do firms that offer their employees a compensation package linking pay to performance have higher productivity? Many firms around the world have attempted to improve their performance by replacing tr...