IZA World of Labor

Pay and incentives

  • 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

    Valerie Smeets, February 2017
    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.
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  • 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

    Jonathan Meer, January 2017
    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.
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  • Does employee ownership improve performance?

    Employee ownership generally increases firm performance and worker outcomes

    Douglas Kruse, December 2016
    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.
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  • Are happy workers more productive?

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

    Eugenio Proto, December 2016
    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.
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  • 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

    Roberto Dell'Anno, December 2016
    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.
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  • Gender wage discrimination

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

    Boris Hirsch, November 2016
    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.
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  • Can lab experiments help design personnel policies?

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

    Marie Claire Villeval, November 2016
    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.
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  • The pros and cons of workplace tournaments

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

    Roman M. Sheremeta, October 2016
    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.
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  • 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

    Julia Bredtmann, September 2016
    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.
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  • Efficiency wages: Variants and implications

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

    Ekkehart Schlicht, July 2016
    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.
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