Comparisons to others’ pay and to one’s own past
earnings can affect willingness to work and effort on the job
Recent studies show that even irrelevant
relative pay information—earnings compared to the past or to
others—significantly affects workers’ willingness to work (labor supply) and
effort. This effect stems mainly from those whose pay compares unfavorably;
accordingly, earning less compared to others or less than in the past
significantly reduces one’s willingness to work and effort exerted on the
job. Comparing favorably, however, has mixed effects—with usually no effect
on effort, but positive or no effects on labor supply. Understanding when
relative pay increases labor supply and effort can thus help firms devise
optimal payment structures.
Rewarding only one dimension of performance may
result in employees ignoring other dimensions
To align employees’ interests with the firm’s
goals, employers often use performance-based pay, but designing such a
compensation plan is challenging because performance is typically
multifaceted. For example, a sales employee should be incentivized to sell
the company’s product, but a focus on current sales without rewarding the
salespeople according to the quality of the product and/or customer service
may result in fewer future sales. To solve this problem, firms often
increase the number of metrics by which they evaluate their employees, but
complex compensation plans may be difficult for employees to understand.
How and why do the careers of men and women
differ? What policies could reduce the differences?
The gender wage gap is largely due to men and
women holding different kinds of jobs. This job segregation is partly driven
by gender differences in careers in corporate hierarchies. Research has
shown that the careers of men and women begin to diverge immediately upon
entry into the labor market and that subsequent career progress exacerbates
the divergence. This divergence of career progress explains a large part of
the gender wage gap. Understanding how and why the careers of men and women
differ is necessary to design effective policies that can reduce the gender
differences in hierarchies.
Firms need to tailor their allocation of talent
and responsibility, and their managerial structure, to fit their competitive
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.
Donors rely on overhead costs to evaluate
charities, but that reliance creates disincentives for charities to hire
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.
Employee ownership generally increases firm
performance and worker outcomes
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.
Firms’ concerns about the well-being of their
employees are largely supported by the evidence
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.
Higher inequality decreases capital accumulation and increases
informality, which, in turn, raises the income of the poor
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
Does the extent of competition in labor markets
explain why female workers are paid less than men?
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.
Employers can use laboratory experiments to
structure payment policies and incentive schemes
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