Economic Models of Employee Motivation

Topics: Employment, Wage, Labor economics Pages: 39 (13056 words) Published: November 5, 2010
SEPTEMBER/OCTOBER 1997

Joseph A. Ritter is a research officer at the Federal Reserve Bank of St. Louis. Lowell J. Taylor is an associate professor at the Heinz School of Public Policy and Management, Carnegie Mellon University. Eran Segev and Joshua D. Feldman provided research assistance.

Economic Models of Employee Motivation
Joseph A. Ritter Lowell J. Taylor

use the terms “wage” and “compensation” interchangeably throughout the article) high enough to deter undesirable behavior by making a job too good to lose are said to pay efficiency wages. It is fairly easy to see whether a firm is using some sort of piece rate plan. There is quite a bit of controversy, however, about whether firms that do not use piece rates adopt efficiency-wage or performancebonding plans. We follow our overview with a discussion of the nature of the evidence supporting the different models.

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o most people it is a common sense proposition that hiring workers is a trickier problem than buying ballpoint pens. It is often difficult to find the right worker to hire, and workers who have already been hired can quit, steal, be hung over, refuse to cooperate with other workers, or simply not work very hard. In some workplaces some of these problems are relatively easy to solve, either by direct supervision or by directly linking pay to production. In general, however, things like ability, effort, and honesty are difficult to verify and consequently present special problems for personnel managers and economic theorists. The ways firms solve the problems of selecting, motivating, and retaining employees are potentially interesting to a wide cross-section of economists because they can affect how labor markets function and, therefore, how the entire economy operates. This article presents an overview of economists’ main hypotheses about the compensation strategies businesses use to address these kinds of problems. Broadly speaking, these solutions fall into three categories (with considerable diversity within each): piece rates, performance bonding, and efficiency wages. Piece rates link pay directly to workers’ output. Performance bonding uses a combination of up-front payments from workers and conditional repayments to guarantee workers’ performance. Firms that pay wages (we

SIMPLE SUPPLY-ANDDEMAND MODELS OF LABOR MARKETS
On one level, economists can analyze labor markets using the same supply-anddemand model they might apply to, say, wheat. Supply increases as the price (wage) received by the supplier increases. Demand increases as the price paid decreases. Equilibrium occurs where supply equals demand. For many purposes it is important to recognize that workers are not perfectly interchangeable; most nurses are not economists. This complication is easily handled by treating the markets for nurses and economists separately, each with its own supply and demand curves. Similarly, workers within the same profession are not typically interchangeable. An important dimension along which different kinds of workers can be distinguished is the collection of applicable knowledge and skills that economists call human capital. Levels of human capital vary not only across individuals, but also over time for a given individual. As an employee accumulates human capital, or as existing human capital deteriorates, the employee’s compensation can be expected to change. A worker’s willingness to accept a particular job will be affected by agreeable and disagreeable facets of the job. Workers require a higher wage to accept a hazardous

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job than a safe one. They may accept lower wages to work in a nice place, have flexible hours, or perform work that requires little effort. Differences in wages that come from these kinds of reasons are called compensating differentials. The theory of labor demand is especially important for this article. The core of that theory is based on...

References: Akerlof, George A. “Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics (November 1982), pp. 543-69. _______ and Lawrence F. Katz. “Workers’ Trust Funds and the Logic of Wage Profiles,” Quarterly Journal of Economics (August 1989), pp. 525-36. Annable, James. “Another Auctioneer is Missing,” Journal of Macroeconomics (Winter 1988), pp. 1-26. Baker, George, Robert Gibbons, and Kevin J. Murphy. “Subjective Performance Measures and Optimal Incentive Contracts,” Quarterly Journal of Economics (1994), pp. 1125-56. Bulow, Jeremy I., and Lawrence H. Summers. “A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination, and Keynesian Unemployment,” Journal of Labor Economics (October 1986), pp. 376-414. Cappelli, Peter, and Keith Chauvin. “An Interplant Test of the Efficiency Wage Hypothesis,” Quarterly Journal of Economics (August 1991), pp. 769-87. Carmichael, H. Lorne. “Self-Enforcing Contracts, Shirking, and Life Cycle Incentives,” Journal of Economic Perspectives (Fall 1989), pp. 65-83. Dickens, William T., Lawrence F. Katz, Kevin Lang, and Lawrence H. Summers. “Employee Crime and the Monitoring Puzzle,” Journal of Labor Economics (July 1989), pp. 331-47. Doeringer, P. B., and M. J. Piore. Internal Labor Markets and Manpower Analysis, Heath, 1991. Gibbons, Robert. “Incentives and Careers in Organizations,” National Bureau of Economic Research Working Paper 5705, August 1996. _______ and Lawrence F. Katz. “Does Unmeasured Ability Explain Inter-industry Wage Differentials?” Review of Economic Studies (July 1992), pp. 515-35.
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_______ and _______. “Seniority-Based Layoffs as an Incentive Device,” Federal Reserve Bank of St. Louis Working Paper 97-17A, November 1997. Shapiro, Carl, and Joseph Stiglitz. “Involuntary Unemployment as a Worker Discipline Device,” The American Economic Review (June 1984), pp. 433-44. Thaler, Richard H. “Anomalies: Inter-industry Wage Differentials,” Journal of Economic Perspectives (Spring 1989), pp. 181-93. Weiss, Andrew. “Job Queues and Layoffs in Labor Markets with Flexible Wages,” Journal of Political Economy (June 1980), pp. 526-38. _______. Efficiency Wages: Models of Unemployment, Layoffs, and Wage Dispersion, Princeton University Press, 1990.
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