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« Back to Results

Wages

Paper Session

Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, International 1
Hosted By: American Economic Association
  • Chair: Peter McHenry, College of William and Mary

Effort and Selection Effects of Performance Pay in Knowledge Creation

Erina Ytsma
,
Carnegie Mellon University

Abstract

I study the effect of performance pay on research productivity through effort and selection effects using the introduction of performance pay in German academia as a natural experiment. To this end, I consolidated information from various, unstructured data sources to construct a data set that encompasses the affiliation history and publication records of the universe of academics in Germany. The performance pay reform introduced attraction and retention bonuses that give rise to strong career concerns, as well as relatively weaker on-the-job performance bonuses that take effect at a later point in time. I estimate the pure effort effect of these performance pay incentives in a difference-in-differences framework, comparing changes in research productivity of a treated cohort of academics, who receive performance pay because they started their first tenured position after the reform, with a control cohort that receives flat wages because they started their first tenured position just before the reform. I find a positive effort effect of career concerns that is economically large; amounting to a 12 to 16% average increase in research productivity. This increase manifests itself most robustly as an increase in research quantity and persists for a number of years. Furthermore, the effort response is strongest and most robust for below-median productive academics, with increases in pure quantity as well as quality-adjusted research output, while top quartile academics do not significantly increase output. I estimate the selection effect by analyzing the rate at which academics of different productivity levels switch to the performance pay scheme. I use the fact that the old and new wage schemes compare differently for academics at different ages, which gives rise to selection incentives that are inversely related to age. Exploiting this variation in a difference-in-differences framework, I find that more productive academics are more likely to select into performance pay. Hence, performance pay, particularly in the form of career concerns, increases research output in academia through both effort and selection effects. However, because the effort effect is strongest for relatively less productive academics, while relatively more productive academics select into performance pay, the selection effect partially counteracts the effort effect.

Heterogeneous Effects of Imperfectly Enforced Minimum Wages in Low-Wage Labor Markets

Vidhya Soundararajan
,
Indian Institute of Management Bangalore

Abstract

We present the first piece of evidence on minimum wage effects across different enforcement regimes. Exploiting state-time variation in minimum wages and enforcement rates across India, we show that minimum wages do not affect labor market outcomes in weak enforcement regimes. In stricter regimes, wage effects are positive and significant, and employment effects are positive at low- and negative at high-minimum wages. These results are consistent with theories on imperfect enforcement in monopsonistic labor markets, and recommend the institution of a reasonably low but a well-enforced minimum wage. Results are robust to using border-district counterfactuals and instrumental variables for enforcement.

School Outcomes of Children Raised by Same-Sex Couples: Evidence from Administrative Panel Data

Deni Mazrekaj
,
KU Leuven
Kristof De Witte
,
KU Leuven
Sofie Cabus
,
KU Leuven

Abstract

Although widely used in policy debates, the literature on children’s outcomes in same-sex families has mostly relied on small selective samples or on samples based on cross-sectional survey data. This led to a lack of statistical power, misclassification of same-sex couples, and the inability to separate children born in same-sex families from children of divorced parents. We address these issues by using unique administrative panel data from the Netherlands: the first country to legalize same-sex marriage in the world. The results indicate that children raised by same-sex couples perform better than children raised by different-sex couples in both primary and secondary education. Our findings are robust to the use of Coarsened Exact Matching to improve covariate balance and to reduce model dependency. Further analyses using a novel bounding estimator suggest that the selection on unobserved characteristics would have to be at more than two and a half times higher than the selection on observed characteristics to render the estimates insignificant.

The Impact of Right-to-Work Laws on Worker Wages: Evidence from Collective Bargaining Agreements

Sudheer Chava
,
Georgia Institute of Technology
Andras Danis
,
Georgia Institute of Technology
Alex Hsu
,
Georgia Institute of Technology

Abstract

We analyze the impact of the introduction of right-to-work (RTW) laws across the US on wages. After the introduction of RTW laws, there is a decrease in wages negotiated through collective bargaining agreements (CBAs). Further, the number of CBAs decreases, and the gap between the fraction of workers covered by a CBA and the fraction of union members increases. Firms increase investment and employment, and reduce their financial leverage. Our results suggest a decline in union bargaining power after RTW laws are passed, which could be a contributing factor to the recent slowdown in wage growth in the US.

Wage Dynamics: The Role of Learning, Human Capital, and Performance Incentives

Elena Pastorino
,
Stanford University
Braz Camargo
,
Sao Paulo School of Economics
Fabian Lange
,
McGill University

Abstract

Using public individual survey data and proprietary firm personnel records, we document that the importance of performance pay declines at the end of a career. This evidence is at odds with the implication of models of implicit and explicit performance incentives that have attempted to explain the life-cycle profile of the variable component of wages. We provide a novel model that integrates uncertainty and learning about individual ability, human capital acquisition, and performance incentives to account for the life-cycle profile of wages and the declining importance of the pay-for-performance component of wages with experience. We analytically characterize the equilibrium wage contract in this environment, derive its qualitative properties, and decompose the pay-for-performance component of the equilibrium wage into four distinct terms. These terms capture the standard trade-off between risk and incentives arising in situations of moral hazard, the desire to hedge against the risk inherent in learning about ability, and the changing strength of reputational and human capital investment motives over time. We prove that the model is identified just based on a panel of wages. We derive estimators of the model's primitive parameters and use the estimated parameters to measure the relative contribution of the three sources of wage dynamics we nest---learning, human capital acquisition, and performance incentives--—to the life-cycle profile of total wages and their variable component. According to our preliminary estimates, performance incentives seem to be qualitatively and quantitatively key to explaining the life-cycle profile of wages and variable pay, despite the declining importance of variable pay relative to fixed pay over time.
JEL Classifications
  • J3 - Wages, Compensation, and Labor Costs