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Abstract:
A theory is proposed that individuals with a'balanced' set of skills are more likely to become entrepreneurs thanindividuals with specializations. A model of occupational choice whichsupports this theory is presented.The model also predicts that the uppertail of the income distribution is fatter for entrepreneurs than it is forspecialists. Empirical tests of the model are based on a survey,conducted in the late 1990s, of Stanford's Graduate School of BusinessAlumni. All 5,000 responses to the survey were studied in light of the respondents'school transcripts.The survey data supports the predictions offered bythe model: those with more varied experience started their own businesses morefrequently than those who took more specialized course loads. The data alsoconfirms that income distributions have fatter upper tails for entrepreneursthan for specialists, although the bottom is similar.In short,entrepreneurs are essentially"jacks-of-all-trades."(SAA)

Stanford University Graduate School of Business, Entrepreneurship, Career choices, Business education, Skills, Background (biographical), Income distribution

Abstract:
The entrepreneur assembles the necessary human,physical, and information resources in an efficient manner to create a newproduct or an existing one at a lower or competitive cost. It is hypothesizedthat while entrepreneurs differ from specialists who have a comparativeadvantage in a single skill, they have more balanced talents that embrace anumber of skills. There are two possible versions of the"jack-of-all-trades" view: (1) Labor market behavior reflects endowedskills or those acquired in school; and (2) persons perform various roles as aninvestment in acquiring skills needed to be an entrepreneur. A model was devised in whichan individual can decide to specializeusing a single skill or become an entrepreneur using a variety of skills. Themodel was tested empirically using data on Stanford University Graduate SchoolBusiness alumni surveyed in the late 1990s. Data included information aboutemployment history, industry, and demographic data. Analysis tends to support the "jack-of-all-trades" view. It wasfound that those with more varied careers, as measured by more employmentroles, are more likely to be entrepreneurs. Those students who studied a morevaried curriculum are also more likely to be entrepreneurs and to found morebusinesses, and those with risk tolerance are more likely to becomeentrepreneurs.(TNM)

Experimental/primary research, Stanford University Graduate School of Business, Employment history, Careers, Educational background, Work experience, Demographics, Skills, Risk orientation, Career choices

Abstract:
The entrepreneur assembles the necessary human,physical, and information resources in an efficient manner to create a newproduct or an existing one at a lower or competitive cost. It is hypothesizedthat while entrepreneurs differ from specialists who have a comparativeadvantage in a single skill, they have more balanced talents that embrace anumber of skills. There are two possible versions of the"jack-of-all-trades" view: (1) Labor market behavior reflects endowedskills or those acquired in school; and (2) persons perform various roles as aninvestment in acquiring skills needed to be an entrepreneur. A model was devised in whichan individual can decide to specializeusing a single skill or become an entrepreneur using a variety of skills. Themodel was tested empirically using data on Stanford University Graduate SchoolBusiness alumni surveyed in the late 1990s. Data included information aboutemployment history, industry, and demographic data. Analysis tends to support the "jack-of-all-trades" view. It wasfound that those with more varied careers, as measured by more employmentroles, are more likely to be entrepreneurs. Those students who studied a morevaried curriculum are also more likely to be entrepreneurs and to found morebusinesses, and those with risk tolerance are more likely to becomeentrepreneurs.(TNM)

Experimental/primary research, Stanford University Graduate School of Business, Employment history, Careers, Educational background, Work experience, Demographics, Skills, Risk orientation, Career choices

Abstract:
The theory proposed below is that entrepreneurs are jacks-of-all-trades who may not excel in any one skill, but are competent in many. A coherent model of the choice to become an entrepreneur is presented. The primary implication is that individuals with balanced skills are more likely than others to become entrepreneurs. The model provides implications for the proportion of entrepreneurs by occupation, by income and yields a number of predictions for the distribution of income by entrepreneurial status. Using a data set of Stanford alumni, the predictions are tested and found to hold. In particular, by far the most important determinant of entrepreneurship is having background in a large number of different roles. Further, income distribution predictions, e.g., that there are a disproportionate number of entrepreneurs in the upper tail of the distribution, are borne out.

Entrepreneurship, Occupation Choice, Diversity, Jack-of-all-trades

Abstract:
The theory proposed below is that entrepreneurs are jacks-of-all-trades who may not excel in any one skill, but are competent in many. A coherent model of the choice to become an entrepreneur is presented. The primary implication is that individuals with balanced skills should be more likely than others to become entrepreneurs. The model provides implications for the proportion of entrepreneurs by occupation, by income and yields a number of predictions for the distribution of income by entrepreneurial status. Using a data set of Stanford alumni, the predictions are tested and found to hold. In particular, by far the most important determinant of entrepreneurship is having background in a large number of different roles. Further, income distribution predictions, e.g., that there are a disproportionate number of entrepreneurs in the upper tail of the distribution, are borne out.

Abstract:
What happens when a firm switches from paying hourly wages to paying piece rates? The theory developed below predicts that average productivity rises, that the firm will attract a more able work force and that the variance in output across individuals at the firm will rise as well. The theory is tested with data from a large autoglass company that changed compensation structures between 1994 and 1995. All theoretical predictions are borne out. In the firm examined, the productivity effects are extremely large, amounting to anywhere from about 20% to 36% of output, depending on what is held constant. About half of the worker-specific increase in productivity is passed on to workers in the form of higher wages.

Abstract:
What happens when a firm switches from paying hourly wages to paying piece rates? The theory developed below predicts that average productivity rises, that the firm will attract a more able work force and that the variance in output across individuals at the firm will rise as well. The theory is tested with data from a large autoglass company that changed compensation structures between 1994 and 1995. All theoretical predictions are borne out. In the firm examined, the productivity effects are extremely large, amounting to anywhere from about 20% to 36% of output, depending on what is held constant. About half of the worker-specific increase in productivity is passed on to workers in the form of higher wages.

Abstract:
One problem with the theory of firm-specific human capital is that it is difficult to generate convincing examples of investment that could generate the sometimes observed large and continuing effects on earnings. Another approach, called the "skill-weights" view, allows all skills to be general in that there are other firms that use the each of the skills. But firms use them in different combinations and with different weights attached to them. The skill-weights view not only has aesthetic appeal, but is consistent with the frequently observed large tenure effects. All of the implications of the traditional view are produced by this approach, and there are a number of other implications that distinguish the new view from the traditional one. The empirical evidence already contains some support for the skill-weights view.

Human Capital, Skills, Skill-weights

Abstract:
One problem with the theory of firm-specific human capital is that it is difficult to generate convincing examples of investment that could generate the sometimes observed large and continuing effects on earnings. Another approach, called the 'skill-weights' view, allows all skills to be general in that there are other firms that use each of the skills. But firms use them in different combinations and with different weights attached to them. The skill-weights view not only has aesthetic appeal, but is consistent with the frequently observed large tenure effects. All of the implications of the traditional view are produced by this approach, and there are a number of other implications that distinguish the new view from the traditional one. The empirical evidence already contains some support for the skill-weights view.

Abstract:
Variable pay, defined as pay that is tied to some measure of a firm's output, has become more important for executives of the typical American firm. Variable pay is usually touted as a way to provide incentives to managers whose interests may not be perfectly aligned with those of owners. The incentive justification for variable pay has well-known theoretical problems and also appears to be inconsistent with much of the data. Alternative explanations are considered. One that has not received much attention, but is consistent with many of the facts, is selection. Managers and industry specialists may have information about a firm's prospects that is unavailable to outside investors. In order to induce managers to be truthful about prospects, owners may require managers to "put their money where their mouths are," forcing them to extract some of their compensation in the form of variable pay. The selection or sorting explanation is consistent with the low elasticities of pay to output that are commonly observed, with the fact that the elasticity is higher in small and new firms, with the fact that variable pay is more prevalent in industries with very technical production technologies, and with the fact that stock and stock options are a larger proportion of total compensation for higher level employees. The explanation fits small firms and start-ups better than larger, well-established firms.

Incentives, Sorting, Selection

Abstract:
Some have observed that individuals perform worse after being promoted. The Peter principle, which states that people are promoted to their level of incompetence, suggests that something is fundamentally misaligned in the promotion process. This view is unnecessary and inconsistent with the data. Below, it is argued that ability appears lower after promotion purely as a statistical matter. Being promoted is evidence that a standard has been met. Regression to the mean implies that future ability will be lower, on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Rather than evidence of a mistake, the Peter principle is a necessary consequence of any promotion rule. Furthermore, firms that take it into account appropriately adopt an optimal strategy. Usually, firms inflate the promotion criterion to offset the Peter principle effect, and the more important the transitory component is relative to total variation in ability, the larger the amount that the standard is inflated. The same logic applies to other situations. For example, it explains why movie sequels are worse than the original film on which they are based and why second visits to restaurants are less rewarding than the first.

Abstract:
Some have observed that individuals perform worse after being promoted. The Peter Principle, which states that people are promoted to their level of incompetence, suggests that something is fundamentally misaligned in the promotion process. This view is unnecessary and inconsistent with the data. Below, it is argued that ability appears lower after promotion purely as a statistical matter. Being promoted is evidence that a standard has been met. Regression to the mean implies that future ability will be lower, on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Rather than evidence of a mistake, the Peter Principle is a necessary consequence of any promotion rule. Furthermore, firms that take it into account appropriately adopt an optimal strategy. Usually, firms inflate the promotion criterion to offset the Peter Principle effect, and the more important is the transitory component relative to total variation in ability, the larger the amount that the standard is inflated. The same logic applies to other situations. For example, it explains why movie sequels are worse than the original film on which they are based and why second visits to restaurants are less rewarding than the first.

Peter Principle, Regression to the Mean, Stochastic

Abstract:
The history of transition in Russia is analyzed in this paper. Issues ranging from managerial incentives to the changing structure of trade are considered in an attempt to present a comprehensive sketch of the state of the Russian economy. The transition in Russia can be compared with demobilization. Demobilization process is often accompanied by large output declines. For instance, during the post World War II demobilization the US GNP declined by 25%. In light of this, the great contraction of the Russian economy does not appear to be a major outlier when the militaristic nature of the Soviet economy is taken into account. We point out a previously unexplored factor detrimental for incentives of Russian managers, which we call soft taxation. Soft taxation is a free market analog of soft-budget constraints. Due to the inefficiency of institutions, managers have an incentive to take costly actions in order to signal that the profitability of the firm is low. Also, we suggest a few indices of aggregate economic shocks including one based on the structure of foreign trade. The values of the indices of aggregate shocks for the Russian economy are compared to those of several other countries. The data seem to indicate that the changes in the structure of Russian trade have been far greater than in non-transition economies. However, other indices of economic adjustment do not paint a picture of a rapid transition.

Economic Transition, Incentives, Soft Taxation

Abstract:
In this review of the personnel economics literature, we introduce key topics of personnel economics, focus on some relatively new findings that have emerged since prior reviews of some or all of the personnel economics literature, and suggest open questions in personnel economics where future research can make valuable contributions to the literature. We explore five aspects of the employment relationship - incentives, matching firms with workers, compensation, skill development, and the organization of work - reviewing the main theories, empirical tests of those theories, and the open questions in each area.

Abstract:
This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous inability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.

Abstract:
This paper offers an explanation of the use of mandatory-retirement clauses in labor contracts. It argues that the date of mandatory retirement is chosen to correspond to the date of voluntary retirement, but the nature of the optimal wage profile results in a discrepancy between spot wage and spot VMP (value of the worker's marginal product). This is because it is preferable to pay workers less than VMP when young and more than VMP when old. By doing so, the "agency" problem is solved, so the contract with mandatory retirement is Pareto efficient. A theory of agency is presented and empirical evidence which supports the hypothesis is provided.

Abstract:
Personnel economics drills deeply into the firm to study human resource management practices like compensation, hiring practices, training, and teamwork. Many questions are asked. Why should pay vary across workers within firms - and how compressed should pay be within firms? Should firms pay workers for their performance on the job or for their skills or hours of work? How are pay and promotions structured across jobs to induce optimal effort from employees? Why do firms use teams and how are teams used most effectively? How should all these human resource management practices, from incentive pay to teamwork, be combined within firms? Personnel economics offers new tools and new answers to these questions. In this paper, we display the tools and principles of personnel economics through a series of models aimed at addressing the questions posed above. We focus on the building blocks that form the foundation of personnel economics: the assumptions that both the worker and the firm are rational maximizing agents; that labor markets and product markets must reach some price-quantity equilibrium; that markets are efficient or that market failures have introduced inefficiencies; and that the use of econometrics and experimental techniques has advanced our ability to identify underlying causal relationships.

Abstract:
Many have observed that individuals perform worse after having received a promotion. The most famous statement of the idea is the Peter Principle, which states that people are promoted to their level of incompetence. There are a number of possible explanations. Two are explored. The most traditional is that the prospect of promotion provides incentives which vanish after the promotion has been granted; thus, tenured faculty slack off. Another is that output as a statistical matter is expected to fall. Being promoted is evidence that a standard has been met. Regression to the mean implies that future productivity will decline on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Both explanations are analyzed. The statistical point always holds; the slacking off story holds only under certain compensation structures.

Abstract:
Labor relations involve incentive problems. The market solves these problems by developing a variety of institutions. This paper describes and assesses the various forms of incentive contracts.

Abstract:
The returns to talent or performance have grown over time in developed countries. Is talent concentrated in a few firms or are firms virtual microcosms of the economy, each having close to identical distributions of talent? The data show that talent is not concentrated in a few companies, but is widely dispersed across companies. Wage dispersion within firms is nearly as high as the wage dispersion overall. The standard deviation of wages within the firm is about 80% of the standard deviation across all workers in the economy. Firms are more similar than they are dissimilar, but they are not identical: the firm mean wage displays considerable dispersion across the population of firms. There is evidence that talent is becoming more concentrated over time within some firms relative to others. In four countries that estimated wage regressions with firm fixed effects, the firm fixed effects are contributing more to the R-squared of the wage regression over time. Law firms have more lawyers than janitors. Janitorial firms have more janitors than lawyers and the differences between firms have become more pronounced. Still, the variance of wages within the average firms remains high.

Abstract:
The returns to talent or performance have grown over time in developed countries. Is talent concentrated in a few firms or are firms virtual microcosms of the economy, each having close to identical distributions of talent? The data show that talent is not concentrated in a few companies, but is widely dispersed across companies. Wage dispersion within firms is nearly as high as the wage dispersion overall. The standard deviation of wages within the firm is about 80% of the standard deviation across all workers in the economy. Firms are more similar than they are dissimilar, but they are not identical: the firm mean wage displays considerable dispersion across the population of firms. There is evidence that talent is becoming more concentrated over time within some firms relative to others. In four countries that estimated wage regressions with firm fixed effects, the firm fixed effects are contributing more to the R-squared of the wage regression over time. Law firms have more lawyers than janitors. Janitorial firms have more janitors than lawyers and the differences between firms have become more pronounced. Still, the variance of wages within the average firms remains high.

Abstract:
Experiments provide a controlled setting where factors can be isolated and studied more easily than in the field, but they often do not allow participants to sort into or out of environments based on their preferences, beliefs, and skills. We conduct an experiment to demonstrate the importance of sorting in the context of social preferences. When individuals are constrained to play a dictator game, 74% of the subjects share. But when subjects are allowed to avoid the situation altogether, less than one third share. This reversal of proportions illustrates that the influence of sorting limits the generalizability of experimental findings that do not allow sorting. Moreover, institutions designed to entice pro-social behavior may induce adverse selection. We find that increased payoffs prevent foremost those subjects from opting out who share the least initially. Thus the impact of social preferences remains much lower than in a mandatory dictator game, even if sharing is subsidized by higher payoffs. Our experiment also sheds light on the motives for sharing. While much sharing is consistent with other-regarding preferences, the majority of subjects share without really wanting to, as evidenced by their willingness to avoid the dictator game and to even pay for avoiding it.

Abstract:
Economics is not only a social science, it is a genuine science. Like the physical sciences, economics uses a methodology that produces refutable implications and tests these implications using solid statistical techniques. In particular, economics stresses three factors that distinguish it from other social sciences. Economists use the construct of rational individuals who engage in maximizing behavior. Economic models adhere strictly to the importance of equilibrium as part of any theory. Finally, a focus on efficiency leads economists to ask questions that other social sciences ignore. These ingredients have allowed economics to invade intellectual territory that was previously deemed to be outside the discipline's realm.

Abstract:
Economics is not only a social science, it is a genuine science. Like the physical sciences, economics uses a methodology that produces refutable implications and tests these implications using solid statistical techniques. In particular, economics stresses three factors that distinguish it from other social sciences. Economists use the construct of rational individuals who engage in maximizing behavior. Economic models adhere strictly to the importance of equilibrium as part of any theory. Finally, a focus on efficiency leads economists to ask questions that other social sciences ignore. These ingredients have allowed economics to invade intellectual territory that was previously deemed to be outside the discipline's realm.

Abstract:
In 1987, the Journal of Labor Economics published an issue on the economics of personnel. Since then, personnel economics, defined as the application of labor economics principles to business issues, has become a major part of labor economics, now accounting for a substantial proportion of papers in this and other journals. Much of the work in personnel economics has been theoretical, in large part because the data needed to test these theories has not been available.

In recent years, a number of firm-based data sets have surfaced that allow personnel economics to be tested. Using two such data sets, the implications of theories that relate to life-cycle incentives compression, and peer pressure are given support. The conclusion is that personnel economics is real. It is far more than a set of clever theories. It has relevance to the real world.

Additionally, firm-based data make asking and answering new kinds of questions feasible. The value of research in this area is high because so little is known as compared with other fields in labor economics. Questions about the importance of a worker's relative position in a firm, about intrafirm mobility, about the effect of the firm's business environment on worker welfare, about the significance of first impressions can be answered using the new data.

Finally, it is argued that the importance of personnel economics in undergraduate as well as business school curricula will continue to grow.

Abstract:
Variable pay, defined as pay that is tied to some measure of a firm's output, has become more important for executives of the typical American firm. Variable pay is usually touted as a way to provide incentives to managers whose interests may not be perfectly aligned with those of owners. The incentive justification for variable pay has well-known theoretical problems and also appears to be inconsistent with much of the data. Alternative explanations are considered. One that has not received much attention, but that is consistent with may of the facts, is selection. Managers and industry specialists may have information about a firm's prospects that is unavailable to outside investors. In order to induce managers to be truthful about prospects, owners may require managers to 'put their money where their mouths are,' forcing them to extract some of their compensation in the form of variable pay. The selection or sorting explanation is consistent with the low elasticities of pay to output that are commonly observed, with the fact that the elasticity is higher in small and new firms, and with the fact that variable pay is more prevalent in industries with very technical production technologies. It does not explain why some firms give stock options even to very low-level workers.

Abstract:
Internal labor markets are those where workers are hired into entry level jobs and higher levels are filled from within. Wages are determined internally and may be quite free of market pressure. External labor markets imply that workers move somewhat fluidly between firms and wages are determined by some aggregate process where firms do not have significant discretion over wage setting. There are a number of theories that lead to internal labor markets. Using data from Sweden from the late 1980s, it is found that although there is significant evidence of internal promotion being important, a significant external market exists that affects both wage setting and hiring patterns. Even in Sweden, which most would not choose as the best example of a free labor market, external factors seem to create strong discipline on the ability of firms to set wages.

Abstract:
The literature on class size yields a number of findings. First, class size effects are difficult to find except when using data where class size variations are truly exogenous. Second, Catholic schools have large classes and better performance. Third, to the extent that class size matters, it is more important for disadvantaged children. Special education classes are smaller than advanced placement classes. Fourth, when many children have joined a class recently, the joiners and their classmates do worse. The theory presented below reconciles all of these facts by recognizing that classroom teaching is a public good where congestion effects are potentially important. Because the optimal class size is larger for behaved-students, the observed relation of educational output to class size is small or even positive. However, increasing class size to ranges away from equilibrium levels will adversely affect educational output. The theory argues for a particular non-linear relation of educational output to class size and is consistent with observed variations in class size by grade level, student and teacher characteristics. Class sizes are more significant in small classes than large ones. There is a special function that maps the substitution of discipline for class size, which may explain why Catholic schools, with large classes, out-perform public schools. The same technology also implies that class size effects are larger for problem children than for well-behaved children. Private schools, which charge a positive price and compete with free public schools, attract better students. This selection may help explain why Catholic schools out-perform public schools even though expulsion rates are lower in Catholic schools than in public ones. Teachers may prefer smaller class size than students or parents either because wages do not reflect working conditions fully or because teachers as a group can raise the demand for their services by lowering class size. The theory provides a measurable and operational way to define school quality that can be tested empirically. Finally, because public schools that operate in a centralized environment do not capture the returns to their successes, public school incentives differ from those of private schools.

Abstract:
Educators worry that high-stakes testing will induce teachers and their students to focus only on the test and ignore other, untested aspects of knowledge. Some counter that although this may be true, knowing something is better than knowing nothing and many students would benefit even by learning the material that is to be tested. Using the metaphor of deterring drivers from speeding, it is shown that the optimal rules for high-stakes testing depend on the costs of learning and of monitoring. For high cost learners, and when monitoring technology is inefficient, it is better to announce what will be tested. For efficient learners, de-emphasizing the test itself is the right strategy. This is analogous to telling drivers where the police are posted when police are few. At least there will be no speeding on those roads. When police are abundant or when the fine is high relative to the benefit from speeding, it is better to keep police locations secret, which results in obeying the law everywhere. Children who are high cost learners are less likely to learn all the material and therefore learn more when they are told what is on the exam. The same logic also implies that tests should be clearly defined for younger children, but more amorphous for more advanced students.

Abstract:
Works councils, found in most Western European economies, are elected bodies of employees with rights to information, consultation, and in some cases co-determination of employment conditions at local workplaces, mandated by law. Many European employers and unions believe that councils improve communication between workers and management, raising social output, while reducing the speed with which decisions are made. This paper analyzes the operation of councils as a means of improving social output by creating more cooperative labor relations. It argues that councils are mandated because the incentive for companies to institute them and delegate them power falls short of the social incentive; that workers provide more accurate information to employers about preferences when councils have some say over how that information is used; and that the communication from employers to workers produces socially desirable worker concessions in bad times that would not occur absent this institution. It compares a jury style random selection of works councilors with selection via elections.

Abstract:
Sellers of new products are faced with having to guess demand conditions to set price appropriately. But sellers are able to adjust price over time and to learn from past mistakes. Additionally, it is not necessary that all goods be sold with certainty. It is sometimes better to set a high price and to risk no sale. This process is modeled to explain retail pricing behavior and the time distribution of transactions. Prices start high and fall as afunction of time on the shelf. The initial price and rate of decline can be predicted and depends on thinness of the market, the proportion of customers who are "window shoppers," and other observable characteristics. In a simplecase, when prices are set optimally, the probability of selling the product is constant over time. Among the more interesting predictions is that women`s clothes may sell for a higher average price than men`s clothes, given similar cost, even in a competitive market. Another is that the initial price level and the rate of price decline are positively related to the probability of selling the good. Other observable relationships are discussed.

Abstract:
Job changes often occur without spells of unemployment. Highly educated workers, for example, rarely suffer unemployment, even though job changes are common. A large proportion of their job switches occur only after the new job is secured. These workers, whose skills and ability levels are less homogeneous, differ from less skilled, perhaps more homogeneous workers who are more likely to experience unemployment in the process of changing jobs. Most research has focused on job changes that imply spells of unemployment. Indeed, the primary rationale behind the earliest papers on search theory was to explain unemployment. But if there exists what some refer to as a "dual labor market," these theories may be most applicable to the secondary workers. This paper attempts to formulate a theory of turnover and wage dynamics that may better describe the primary labor force, defined as those who change jobs without unemployment. In the process, a number of previously unexamined phenomena are explored.

Abstract:
Common culture and common language facilitate trade between people. Minorities have incentives to become assimilated and to learn the majority language so that they have a larger pool of potential trading partners. The value of assimilation is larger to someone from a small minority than to one from a large minority group. When a society has a very large majority of individuals from one culture, individuals from minority groups will be assimilated more quickly. Assimilation is less likely when an immigrant's native culture and language is broadly represented in his new country. Also, when governments protect minority interests directly, incentives to be assimilated into the majority culture are reduced. Both factors may explain the recent rise in multiculturalism. Individuals do not properly internalize the social value of assimilation and ignore the benefits others receive when they learn the majority language and become assimilated. In a pluralistic society, a government policy that encourages diverse cultural immigration over concentrated immigration is likely to increase the welfare of the population. In the absence of strong offsetting effects, policies which encourage multi- culturalism reduce the amount of trade and have adverse welfare consequences. Conversely, policies that subsidize assimilation and the acquisition of majority language skills can be socially beneficial. The theory is tested and confirmed by examining U.S. Census data, which reveals that the likelihood that an immigrant will learn English is inversely related to the proportion of the local population that speaks his or her native language.

Abstract:
One of the economic benefits of immigration is that the diversity of the population is enhanced. Diversity, it is argued, enriches the environment in which individuals live and trade and may contribute to greater creativity. What does diversity mean? Do current immigration policies enhance diversity? To the extent that there are gains from diversity, they come through the interaction of individuals from one culture or background with individuals from another. A good partner in the interaction has different skills, has skills that are relevant to one's own activity, and is a person with whom one can communicate. The argument in favor of diversity is evaluated both theoretically and empirically using the 1990 Census. Diversity cannot be the justification of U.S. immigration policy. Indeed, current immigration policy fails to promote diversity. Further, the results suggest that our immigration policy has resulted in differences in the characteristics of immigrants that reflect the effects of selection as much as they do the underlying characteristics of the populations from which the immigrants are drawn. Balanced immigration, perhaps implemented through the sale of immigration slots, would do more to enrich the diversity of the US population.

Abstract:
Workers who hold a firm's stock make decisions other than those that pure capital owners would make, but there exist institutions and compensation packages that will generally lead workers to favor efficient firm decisions. Workers care about their firm-specific rents and may seek shares in their firm to use them to protect those rents. Their views toward firm decisions will differ depending on their firm-specific human capital and tenure in the firm. The workers most favorable to efficient firm decisions are the very young and very old, who have the least amount to lose in employment rent and those with larger shares of ownership. An appropriate severance pay policy will induce workers to choose efficient outcomes even if it calls for their own layoffs. Single company based defined contribution pension funds, which hold shares in their own firm, are likely to tilt worker- owners to favor efficient decisions when layoffs and other changes are modest, but not when the changes are huge. Pension funds are more likely to buy up shares and successfully change behavior in small firms, in firms that are highly levered, and when the investment community has diverse views on the benefit from changing a firm's current irresponsible policies.

Abstract:
No abstract is available for this paper.

Abstract:
It has long been recognized in finance and other literature that variance provides option value. The same point carries over to the labor market. Firms like variance in new employees because they can keep the good workers and terminate the bad ones. But market wages must adjust to make the marginal firm indifferent between high and low variance workers. The market equilibrium for new, risky workers is explored to determine how workers and firms line up on the various sides of the market. Firms in growing industries prefer young, high variance workers. Growing industries will be characterized by high turnover rates. In order for risky workers to provide option value, it is necessary that the initial employer have some advantage over other firms. Private information or mobility costs can provide that advantage. Also required is that the risk have a firm specific component. General variations in ability provide no option value to an initial hirer.

Abstract:
During the past decade, much has been said about the role that on-the-job training plays in augmenting one's stock of human capital. Up to this point, little has been done to distinguish the effect of on-the-job training from that of aging on the increase in human wealth. The reason rests primarily on the fact that it is difficult to observe or even define in some appropriate way the amount of on-the-job training that an individual possesses. In this paper, a method is developed by which one may compare the effects of work experience to those of aging per se. The difference is then attributed to on-the-job training.

Institutional subscribers to the NBER working paper series, and resident of developing countries may download this paper without additional charge at www.nber.org

Abstract:
It can be claimed that education is simply a normal consumption good and that like all other normal goods, an increase in wealth will produce an increase in the amount of schooling purchased. Increased incomes are associated with higher schooling attainment as the simple result of an income effect. If this is so, schooling increases an individual`s wealth only by the consumption value of the good, since it is a non-saleable asset. This paper will attempt to determine empirically the amount by which an increase in wealth is caused by schooling as distinguished from the amount by which the demand for schooling increases as the result of an increase in wealth.

Abstract:
Most items are sold to consumers by retail stores. Stores have two features that distinguish them from auctions. First, the price is posted and a consumer who values the good at more than the posted price is sold the good. Second, the sale takes place as soon as the consumer decides to buy. In contrast, auctions have prices that are determined ex post and the potential consumer must wait until the auction is held to buy the good. Consequently, auctions result in 'false trading', where buyers sometimes pass up other valuable opportunities while waiting for the auction to occur or instead make undesired duplicate purchases. Retail stores dominate auctions when the good is perishable and/or becomes obsolete quickly, when the market is thin, and when close substitutes for the good are plentiful. These predictions are consistent with a number of observed phenomena.

Abstract:
The globalization of firms is explored at theoretical and empirical levels. The idea is that a global firm is a multi-cultural team. The existence of a global firm is somewhat puzzling. Combining workers who have different cultures, legal systems, and languages imposes costs on the firm that would not be present were all workers to conform to one standard. In order to offset the costs of cross-cultural dealing, there must be complementarities between the workers that are sufficiently important to overcome the costs. Disjoint and relevant skills create an environment where the gains from complementarities can be significant. It is also necessary that teammates be able to communicate with one another. The search for the best practice' is analyzed and empirical support from an examination of trading patterns is provided.

Abstract:
This paper is another contribution to the vast literature which addresses this issue: comparison of household income per capita among households of different structures requires judgment about the relationship between real income and family size. Our work uses a revealed preference approach in which household size/structure variables are included in empirical demand studies and the estimated coefficients on these variables are used to infer equivalence; it differs from many of the other studies not in basic concept but in its empirical strategy. While most studies build family composition effects into a relatively formal structural model of demand and impose considerable restriction in order to obtain an estimable system, we use a reduced-form approach which requires much less of the data.

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This paper sets up a microeconomic theory of labor unions. It discusses their formation and goals, their hierarchical structure, and the nature of rent distribution. The theory provides predictions for the probability that an industry or occupation will be unionized, the proportion of that industry that will be unionized, and observed wage differentials within that industry. It discusses the way that those values change in response to changes in the supply of labor, demand for labor, cost of organizing the union, and cost of defeating the union. Institutions such as featherbedding, fringe benefits, and seniority are rationalized in this framework. The model is consistent with competitive factor and product markets.

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A key tenet of the theory of human capital is that investment in skills results in higher productivity. The previous literature has estimated the degree of investment in human capital for individuals by looking at individual wage growth as a proxy for productivity growth. In this paper, we have both wage and personal productivity data, and thus are able to measure of the increase in workers' output with tenure. The data is from an autoglass company. Most of production occurs at the individual level so measures of output are clear. We find a very steep learning curve in the year on the job: output is 53 percent higher after one year than it is initially when hired. These output gains with tenure are not reflected in equal percentage pay gains: pay profiles are much flatter than output profiles in the first year and a half on the job. For these data, using wage profiles significantly underestimates the amount of investment compared to the gains evident in output-tenure profiles. The pattern of productivity rising more rapidly than pay reverses after two years of tenure. Worker selection is also important. Workers who stay longer have higher output levels and faster early learning.

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With the growth of the literature on incentive compensation has come the belief by some that incentive pay may be less rigid than pay that is not designed to effect incentives. Some have gone so far as to argue that this may explain differences in unemployment rates across countries. it is shown that there is no direct link between incentives and wage rigidity. Many compensation schemes that provide incentives have the reverse effect: That is, they tend to make wages more rigid than would be the case were incentives not an issue atall. This paper explores the relationship between wage rigidity and the provision of incentives in a variety of circumstances.

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Individuals involved in basic research, like other workers, respond to incentives. Funding agencies provide implicit incentives when they specify the rules by which awards are made. The following analysis is an exercise in understanding incentives at an applied level. Specific rules are examined and analyzed to determine their incentive effects. For example, what is the effect of rewarding past effort? What happens when a few large awards are replaced by many small awards? How does the timing of an award affect effort? How does an agency choose which topics to fund? After having mapped out the responses of researchers to rules, socially optimal rules are derived. Research incentive issues have private business analogues, and the extension to the operation of the firm is discussed briefly.

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No abstract is available for this paper.

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Pensions may contribute to male/female or black/white inequality to the extent that white males are more likely to receive pensions than are other groups. Conditional on receiving pensions, the value of pension benefits varies because white males have the highest level of expected tenure atretirement. By using a combination of the Current Population Survey and the 1980 Banker`s Trust Corpprate Pension Plan Study, we find that the existence of pension plans contributes to black/white inequality but leaves male/female inequality unchanged among whites. Even though females are less likely tor eceive pensions than males, those females who do receive pensions enjoy generous ones. Among blacks, pensions exacerbate sex differences because black women are only about 75% as likely to receive pensions as black males.

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Many different types of pension plans exist in American firms. The stipulations of plans vary dramatically, even among large firms, with respect to vesting, relationship of the pension to final salary, maximum and minimum years of service constraints, and maximum and minimum benefit levels. These provisions are examined to determine their effects on worker behavior.Specifically, the paper analyes which plans encourage or discourage appropriate worker responses in hours worked, turnover, human capital investment and effort. An attempt is made to explain the provisions in light of the findings.

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In this paper, a few theoretical issues will be raised regarding the relationship between the distribution of human capital and that of human wealth. Special attention will be paid to the empirical implications of the analysis.

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This paper will employ a method (devised in Lazear [1976] ) to estimate the unobserved component of wages. The size of this component will be calculated for non-whites and whites separately and then compared. Since, as it turns out, the component is larger for whites than non-whites, observed wage differentials understate true differentials. Furthermore, comparison of the period between1966-1969 with the 1972-1974 period reveals that this unobserved differential increased substantially over time. The results of this study suggest that although the pecuniary non-white -- white differential has narrowed substantially between 1966 and 1974 for young men, the on-the-job training differential has increased by almost the exact same amount. This implies that in real wealth terms there has not been any narrowing of the differential at all. This will become more apparent in later years as those non-whites who were hired into skilled jobs today fail to be promoted or obtain higher paying jobs elsewhere at the same rate as their white counterparts.

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Demographic changes in the labor force will imply that firms must change their labor practices in the coming decades. My estimates suggest that the labor force will get older and more female. The aging will not be as pronounced for males as for females because the trend toward early retirement among males will offset demographic changes. The size of the labor force will grow until around 2012 and then will decline. Given these changes, there are a number of issues that face employers. First, the aging workforce may mean an increase in the size of the firm's current deficit, defined as the difference between sales and labor cost. Second, under these circumstances, firms may do well to invest in assets that are highly correlated with the nominal wage bill liability. Short-term treasury bills are a good candidate, as is, paradoxically, putting pension assets back in the capital of the firm itself. This strategy can reduce the risk of bankruptcy. Third, explicit buyouts are the easiest way to reduce the size of the elderly workforce. But this will not help the individual firm's deficit problem. Fourth, declining ages of retirement among males can be reversed by changes in social security policy. A decline in real benefits and increase in the age of entitlement are likely to have the largest effects on raising the retirement age.

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No abstract is available for this paper.

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A common theme which runs through much of the investment literature is that private incentives may lead to sub-optimal levels of investment activity. The idea has been extended casually to consideration of human capital investment as well. It is sometimes contended that decisions, made by parents, have adverse effects on their offspring, which could be prevented if inter-generational contracts could be struck. If so, a case can be made for government intervention or subsidization programs to alleviate these intergenerational externalities. Specifically, the sub-optimal investment in offspring human capital may take such obvious forms as poor clothing, too little health care, or too few resources devoted to the child`s education. Less obvious externalities may result when parents underinvest in themselves because they fail to consider spillover benefits to their children. Parental schooling, for example, may affect the child`s ability (or desire) to learn. Dietary patterns established by parents for themselves may influence the child`s eating habits and affect his health. More directly, healthy parents are less likely to transmit diseases to their offspring. This paper will examine the effects of these intergenerational externalities in greater detail.

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In this paper, another aspect of optimizing behavior is considered. Specifically, it asks whether variations in levels of attained schooling across groups can be explained by a model that assumes that capital markets are perfect and that individuals maximize wealth. The logic of the analysis proceeds as follows: First, a model is constructed that allows estimation of costs and returns to education for each individual, based on the assumption that all individuals face the same borrowing rates. Given costs and returns, one can obtain an optimal wealth-maximizing level of education for each individual. Differences between actually acquired and wealth-maximizing levels of education can then be calculated, and one can determine whether or not the residuals are systematically related to background variables. If, for example, low-income individuals have a consistently larger estimated wealth-maximizing level of education than actual level, one could conclude either that returns to schooling differed between groups or that capital market differences exist. The model allows these two explanations to be distinguished. Since differential returns are caused by wage differences across groups, the wealth-maximizing level can take these labor market variations into account. Any residual variation will be due to factors other than differential wage rates, presumably capital cost differences .

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Many job changes occur without intervening spells of unemployment.A model is constructed in an attempt to understand this phenomenon. It implies that the best workers are hired away first because, with imperfect information, prices do not fully adjust for quality. Thus, there develops stigma associated with failing to receive outside offers. The force of the stigma,which affects wages, depends upon the likelihood of discovering a worker`s ability, the size of the market, and the speed of diffusion of information. In some occupations, it implies that there quickly develop pronounced differ-ences in the treatment of raided and unraided workers. A consequenceis a theory of occupational wage dispersion. The Peter Principle-that workers are promoted to a level of incompetence-is a direct implication.The model can be applied to product markets as well to explain the relationship between price and time on the shelf.

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We investigate the relationship between current schooling and current wage rates. Casual observation seems to reflect a discontinuity in wage rate growth which occurs when an individual completes school and joins the labor force as a permanent member. This suggests that the time spent in work while attending school is in some sense secondary. Here, the marginal value of the individual's time is considerably lower than the average value of his time. The problem is essentially one of "anti-complementarities" between the production of human capital through formal schooling and working in the primary occupation. More generally, the productivity of an individual's time in one endeavor is not independent of how the rest of his time is spent. If this is the case, students will be willing to accept lower paying jobs which do not greatly diminish the productivity of school time in lieu of jobs offering higher wages at the cost of a greater reduction in school time productivity. The wages of students, other things constant, are about 12% lower than those of non-students. The magnitude of this wage differential is surprisingly large and warrants investigation on empirical grounds alone. This paper explores the empirical relationship and examines various explanations for it. Finally, implications of the analyses are discussed.

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