MICHAEL RAITH, University of Rochester - Simon School
Email: raith@simon.rochester.edu

In many occupations, the consequences of an agent's actions become known only over time. Should a principal then compensate an agent based on early but noisy information about performance, or later but more accurate information, or both? To answer this question, I study a two-period model in which a principal can pay a risk-averse agent based on both true output, which is realized with delay, and an early signal of output. The agent can borrow against future income, and can commit to a long-term contract. I show that under very general conditions, the optimal wage contract depends on the early signal as well as on output even if the signal is merely a noisy version of output; that is, if the signal is uninformative of effort. Specifically, for given output levels, better signals are on average associated with higher wages. Thus, an important characteristic of any performance measure is the time at which it is generated, which expands the range of signals useful for contracting well beyond that implied by the classic Informativeness Principle. The results also shed light on the use of forward-looking performance measures such as stock returns in managerial incentive contracts.

LOUISE FOX, World Bank - Office of the Chief Economist
Email: lfox@worldbank.org
ANA MARIA OVIEDO, World Bank
Email: aoviedo@worldbank.org

Using recent matched employer-employee data from the manufacturing sector in 20 Sub-Saharan African countries, the authors analyze how the supply of skills and legal origin of the country affect the wage setting process. The wage analysis yields three main findings. First, increasing returns to education, especially for older workers, suggest that the expansion of education in Africa has reduced returns to education for entrants in the labor market. Second, age effects matter not just for returns to education, but also for the wage setting process more generally. In particular, in civil-law countries, returns to seniority are rewarded only after a certain age. Third, workers exercise some power in the wage setting process but their influence varies by linguistic group. In common-law countries, union presence benefits all workers equally, not just members, whereas in civil-law countries, only older members enjoy higher wages. The authors also contrast wage premia with relative marginal productivities for different age, occupation, and education categories. The findings show that in general, older, highly educated, and highly ranked workers receive wage premia that do not reflect a higher relative marginal productivity.

JOHN H. PENCAVEL, Stanford Institute for Economic Policy Research (SIEPR), Institute for the Study of Labor (IZA)
Email: PENCAVEL@LELAND.STANFORD.EDU

Can conventional economic analysis help in defining and measuring the success of labor unions? In this paper, a general indicator of union welfare is proposed and particular expressions for the wage and employment objectives of unions are rearranged to derive measures of union success or welfare. These indicators combine two measures: union density and the relative union-nonunion wage gap. The indicators are applied to describe the movement of union welfare in the United States over the past eighty years, the differences in union success among groups of U.S. workers, and the variation in union well-being across countries.

TEODORA PALIGOROVA, Bank of Canada
Email: tpaligorova@bankofcanada.ca

According to the rent-extraction hypothesis, weak corporate governance allows entrenched CEOs to capture the pay-setting process and benefit from events outside of their control - get paid for luck. In this paper, I find that the independence requirement imposed on boards of directors by the Sarbanes-Oxley Act of 2002 (SOX), together with the governance regulations subsequently introduced by stock exchanges, affects CEO pay structure. In firms whose corporate boards were originally less independent, and thus more affected by these provisions, CEO pay for performance strengthened while pay for luck decreased after adopting SOX. In contrast, those firms that exhibited strong board independence prior to SOX showed little evidence of pay for luck and little change in pay for performance following the adoption of SOX. The results are consistent with the rent-extraction hypothesis and robust to alternative explanations such as asymmetric benchmarks, market structure, and managerial talent.

PIERRE LEFEBVRE, University of Quebec at Montreal (UQAM) - Department of Economics
Email: lefebvre.pierre@uqam.ca
PHIL MERRIGAN, University of Quebec at Montreal (UQAM)
Email: merrigan.philip@uqam.ca
MATTHIEU VERSTRAETE, University of Quebec at Montreal (UQAM)
Email: verstraete.matthieu@courrier.uqam.ca

Effects of a low-fee universal childcare policy, initiated in Quebec, the second most populous province in Canada, on the cognitive development of preschool children are estimated with a sample of 4- and 5-year-olds (N=8,875; N=17,154). In 1997, licensed and regulated providers of childcare services began offering daycare spaces at the reduced fee of $5 per day per child for children aged 4. By 2000, the low-fee policy applied to all children aged 0 to 59 months (not in kindergarten). The study uses 6 cycles of biennial data drawn from Statistics Canada's National Longitudinal Survey of Children and Youth (1994-2004) and quasi-experimental estimation methods to provide evidence that the policy had substantial negative effects on preschool children's Peabody Picture Vocabulary Test scores. The negative effects are found to be stronger for children with mothers who have lower levels of education.

YAEL V. HOCHBERG, Northwestern University - Kellogg School of Management
Email: y-hochberg@kellogg.northwestern.edu
LAURA ANNE LINDSEY, Arizona State University - Finance Department
Email: laura.lindsey@asu.edu

We examine how options granted to non-executive employees affect the performance of the firm by exploring the link between the implied incentives of the option portfolio and firm operating performance. We employ an instrumental variables approach that combines information about the characteristics of the labor market in which firms compete with information on firm option programs from the IRRC to identify causal effects. Firms whose non-executive employee option portfolios have higher implied incentives exhibit higher subsequent operating performance. The incentive-performance effect is concentrated in smaller firms and in firms with higher growth opportunities. Additionally, the effect is concentrated in firms that grant options broadly to non-executive employees, consistent with theories of mutual monitoring among co-workers.

SANTIAGO BAZDRESCH, University of Minnesota - Finance Department
Email: sbazdresch@csom.umn.edu
FREDERICO BELO, University of Minnesota
Email: fbelo@umn.edu
XIAOJI LIN, London School of Economics
Email: x.lin6@lse.ac.uk

We document that the firm level hiring rate predicts stock returns in the cross-section of US publicly traded firms even after controlling for investment, size, book-to-market, momentum, net stock issues, accruals, asset growth and profitability. The predictability shows up in all size groups (micro caps, small and large firms) and in both Fama-MacBeth cross sectional regressions and in portfolio sorts. We propose a production-based asset pricing model with adjustment costs in labor and capital that explains the main empirical findings. We derive a novel stock return decomposition that expresses the firms' stock return in terms of firms' characteristics, in particular the firms' investment and hiring rates. The model implies that investment and hiring rates predict stock returns because these variables are proxies for the firms' time-varying conditional betas. The model also implies that hiring (investment) is more informative about future returns for labor intensive (capital intensive) firms which we verify in the US data.

PHILIPPE AGHION, Harvard University - Department of Economics, Centre for Economic Policy Research (CEPR), National Bureau of Economic Research (NBER)
Email: paghion@fas.harvard.edu
YANN ALGAN, Universite Paris I Pantheon-Sorbonne - CNRS-EUREQUA, Institute for the Study of Labor (IZA)
Email: yann.Algan@univ-paris1.fr
PIERRE CAHUC, National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE), Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA), National Center for Scientific Research (CNRS), Centre for Economic Policy Research (CEPR), Institute for the Study of Labor (IZA)
Email: cahuc@ensae.fr

Can public policy interfere with culture, such as beliefs and norms of cooperation? We investigate this question by evaluating the interactions between the State and the Civil Society, focusing on the labor market. International data shows a negative correlation between union density and the quality of labor relations on one hand, and state regulation of the minimum wage on the other hand. To explain this relation, we develop a model of learning of the quality of labor relations. State regulation crowds out the possibility for workers to experiment negotiation and learn about the true cooperative nature of participants in the labor market. This crowding out effect can give rise to multiple equilibria: a good equilibrium characterized by strong beliefs in cooperation, leading to high union density and low state regulation; and a bad equilibrium, characterized by distrustful labor relations, low union density and strong state regulation of the minimum wage. We then use surveys on social attitudes and unionization behavior to document the relation between minimum wage legislation and the beliefs about the scope of cooperation in the labor market.