Career and Non-Career Jobs: Dangling the Carrot

Abstract

Using a novel theoretical framework for a model economy with "career" and "non-
career" jobs, this study investigates the effects on the labor market when the payment
structure is according to rank which divides the workers into different classes based
on merit, with higher reward per unit of effort for the higher ranks. Labor effort in
the lower ranks thus depends not only on the wage but also on the probability to get
promoted to the higher positions. Therefore, the labor supply implies that the wage
is lower than the marginal rate of substitution. Firms take advantage of the workers'
ambition to climb the company's employment hierarchy and manage to offer a wage
to the lower (higher) ranks that is lower (higher) than the marginal product. The
framework can provide interesting insights into various puzzles such as the wage gap
between men and women, the cyclicality of the labor wedge and the low volatility of
the real wage relative to hours and output along the business cycle without imposing ad-hoc nominal wage rigidities.

Keywords: career-jobs, wage gap, labor wedge, company hierarchy

JEL Classification: J01, J20, J31, J33