Workers' Trust Funds and the Logic of Wage Profiles

20 Pages Posted: 5 Jul 2004

See all articles by George A. Akerlof

George A. Akerlof

University of California, Berkeley; National Bureau of Economic Research (NBER)

Lawrence F. Katz

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1988

Abstract

This paper defines a concept, a worker's trust fund, which is useful in analyzing optimal age-earnings profiles. The trust fund represents what a worker loses if dismissed from a job for shirking. In considering whether to work or shirk, a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort. This concept is used to show that the implicit bonding in upward sloping age-earnings profiles is not a perfect substitute for an explicit upfront performance bond (or employment fee). It is also shown that the second-best optimal earnings profile in the absence of an upfront employment fee pays total compensation in excess of market clearing in a variety of stylized cases.

Suggested Citation

Akerlof, George A. and Katz, Lawrence F., Workers' Trust Funds and the Logic of Wage Profiles (March 1988). NBER Working Paper No. w2548, Available at SSRN: https://ssrn.com/abstract=425574

George A. Akerlof (Contact Author)

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Lawrence F. Katz

Harvard University - Department of Economics ( email )

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