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Wage Trends as Performance Displays Productive Potential: A Model and Application to Academic Early Retirement

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Author Info
Smith Freeman
Abstract

Wage trends over the working career are explored in a two-period model assuming that workers have different intrinsic productivities which are manifested stochastically. Firms compete for a limited number of risk averse employees. The basic model, which was developed for the study of academic research employment, postulates that information on prospective productivity is symmetrically available to firm and worker. The "observed" pattern of academic wages is found to emerge: young faculty is underpaid and the less well paid older faculty is overpaid. The model is used to investigate early retirement plans intended to induce the latter group to retire. It is found that such plans can only be economically advantageous if the prorated overhead costs of a faculty member exceed the value of his output. The basic model is then reinterpreted to answer the general question: when and how should a firm discharge employees of low productivity? A contrasting asymmetrical information model is also introduced (employees have more information than employers). In the asymmetrical case, the composition of the labor force is endogenously determined by self-selection of prospective employees. Firing of employees with poor track records can also occur.

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Publisher Info
Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 8 (1977)
Issue (Month): 2 (Autumn)
Pages: 419-443
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Handle: RePEc:rje:bellje:v:8:y:1977:i:autumn:p:419-443

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  1. Khovanskaya, Irina & Sonin, Konstantin & Yudkevich, Maria, 2008. "Budget Uncertainty and Faculty Contracts: A Dynamic Framework for Comparative Analysis," CEPR Discussion Papers 6744, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Andrew Weiss & Henry Landau, 1985. "On the Negative Correlation Between Performance and Experience and Education," NBER Working Papers 1613, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Carolyn Pitchik & Aloysius Siow, 1997. "Self-Promoting Investments," Working Papers pitchik-97-01, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  4. Michael Waldman, 1990. "A Signalling Explanation for Seniority Based Promotions and Other Labor Market Puzzles," UCLA Economics Working Papers 599, UCLA Department of Economics. [Downloadable!]
  5. Nikolaos Theodoropoulos & John G. Sessions, 2009. "Tenure, Wage Profiles and Monitoring," University of Cyprus Working Papers in Economics 5-2009, University of Cyprus Department of Economics. [Downloadable!]
    Other versions:
  6. Roland Amann, 2004. "Self-Selection and Wage-Tenure Profiles for Heterogeneous Labor," Working Papers of the Research Group Heterogenous Labor 04-16, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim. [Downloadable!]
  7. Andrew Weiss & Henry Landau, 1987. "Validating Hiring Criteria," NBER Working Papers 2167, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. C Dougherty, 2000. "Impact of Work Experience and Training in the Current and Previous Occupations on Earnings: Micro Evidence from the National Longitudinal Survey of Youth," CEP Discussion Papers dp0456, Centre for Economic Performance, LSE. [Downloadable!]
  9. Cater, Bruce & Lew, Byron & Pivato, Marcus, 2009. "Why tenure?," MPRA Paper 14823, University Library of Munich, Germany. [Downloadable!]
  10. Ben T. Yu, 1984. "Comparative Productivity of Inventors in Emerging Research Organizations: Some Evidence from the U.S. Petroleum Industry," UCLA Economics Working Papers 331, UCLA Department of Economics. [Downloadable!]
  11. John Haltiwanger & Michael Waldman, 1983. "Why Bad Wokers Receive Raises," UCLA Economics Working Papers 301, UCLA Department of Economics. [Downloadable!]
  12. John Haltiwanger & Michael Waldman, 1984. "Insurance Aspects of Labor Market Contracting: An Overview," UCLA Economics Working Papers 348, UCLA Department of Economics. [Downloadable!]
  13. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  14. John Haltiwanger & Michael Waldman, 1985. "Insurance and Labor Market Contracting: An Analysis of the Capital Market Assumption," UCLA Economics Working Papers 370, UCLA Department of Economics. [Downloadable!]
    Other versions:
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