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New Models of Search and Labor Market Institutions

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, International 4
Hosted By: American Economic Association
  • Chair: Costas Meghir, Yale University

CEO Pay and the Rise of Relative Performance Contracts: A Question of Governance

John Van Reenen
,
Massachusetts Institute of Technology
Brian Bell
,
King's College London

Abstract

Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this, we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders’ return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial “pay-for-luck” as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this “compensation effect” is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance

Work and Grow Rich: The Dynamic Effects of Performance Pay Contracts

Christos Makridis
,
Massachusetts Institute of Technology

Abstract

This paper studies the rise of performance pay contracts and their aggregate effects on the labor market. First, using the Panel Study of Income Dynamics and National Longitudinal Survey of Youth, I document three patterns: (i) the share of performance pay workers grew from 15% in 1970 to 50% by 2000, (ii) performance pay workers experience higher earnings levels and growth rates and work longer hours, and (iii) invest more in their on-the-job human capital. These differences persist even when comparing similar jobs in the same establishment using the National Compensation Survey. Second, I build a dynamic Roy model with heterogeneity in performance pay, time-varying probabilities of receiving performance pay, and human capital accumulation. The model is calibrated using simulated method of moments on the NLSY79. Third, I use my model to gauge the role of incentives, the contribution of performance pay to rising earnings inequality, and evaluate a recently proposed counterfactual 73% marginal tax rate.

The Gender Gap: Micro Sources and Macro Consequences

Christian Moser
,
Columbia University
Iacopo Morchio
,
University of Vienna

Abstract

Using administrative linked employer-employee data and a structural equilibrium search model, we study the role of the firm in determining gender gaps in pay and participation. Using the data, we find that half of the gender wage gap is due to differences in pay between employers, with women working at systematically lower-paying firms. Using the model, we estimate to what extent these gender pay differences between firms reflect employer discrimination versus gender-specific amenities versus productivity differences. We use the estimated model to quantify the equilibrium effects of discrimination on the gender gaps in pay and participation. We find substantial gaps arising even in an economy where not all employers discriminate against women in the labor market.

Employment, Training and Human Capital Accumulation

Richard Blundell
,
University College London
Monica Costa-Dias
,
U.K. Institute of Fiscal Studies
Costas Meghir
,
Yale University

Abstract

In this paper we examine the role of employer provided training in human capital accumulation and careers of men and women. We focus both on men and on women for whom we examine the role of training both before and after fertility episodes. Using data on actual training offered by firms we evaluate its effect on earnings based on an IV strategy that exploits variations in the tax credit withdrawal rates as well as variations in beginning of period training intensity by location and industry. While we do establish positive and significant returns to this training it is well understood that some of the returns, at least initially, will be incident on the firm that may have funded it. We thus specify and estimate a model of employment and wage determination with labor market frictions and human capital accumulation, including training, that allows us to understand the extent to which firms fund training and the share that workers obtain of the returns. In this model both wages and training are endogenous and are chosen to satisfy equilibrium in the labor market. We estimate separate models for men and women for whom we also allow for the possibility of having children. The model is estimated and we then carry out counterfactual simulations to understand better how policy can improve the provision of training.
Discussant(s)
Steven Kaplan
,
University of Chicago
John Rust
,
Georgetown University
Paul Beaudry
,
University of British Columbia
Rasmus Lentz
,
University of Wisconsin-Madison
JEL Classifications
  • J3 - Wages, Compensation, and Labor Costs
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy