Labor Studies

The NBER's Program on Labor Studies met in Cambridge on April 7. Program Director Richard B. Freeman and Lawrence F. Katz, both of NBER and Harvard University, organized the following agenda:

• Francine D. Blau, NBER and Cornell University, and Lawrence M. Kahn, Cornell University, "Do Cognitive Test Scores Explain Higher U.S. Wage Inequality?"
• Kevin M. Murphy and Robert H. Topel, NBER and University of Chicago, "The Economic Value of Increased Longevity and Medical Research"
• Christopher N. Avery, Harvard University; Christine M. Jolls and Alvin E. Roth, NBER and Harvard University; and Richard A. Posner, University of Chicago, "The Market for Federal Judicial Law Clerks"
• Canice Prendergast, NBER and University of Chicago, "The Tenuous Tradeoff of Risk and Incentives"
• Sandra E. Black, Federal Reserve Bank of New York, and Lisa M. Lynch, NBER and Tufts University, "What's Driving the Economy? The Benefits of Workplace Innovation" (NBER Working Paper No. 7479)
• David Neumark, NBER and Michigan State University, and Scott J. Adams, Michigan State University, "Do Living Wage Ordinances Reduce Urban Poverty?"

Using microdata from the 1994-5 International Adult Literacy Survey, Blau and Kahn examine the role of cognitive ability in explaining higher wage inequality in the United States than in other countries. They find that the greater dispersion of cognitive test scores in the United States does play a part in explaining higher U.S. wage inequality, but that higher labor market "prices" (that is, returns to measured human capital and cognitive performance) and residual inequality also are important for both men and women. Blau and Kahn find that, on average, "prices" are quantitatively much more important than differences in the distribution of test scores. Internationally, collective bargaining coverage turns out to be significantly and negatively related to wage differentials and significantly and positively related to employment differentials across skill groups. This suggests that unions lower wage differentials, causing a reduction in employment among the group whose wages are raised the most. The authors also find that a group's net labor supply (supply minus demand) is significantly negatively related to its relative wage but is not related to its relative employment level. Blau and Kahn conclude that both institutions and market forces affect labor market outcomes.

Murphy and Topel develop an economic framework for evaluating the social benefits of medical research. They begin with a model of the economic value of health and life expectancy, which they apply to U.S. data on overall and disease-specific mortality rates. They find that the historical gains from increased longevity have been enormous, on the order of $2.8 trillion annually from 1970-90. The reduction in mortality from heart disease alone has increased the value of life by about $1.5 trillion per year over the 1970-90 period. The potential gains from future innovations in health care are also extremely large. Eliminating deaths from heart disease would generate approximately $48 trillion in economic value, while a cure for cancer would be worth $47 trillion. Even a modest 1 percent reduction in cancer mortality would be worth about $500 billion. Unless costs of treatment rise dramatically with the application of new medical knowledge, these estimates indicate that the social returns to investment in new medical knowledge are enormous.

In September 1998, the Judicial Conference of the United States abandoned its latest attempt to regulate the timing of interviews and offers in the law clerk selection process. Avery, Jolls, Posner, and Roth empirically survey the further unraveling of the market since then, make comparisons with other entry-level professional labor markets, and evaluate some possibilities for reform.

Prendergast provides three simple reasons why there might not be a tradeoff of risk and incentives, and why incentives are more likely to be found in situations with considerable uncertainty. First, he shows that the effectiveness of input monitoring is lower in risky settings, so output-based pay may be the only way to induce appropriate efforts in uncertain situations. Second, firms use performance appraisals for reasons other than rewarding agents. Specifically, firms using subjective evaluation procedures worry about a tradeoff between incentives and worker selection in a way that results in higher incentives in noisier environments. Third, monitoring is often triggered by endogenous events, such as an impression of poor performance, and is less effective in noisy environments. To compensate for this reduced role for monitoring in uncertain environments, incentives are increased.

Using a unique nationally representative sample of U.S. establishments surveyed in 1993 and 1996, Black and Lynchexamine the relationship between workplace innovations and establishment productivity and wages. They match plant-level practices with plant-level productivity and wage outcomes and find a positive and significant relationship between the proportion of nonmanagers using computers and the productivity of establishments. They also find that firms that re-engineer their workplaces to incorporate more high performance practices experience higher productivity and higher wages. Profit sharing and stock options also are associated with increased productivity. However, increasing the use of profit sharing or stock options results in lower regular pay for workers, especially for technical workers and clerical/sales workers. Finally, increasing the percentage of workers meeting regularly in groups has a larger positive effect on both productivity and wages in unionized establishments.

Many cities in the United States recently have passed living wage ordinances. These ordinances typically mandate that businesses under contract with the city, or in some cases receiving assistance from the city, must pay their workers a sufficient wage to financially support a family. Neumark and Adams estimate the effects of these living wage ordinances on the wages and hours of workers in cities that have adopted such legislation. They also look at the effects of the ordinances on employment and poverty rates in these cities. They find that living wage ordinances boost the wages of low-wage workers. In addition, Neumark and Adams find that living wage ordinances have a weak negative effect on hours of low-wage workers and a strong negative effect on employment. Finally, they estimate that living wage ordinances may help to achieve modest reductions in urban poverty.