Archive | 2021
Career and Non-Career Jobs: Dangling the Carrot
Abstract
Using a novel theoretical framework for a model economy with career and non-<br>career jobs, this study investigates the effects on the labor market when the payment<br>structure is according to rank which divides the workers into different classes based<br>on merit, with higher reward per unit of effort for the higher ranks. Labor effort in<br>the lower ranks thus depends not only on the wage but also on the probability to get<br>promoted to the higher positions. Therefore, the labor supply implies that the wage<br>is lower than the marginal rate of substitution. Firms take advantage of the workers <br>ambition to climb the company s employment hierarchy and manage to offer a wage<br>to the lower (higher) ranks that is lower (higher) than the marginal product. The<br>framework can provide interesting insights into various puzzles such as the wage gap<br>between men and women, the cyclicality of the labor wedge and the low volatility of<br>the real wage relative to hours and output along the business cycle without imposing ad-hoc nominal wage rigidities.