Knowledge that Transforms

We conduct an experimental analysis of final offer arbitration (FOA) with differentially informed players. Under FOA, the arbitrator must choose one of the two submitted offers. In our control, the uninformed player makes an offer to the informed player prior to the submission of offers to the arbitrator. The treatment allows negotiation after offers are submitted to the arbitrator. Because these offers are potentially binding, they may transmit privately held information and, thereby, lower the dispute rate. We find that allowing negotiation in the face of potentially binding offers lowers the dispute rate by 27 percentage points.

The assumption of constant returns in the matching function, embodied in most bilateral search models, is crucial to ensure the uniqueness of the unemployment rate along a steady‐state growth path. This article explores the empirical viability of this assumption by estimating individual reemployment probabilities on a sample of unemployment entrants. I apply hazard models to survey data on both completed and uncompleted unemployment durations. The hypothesis of constant returns to matching is not rejected, on the basis of the evidence that the job‐finding hazard depends only on local labor market tightness and is independent of its size.

A large literature attempts to explain compensation and personnel policies in large organizations. Three features of the U.S. military system—flat rank spreads in pay, a relatively generous pension, and heavy reliance on up‐or‐out promotions—are at variance with common practices in large civilian organizations. This article develops a model of individual decision making in a large, hierarchical organization and uses the model to explain these apparent puzzles. The lack of lateral entry and heterogeneity in entrants’ abilities and preferences for military service play key roles in the observed policies.

In a world in which employment contracts are incomplete, it is costly for a firm to establish credibility for honoring implicit terms of employment agreements. By monitoring the employment relationships between the firm and its workers, the labor union may provide the workforce with valuable information regarding the firm's adherence to these implicit agreements. Thus, the union provides a signaling mechanism that allows workers to coordinate their actions in order to discipline the firm for a breach of the implicit contract. This mechanism enhances the firm's credibility when forming employment contracts and facilitates increased employment levels.

Evidence on wage cyclicality shows job changers have more procyclical wages than job stayers. Previous work argued this arises because workers gain greater access to jobs in sectors such as manufacturing that offer high wages. This article argues that workers who switch jobs in booms enter temporary jobs with unemployment risk and are merely compensated for subsequent losses. I demonstrate that the two explanations can be distinguished using the relationship between unemployment insurance and wage cyclicality among job changers. The evidence supports the compensation hypothesis; that is, that job changers might not experience real gains from higher‐paying jobs in booms.

Why do countries that impose employer sanctions to deter the illegal entry of foreign workers nevertheless grant amnesty to illegal immigrants? In this article, I provide a positive theory of amnesty provision in a model where the constrained optimal immigration reform, involving the joint use of employer sanctions and border interdictions, is time‐inconsistent. In particular, my framework demonstrates that host countries of immigration can enhance the credibility of their immigration reforms by “binding their own hands” and strategically granting a socially excessive amount of amnesty to illegal workers.

The employment effects of minimum wage noncompliance have been the focus of several theoretical contributions to the minimum wage literature, the dominating conclusion being that the noncomplying employer, while reducing employment below the free‐market level, will still employ more labor than he would if complying. Allowing, however, for partial compliance, this study applies a portfolio‐choice approach to the employer’s problem, concluding surprisingly that the minimum wage law may give rise to a full‐compliance employment effect even if it is partially evaded. This result is further shown to hold with regard to labor market laws in general.

Exploiting long term interindustry demand shifts, this article provides evidence that (1) industry‐level wages do not respond to industry demand conditions; (2) at the industry level, the employment of young workers responds more to demand shifts than does the employment of experienced workers; and (3) the postdisplacement wages of displaced workers are strongly affected by demand in their predisplacement industries. These findings are consistent with a model in which worker's investments in industry‐specific skills pose a barrier to interindustry labor mobility and wages do not respond to spot labor market conditions.

Theory predicts that minimum wages will reduce employer‐provided on‐the‐job training designed to improve workers' skills on the current job, but it is ambiguous regarding training that workers obtain to qualify for a job. We estimate the effects of minimum wages on both types of training received by young workers, exploiting cross‐state variation in minimum wage increases. Much of the evidence supports the hypothesis that higher minimum wages reduce formal training to improve skills on the current job. But there is little or no evidence of offsetting increases in training undertaken to qualify for or obtain jobs.

We investigate the relationship between financial wealth, reservation wages, and labor market transitions. Wealth is assumed to affect the level of the reservation wage and the employment probability. We test for the validity of this assumption by estimating a simultaneous‐equations model of reservation wages, labor market transitions, and wealth. The data used for the analysis relate to a sample of unemployed job searchers. We use subjective information on the reservation wage. Wealth is found to have a significantly positive impact on the reservation wage. The overall impact of wealth on the employment probability is negative though small.