Knowledge that Transforms

We study the relationship among productivity, management practices, and employee ability using German data combining management practices surveys with employees’ longitudinal earnings records. Including human capital reduces the association between productivity and management practices by 30%–50%. Only a small fraction is accounted for by the higher human capital of the average employee at better-managed firms. A larger share is attributable to the human capital of the highest-paid workers, that is, the managers. A similar share is mediated through the pay premiums offered by better-managed firms. We find that better-managed firms recruit and retain workers with higher average human capital.

Decomposing the year-to-year changes in the earnings distribution from 2004 to 2013, we analyze the role of the employer in explaining earnings inequality in the United States. Movements between the bottom, middle, and top involve 20.5 million workers each year. Another 19.9 million move between employment and nonemployment. There are large gains from working at a top-paying firm for all skill types. Working for a high-paying firm produces benefits today, through higher earnings, that persist through an increase in the probability of upward mobility. High-paying firms facilitate moving workers to the top of the distribution and keeping them there.

How does firm value change in response to a minimum wage hike? This paper exploits the announcement of a big change in the UK minimum wage that was both totally unanticipated and free of uncertainty. The stock market response to this is examined in an event study setting. The analysis uncovers significant falls in the stock market value of low-wage firms. In light of this finding, the paper concludes by discussing magnitudes of response, including longer-term modes of firm adjustment to the cost shock induced by the minimum wage hike.

Identifying policy-relevant treatment effects from randomized experiments requires the absence of spillovers between participants and nonparticipants (SUTVA) or variation in observed treatment levels. We find that SUTVA is violated for a Danish activation program for unemployed workers. Using a difference-in-differences model, we show that nonparticipants in the experiment regions find jobs more slowly after the introduction of the program than workers in other regions. We estimate an equilibrium search model to identify the policy-relevant treatment effect. A large-scale rollout of the program is shown to decrease welfare, while a standard partial microeconometric cost-benefit analysis concludes the opposite.

We study the migration behavior of displaced workers and find that job displacement increases regional mobility. We find, however, that noneconomic factors, such as family ties, are very important for the migration decision and that there is strong heterogeneity in outcomes. We find large income losses for workers who move to regions where they have family or to rural areas, while, for example, rural to urban movers realize a significant long-term earnings increase. We also find that life events related to fertility, divorce, and new relationships correlate with mobility after job loss and may partly explain the large income losses.

We synthesize two related literatures on firm-level drivers of wage inequality. Studies of rent sharing that use matched worker-firm data find elasticities of wages with respect to value added per worker in the range of 0.05–0.15. Studies of wage determination with worker and firm fixed effects typically find that firm-specific premiums explain 20% of overall wage variation. To interpret these findings, we develop a model of wage setting in which workers have idiosyncratic tastes for different workplaces. Simple versions of this model can rationalize standard fixed effects specifications and also match the typical rent-sharing elasticities in the literature.

We survey the literature on estimating risk preferences using field data. We concentrate our attention on studies in which risk preferences are the focal object and estimating their structure is the core enterprise. We review a number of models of risk preferences—including both expected utility (EU) theory and non-EU models—that have been estimated using field data, and we highlight issues related to identification and estimation of such models using field data. We then survey the literature, giving separate treatment to research that uses individual-level data (e.g., property-insurance data) and research that uses aggregate data (e.g., betting-market data). We conclude by discussing directions for future research.

The importance of evolutionary forces for comparative economic performance across societies has been the focus of a vibrant literature, highlighting the roles played by the Neolithic Revolution and the prehistoric "out of Africa" migration of anatomically modern humans in generating worldwide variations in the composition of human traits. This essay provides an overview of the literature on the macrogenoeconomics of comparative development, underscoring the significance of evolutionary processes and of human population diversity in generating differential paths of economic development across societies. Furthermore, it examines the contribution of a recent hypothesis set forth by Nicholas Wade, regarding the evolutionary origins of comparative development, to this important line of research.

This essay reviews Nancy MacLean’s Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America, which triggered a huge controversy that virally spread on the Internet and in various journals. We will evaluate MacLean’s almost biographical account of James Buchanan, which portrays the 1986 Nobel Prize laureate as the mastermind behind today’s attacks, by the foot soldiers of the radical right, on American democracy. This essay develops three main points. One, MacLean’s general narrative puts too much emphasis on Buchanan and largely neglects the many other important characters who contributed to the intellectual criticism of government intervention. Two, MacLean’s account is marred by many misunderstandings about public choice theory, for instance about the role that simple majority rule plays in constitutional economics. Third, in the midst of abundant archival material, her historical narrative is, at best, sketchy, and is replete with significantly flawed arguments, misplaced citations, and dubious conjectures. Overall, MacLean tends to overinterpret certain aspects in Buchanan’s life and thought, while she overlooks others that are equally important in understanding his work and influence. In particular, we stress that Buchanan was, first and foremost, a scholar, not a political activist, who gave significant attention to ethical considerations in his analysis of markets.

Social neuroscience studies the “social brain,” conceived as the set of brain structures and functions supporting the perception and evaluation of the social environment. This article provides an overview of the field, using the book Social Neuroscience: Brain, Mind, and Society (Russell K. Schutt, Larry J. Seidman, and Matcheri S. Keshavan, editors) as a starting point. Topics include the evolution of the social brain, the concept of “theory of mind,” the relevant brain networks, and documented failures of the social brain. I argue that social neuroscience and economics can greatly benefit from each other because the social brain underlies interpersonal decision making, as studied in economics.