Personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers. But it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme. However, when workers' rewards are based on relative comparisons, salary compression reduces uncooperative behavior that is detrimental to the firm. Relative comparisons imply that some reference group must be selected. The major result is that, within the relevant groups, some wage compression is efficient. Copyright 1989 by University of Chicago Press.

Personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers. But it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme. However, when workers' rewards are based on relative comparisons, salary compression reduces uncooperative behavior that is detrimental to the firm. Relative comparisons imply that some reference group must be selected. The major result is that within the relevant groups, some wage compression is efficient.

This paper offers an explanation of the use of mandatory-retirement clauses in labor contracts. It argues that the date of mandatory retirement is chosen to correspond to the date of voluntary retirement, but the nature of the optimal wage profile results in a discrepancy between spot wage and spot VMP (value of the worker's marginal product). This is because it is preferable to pay workers less than VMP when young and more than VMP when old. By doing so the "agency" problem is solved, so the contract with mandatory retirement is Pareto efficient. A theory of agency is presented and empirical evidence which supports the hypothesis is provided.

This paper offers an explanation of the use of mandatory-retirement clauses in labor contracts. It argues that the date of mandatory retirement is chosen to correspond to the date of voluntary retirement, but the nature of the optimal wage profile results in a discrepancy between spot wage and spot VMP (value of the worker's marginal product). This is because it is preferable to pay workers less than VMP when young and more than VMP when old. By doing so, the problem is solved, so the contract with mandatory retirement is Pareto efficient. A theory of agency is presented and empirical evidence which supports the hypothesis is provided.

The 1970 and 1979 Current Population Surveys are used to compute the personal distribution of income. The major innovation in this paper is that all individuals in the household are not treated identically. In particular, children receive a different proportion of income than do adults. That proportion is estimated. Its variations with respect to household characteristics are discussed, and a final distribution of personal income is computed. That distribution has considerably fatter tails than does the one normally used.

As the fields of personnel economics and organizational economics have become more visible in recent years, more economists, practitioners, and policymakers have become interested in the internal workings of firms. Fortunately, at the same time as interest in these areas has grown, new data sets have emerged that provide consistent personnel data from a wide variety of firms. This paper provides an example of how newly available data can be used to analyze internal labor markets and suggests how such data can be used to address other issues. Basic questions in personnel economics include how firms set wages and how people move between jobs (within and across firms). Answering these questions is essential to assessing the relative importance of theoretical models as explanations of the nature of employment relationships. These models include agency theory, matching, and search theory, among others. Historically, most attempts to study these models were limited to data sets that are drawn from a random sample of individuals with no identification of firms, such as the Current Population Survey (CPS). While much can be learned from such studies, much of the inference is indirect and the data may suffer from inconsistent or inaccurate self-reported data. An alternative strategy, used by, for example, Lazear (1992), George Baker et al. (1994), and Kenn Ariga et al. (1999), is to procure detailed personnel information from a single firm and use it to study the policies at that firm. While these papers were successful at providing details of the individual firms, they leave open the question of how widely the results generalize, especially given that the results are not consistent even across these three papers, which are based on different firms. An important step in getting past the limits of CPS-style and individual-firm data is to find data sets that provide employee details for numerous firms. Such data sets have been created in the United States, France, Sweden, and other countries. As John M. Abowd and Francis Kramarz (1999) show, these data sets take many forms and, like the data that preceded them, have varying strengths and weaknesses. They have already been used, according to Abowd and Kramarz (1999), in over 100 studies of more than 15 countries. That paper provides details on many of these studies, as well as comparing some of the features of the various data sets. Although the U.S. data have many virtues, they lack job information. A key advantage of the Swedish data used here is its detailed and accurate job classifications. This makes it possible to determine whether job openings are filled internally or externally and to follow employees as they change jobs. The data include many firms, a long panel of years, and accurate wage data, allowing the study of the relative importance of firms and jobs on wage changes and levels. The main results of this paper are as follows. First, the Swedish firms studied fill a significant † Discussants: Henry Farber, Princeton University; Lawrence Katz, Harvard University; Derek Neal, University of Chicago.

Partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie. But in organizations of any significant size, the free-rider effects would seem to choke off any motivational forces. This analysis explores how peer pressure operates and how factors such as profit sharing, shame, guilt, norms, mutual monitoring, and empathy interact to create incentives in the firm. The argument that Japanese firms enjoy team spirit because compensation is linked to overall profitability is analyzed. An explanation for the prevalence of partnerships among individuals in similar occupations is provided.

This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous inability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.

[This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous in ability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.]