In the United States, black workers earn less than their white counterparts and have higher rates of unemployment. Empirical work indicates that most of this wage gap is accounted for by differences in cognitive skills that emerge at an early age. In this paper, we demonstrate that the same is not true for black-white disparity in unemployment. A large unexplained unemployment differential motivates the paper's second contribution—a potential theoretical explanation. This explanation is built around a model that embeds statistical discrimination into the subjective worker evaluation process that lies at the root of the efficiency-wage theory of equilibrium unemployment.

From the standpoint of economic theory, the difficulty in regulating workers' performance distinguishes labor markets from commodity markets. Commodities do not respond to incentives. Workers, in contrast, can quit, steal, be hung over, refuse to cooperate with other workers, or generally work at low effort levels. Since direct monitoring is often costly and unreliable, it may not be the profit-maximizing solution to this problem. Economists have discussed various schemes to make productive behavior incentive-compatible for workers. The most frequently discussed schemes fall into two broad categories: efficiency wages and deferred compensation or bonding schemes.! These schemes have been suggested as explanations for a wide variety of labormarket features that appear anomalous from the conventional supply-and-demand perspective. Efficiency-wage models can generate equilibria in which there is involuntary unemployment and in which identical workers are paid different wages in jobs that are otherwise equally attractive. George A. Akerlof and Janet L. Yellen (1985) have argued that they can provide an important component of a model of business cycles. Deferred-compensation schemes have been proposed as explanations for upward-sloping age-earnings profiles, mandatory retirement, pensions, and hierarchical (tournament) promotion structures.2 Because bonding is costless to firms, efficiency-wage and bonding strategies are often viewed as mutually incompatible; profit-maximizing firms should offer efficiency wages only in situations where bonding is impossible. One widely held view argues that in labor markets where agency issues arise, these problems are effectively solved by various bonding arrangements (and moreover, that this observation helps to explain otherwise peculiar features of some labor markets, as mentioned above). It follows that efficiency wages do not generally exist. Proponents of efficiency-wage theory argue that there is considerable evidence of widespread agency problems (e.g., large expenditures by many firms on monitoring) and that there are barriers to the use of bonds, notably moral hazard on the part of firms or legal constraints. Efficiency wages cannot therefore be ruled out a priori as an equilibrium solution to these agency problems.3 In this paper we study these issues surrounding efficient worker compensation in a framework that allows heterogeneity among firms and integrates the financial and

We study the economics of employment relationships in large law firms. Our point of departure is the “property‐rights” approach that emphasizes the centrality of ownership’s legal rights to control significant nonhuman assets of the enterprise. From this perspective, law firms are an interesting object of study because the key asset in these firms is knowledge, particularly knowledge of the needs and interests of clients. We argue that two distinctive organizational features of law firms—the use of “up‐or‐out” promotion contests and the practice of having winners become residual claimants in the firm—emerge naturally in this setting.

The "efficiency wage hypothesis" offers an explanation for employment rents. According to this hypothesis, firms pay wages above the opportunity cost of labor to elicit productivity or quality-enhancing behaviors from employees. Firms pursue this strategy when alternative incentive schemes are unavailable or too costly. Thus, firms will not pay premium wages when employees post sufficiently large performance bonds. This article examines employment rents in a setting where employees post sizable performance bonds-large law firms. Contrary to the efficiency wage hypothesis, we find that associates in these large firms post substantial performance bonds while also receiving substantial, ex ante rents.

This paper describes an organizational setting in which professional employees are required to work inefficiently long hours. The focus of our investigation is large law firms. The income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard. Law firms use indicators of this propensity--especially an associate's record of billable hours--in promotion decisions. Reliance upon work hours as an indicator leads to a "rat-race" equilibrium in which associates work too many hours. We find evidence in support of this conclusion with data we collected from two large law firms.

This paper describes an organizational setting in which professional employees are required to work inefficiently long hours. The focus of the authors' investigation is large law firms. The income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard. Law firms use indicators of this propensity--especially an associate's record of billable hours--in promotion decisions. Reliance upon work hours as an indicator leads to a rat-race equilibrium in which associates work too many hours. The authors find evidence in support of this conclusion with data they collected from two large law firms.

Managed care organizations rely on incentives that encourage physicians to limit medical expenditures, but little is known about how physicians respond to these incentives. We address this issue by analyzing the physician incentive contracts in use at a health maintenance organization. By combining knowledge of the incentive contracts with internal company records, we examine how medical expenditures vary with the intensity of the incentive to cut costs. Our investigation leads us to a novel explanation for high‐powered group incentives: such incentives can improve efficiency in the allocation of resources when the allocation process is based on the professional judgment of multiple agents. Our empirical work indicates that medical expenditures at the HMO are 5 percent lower than they would have been in the absence of incentives.

We examine Becker's (1960) contention that children are "normal." For the cross section of non-Hispanic white married couples in the U.S., we show that when we restrict comparisons to similarly-educated women living in similarly-expensive locations, completed fertility is positively correlated with the husband's income. The empirical evidence is consistent with children being "normal." In an effort to show causal effects, we analyze the localized impact on fertility of the mid-1970s increase in world energy prices - an exogenous shock that substantially increased men's incomes in the Appalachian coal-mining region. Empirical evidence for that population indicates that fertility increases in men's income.

The Great Migration-the massive migration of African Americans out of the rural South to largely urban locations in the North, Midwest, and West-was a landmark event in U.S. HISTORY: Our paper shows that this migration increased mortality of African Americans born in the early twentieth century South. This inference comes from an analysis that uses proximity of birthplace to railroad lines as an instrument for migration.