In labor market equilibrium, sectoral differences in "natural" rates of unemployment generate a conformable distribution of wage differentials that compensate workers for bearing unemployment risk. This paper offers new empirical evidence on the determinants of this equilibrium. The analysis consists of two stages. First, I estimate a three-state model of employment and unemployment that identifies the determinants of individuals' rates of entering and leaving unemployment spells. Sectoral, demographic, and policy-induced differences in unemployment probabilities evolve naturally from this framework. Second, I estimate the impact of these differences on the distribution of wages. An important finding is the powerful impact of the unemployment insurance (UK) system both on unemployment and on equalizing wage differences. The evidence is strong that the availability of UK increases unemployment, while simultaneously reducing the magnitude of compensating wage differentials. Most of the effect of UK on unemployment is due to an increased probability of entering spells of unemployment, mainly temporary layoffs, though the duration of spells is also affected. Neglect of the role of UK as a substitute for wages partially accounts for the small compensating differentials estimated in previous research. In the absence of UK, each point of anticipated unemployment raises an individual's wage by about 2.5%.

This paper studies the processes of wage and employment dynamics within local labor markets. The theoretical context is a dynamic spatial equilibrium among locales that is supported by incentives to migrate to markets offering the greatest present value of future earnings. Thus costly migration arbitrages geographic wage differences. Using a time series of cross-sectional files from the Current Population Surveys of 1977-79, I find that wages are sensitive to interarea differences in market conditions. A positive relative shock to local labor demand increases relative wages within a locale, but expectations of future demand actually reduce current wages because of increased current migration. Thus wages are more flexible in response to transitory changes in local market conditions than to permanent ones. Consistent with theory, wages are most flexible among the least mobile demographic groups, who are inelastically supplied across geographic areas.

This paper studies the processes of wage and employment dynamics within local labor markets. The theoretical context is a dynamic spatial equilibrium among locales that is supported by incentives to migrate to markets offering the greatest present value of future earnings. Thus costly migration arbitrages geographic wage differences. Using a time series of cross-sectional files from the Current Population Surveys of 1977-79, I find that wages are sensitive to interarea differences in market conditions. A positive relative shock to local labor demand increases relative wages within a locale, but expectations of future demand actually reduce current wages because of increased current migration. Thus wages are more flexible in response to transitory changes in local market conditions than to permanent ones. Consistent with theory, wages are most flexible among the least mobile demographic groups, who are inelastically supplied across geographic areas.

Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism--arbitrary rewards and less productive job assignments--against supervisors' demands for authority over subordinates. The authors analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules.

Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism--arbitrary rewards and less productive job assignments--against supervisors' demands for authority over subordinates. We analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules.