The Strength of Occupation Indicators as a Proxy for Skill

Labor economists have long used occupation indicators as a proxy for unobserved skills that a worker possesses. In this paper, we consider whether inter-occupational wage differentials that are unexplained by measured human capital are indeed due to differences in often-unmeasured skill. Using the National Compensation Survey, a large, nationally- representative dataset on jobs and ten different components of requisite skill, we compare the effects on residual wage variation of including occupation indicators and including additional skills measures. We find that although skills do vary across 3-digit occupations, occupation indicators decrease wage residuals by far more than can be explained by skill differentials. This indicates that “controlling for occupation” does not equate to controlling for skill alone, but also for some other factors to a great extent. Additionally, we find that there is considerable within occupation variation in skills, and that the amount of variation is not constant across skill levels. As a result, including occupation indicators in a wage model introduces heteroskedasticity that must be accounted for. We suggest that greater caution be applied when using and interpreting occupation indicators as controls in wage regressions.human capital measurement; job skills; occupation indicator variables

The informal sector, firm dynamics, and institutional participation

The informal microfirm sector is believed to be large, accounting for 20-40 percent of employment in many developing countries. The literature tends to view the sector as the disadvantaged sector of a segmented labor market, as existing to evade government regulations, or as constrained by lack of access to government services. The authors offer a unique theoretical framework to analyze informality and microfirm growth behavior -- one that emphasizes the entrepreneurial nature of informal firms and sees informality as a secondary characteristic. First, they assume that informal firms in developing countries have dynamics similar to firms in industrial countries: entrepreneurs have unobserved, differing cost structures that determine their long-run size and survival -- structures that they can only discover by going into business. Second, informality can be thought of as a decision to participate in societal institutions. Access to mechanisms that ensure property rights, pool risk, or enforce contracts become more important as a firm grows, and the entrepreneur will be willing to pay for them through"taxes"in a way that was not the case as a small firm. The combination of these assumptions generates several of the stylized facts emerging from cross-sectional data and identified in existing models -- informal firms tend to remain small and have high rates of mortality, and lower productivity -- without recourse to government-induced distortions in labor or product markets. Further, the framework predicts that firms whose cost structures dictate that they should expand will make the transition to formality as they grow. Using detailed observations from Mexico, the authors find their view consistent with patterns of formality and growth of microfirms.Public Health Promotion,Small and Medium Size Enterprises,Small Scale Enterprise,Decentralization,Microfinance,Private Participation in Infrastructure,Small Scale Enterprise,Microfinance,Governance Indicators,Environmental Economics&Policies

Optimizing Incentive Plan Design: A Case Study

We study effects of a firm's attempt to optimize an existing incentive scheme to increase sales growth for direct store delivery workers. Before optimization workers reported Ratchet Effects that lowered productivity. The altered incentive plan offered higher compensation for increased sales relative to a sales growth target, and lower compensation for failing to meet the target. We gathered data on performance and attitudes at pilot and control sites before and after the change. Relative to control sites, sales growth increased in the pilot sites by two percent, a meaningful contribution to firm profits. We find no change in distortion of effort or manipulation of the performance measure. Workers did not substantially change number of hours worked, though allocation of time across tasks changed slightly. Despite increased productivity, workers continued to report Ratchet Effects after the change. We also find that an unplanned price increase midway through a fiscal year affected the extent of Ratchet Effects that year.incentives, ratchet effect

Design and Implementation of Pay for Performance

A large, mature and robust economic literature on pay for performance now exists, which provides a useful framework for thinking about pay for performance systems. I use the lessons of the literature to discuss how to design and implement pay for performance in practice