Economists Try to Crack The Compensation Puzzle

Seemingly irrelevant characteristics, including beauty, height, obesity, and even whether one keeps a clean house, are often robust predictors of earnings,” write three well-credentialed economics professors in the December issue of the Journal of Economic Literature.

The italics are theirs. A follow-up sentence, also in italics, reads: “The puzzle is to explain why these apparently irrelevant traits earn a competitive reward in labor markets.”

The article is called “The Determinants of Earnings: A Behavioral Approach,” and it’s written by Professors Samuel Bowles and Herbert Gintis of the University of Massachusetts, and Melissa Osborne of Towson University. Do Messrs. Bowles and Gintis and Ms. Osborne really believe the abovementioned traits are “apparently irrelevant” to the salaries people earn? They seem to, since they inform us upfront that the only way to unlock the puzzle is through a “parsimonious and non-ad hoc” mathematical model of employer/employee behavior.

Their zeal for precision doesn’t always apply to the way they put things. For example, obesity just can’t be one of those traits receiving a “competitive reward in labor markets.” And matters get only worse once we learn about that Ultimate Model capable of unlocking the Grand Puzzle, albeit in a parsimonious way.

According to the authors — and they really mean this — the key lies in appreciating a) the persistence of “disequilibrium rents arising from technological or other shocks,” and b) the fact that “labor services are not subject to costly enforceable contracts.”

By point A they mean the economy is never in that never-never land of “equilibrium,” but always in flux. And change brings financial opportunity, not just to the entrepreneurial folks, but also to workers who just happen to have the right skills at the right moment. So if, say, you’re a divorce lawyer at a time when the divorce rate is suddenly on the rise, for a while you’ll earn a premium for your labor — a “disequilibrium rent.”

By point B, they mean that while it’s possible for an employer to draw up an enforceable contract specifying the quantity of hours an employee works, no such contract can specify the quality of that work.

Now, what does all this have to do with the fact that obese folks get paid less and tall folks more? Answer: just about nothing.

Just before the authors run us through the math of their model, they explain the basic point. In the disequilibrium world, the only contract that can be enforced on the employee is that he “agree to accept the employer’s authority during the hours of work.” So when it comes to monitoring the quality of that work, the employer has two choices. He can take the time to do it himself, or he can delegate that job to other employees.

But therein lies the rub, say the authors: “Where one employee is expected to monitor other employees, different behavioral traits, physical characteristics, or modes of self-presentation … might be highly valued by employers.”

So our economists finally have cracked the puzzle. If only the employer had direct knowledge of the employee’s performance on the job, then his/her beauty, obesity, height, or habit of keeping a clean house would make no difference! But since he doesn’t, they do.

But gosh, keeping a clean house isn’t a trait the employer can directly monitor anyway, unless he takes the trouble to visit the employee’s home. And if, by weird chance, he does pay that visit, he will know something of value about the employee’s job performance, since a clean house indicates the employee is probably a good worker — especially if his work is cleaning houses.

As for beauty, beautiful people will tend to earn a higher wage premium even if the employer were directly monitoring their performance. That’s because, at least in the service sector where most of us work, performance evaluations will generally be rough and approximate. So people of beauty whose job performance falls in the broad range of acceptable-to-good will be promoted sooner than ugly folk who do about as well.

And besides, beauty isn’t just a skill, it’s an output. And whenever that’s the case, employers can very easily monitor the quality of that output through the simple act of gazing. But since demand for that output almost always exceeds the supply, beauteous folks will command a premium for that output.

Some of the obvious examples of people who get paid, in part, to “produce” beauty include actors, actresses, models, call girls, strippers, waiters, waitresses, secretaries, receptionists and salespeople. And being tall commands a premium in the job market for reasons very similar to beauty.

And as for why obese people suffer a discount — well, just about the only addictions society seem to tolerate these days are addictions to caffeine and sex. The palpable results of food addiction are certainly condemned, if not the addiction itself.

Now, economics tells us that when victims of discrimination receive a lower wage than others, competing employers eventually will see the advantage of hiring them away at a higher wage. The reason: These employers will seek to profit from the wider-than-average spread between the productivity of these people and the wage they receive. This corrective process has happened both with African-Americans and with women.

But when most of society harbors those bigoted feelings, as it certainly does against obesity, that corrective process may never occur. And of course, there may be some truth in the feeling that obese folks are less productive than most.

At another point in the article, Messrs. Bowles and Gintis and Ms. Osborne report that, according to one survey of establishments reporting a “‘skill shortage,’ personnel managers identified the recruitment problem as ‘lack of technical skills’ in 43% of the cases, but ‘poor attitude, motivation, or personality’ in a remarkable 62% of the cases.

Here the italics are mine. Since the authors are college professors, they presumably teach in addition to publishing. “Attitude” and “motivation” are virtually buzzwords in the classroom world. So what teachers of economics would call it “remarkable” that these traits can be more important than the technical skills that workers with a good attitude usually can acquire anyway? Teachers of economics.

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