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Informal Incentives and Labor Markets

Matthias Fahn and Takeshi Murooka

No 9740, CESifo Working Paper Series from CESifo

Abstract: This paper theoretically investigates how labor-market tightness affects market outcomes if firms use informal and self-enforcing agreements to motivate workers. We characterize profit-maximizing equilibria and derive the following results. First, an increase in the supply of homogenous workers can increase wages. Second, even though all workers are identical in terms of skills or productivity, a discrimination equilibrium exists in which a group of majority workers are paid higher wages than a group of minority workers. Third, minimum wages can reduce such discrimination and increase employment. We discuss how these results are consistent with empirical evidence on immigration and a gender pay gap, and provide new testable implications.

Keywords: informal incentives; labor supply; immigration; wage discrimination; minimum wage (search for similar items in EconPapers)
JEL-codes: D21 D86 J21 J38 J61 J71 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-hrm
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