Bryan Caplan  

"Do the Opposite": Efficiency Wages and Incentives for Employer Candor

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In a classic episode of Seinfeld, George Costanza realized that his instincts were fundamentally wrong, and vowed to "do the opposite":

George: Elaine, bald men, with no jobs, and no money, who live with their parents, don't approach strange women.

Jerry: Well here's your chance to try the opposite. Instead of tuna salad and being intimidated by women, chicken salad and going right up to them.

George: Yeah, I should do the opposite, I should.

Jerry: If every instinct you have is wrong, then the opposite would have to be right.

George: Yes, I will do the opposite. I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!

The same lesson often applies to government intervention. Yes, market failures do exist. But when you look at "corrective" policy, it often turns out to be the opposite of what economic theory recommends.

Case in point: Quite a few economists worry about so-called "efficiency wages." Carl Shapiro and Joe Stiglitz worked out the canonical version of the model. (If you have Jstor access, the whole article should be here). Suppose employers cannot perfectly monitor their employees. How can they maintain worker discipline? One route: Raise your employees' wages so you can scare them by threatening to fire them if they cross the line. People worry a lot more about losing a good job than a crummy job.

If everyone does this, the result is some permanent involuntary unemployment. Wages do not fall in response to the labor surplus because at lower wages, employees would stop worrying about getting fired and start misbehavin'.

The fundamental social problem of efficiency wages is that they cause involuntary unemployment. The higher the wage, the worse the problem. So how could you alleviate the problem? One simple method is to increase the stigma of getting fired. If stealing pencils goes on your "permanent record," you might think twice even if your current job is nothing special.

So what happens in the real world? Does the law force employees to candidly share information about wayward employees in order to dampen the effects of efficiency wages on employment? No way. It does the opposite. These days, employers are extremely reluctant to share negative information about a former employee because they might get sued. (This is especially true if the former employee is already in a "protected class" - i.e. is not a white male under the age of 40). If an employee steals pencils, you don't tell his next potential boss that he's a thief, because maybe the thief will find out and go to a lawyer. The law punishes honesty, not dishonesty, or silence.

If you seriously wanted to reduce the fall-out of efficiency wages, you wouldn't let employees sue former employers for narcing on them; you would let current employers sue their workers' past employers who covered up their on-the-job shenanigans!


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The author at voluntaryXchange in a related article titled Only In Utah? NOT! writes:
    The recent firing of untenured associate professor Stephen Roberds by Southern Utah University has ignited some smoldering discontent among some SUU students. There are a lot of bad feelings on campus right now, and the response by the SUU administration [Tracked on February 22, 2005 5:48 PM]
COMMENTS (13 to date)
Uriah Heep writes:

Great, now I'm going to lose out in a job opportunity because my former employer is missing a pencil.

Mathias writes:

As the comment above eludes to, your solution just gives too much unilateral power to the employer. There needs to be some kind of industrial jurisprudence in place to make sure workers aren't blacklisted by employers.
Secondly, employees who are caught stealing are normally reported to the police and if found guilty will have it recorded on their "permanent record" if future employers screen for it.
Third, given your scenario, what about the unemployment created by workers actively seeking work but unable to find it due to being blacklisted by employers?

jen larson writes:


I wonder about the assumption that high wages cause unemployment. Isn't that opposite to Henry Ford's idea that his workers should be able to buy his cars? Isn't the argument made that capitalism defeated socialism because an increasing percentage of wealth came to the workers? Don't many places with low wages have high unemployment?

I personally think there are lots and lots of variables involved. However now is a chance to test the thesis. The recent situation is an increasing amount of revenue going to business, less to workers. According to the concept presented this should dramatically increase unemployment and increase national wealth.

Is perhaps the claim that this isn't working because we don't have a blacklist just an excuse?

jeremyh writes:

Firstly, let us not conflate the quite separate notions of diligent vs less diligent behavior, as against lawful vs unlawful behavior. I think the stealing pencils example is a poor one, because it is instructive of the lawful-unlawful dimension, not the diligent/lazy one, and there are already plenty of consequences for unlawful behavior.

Diligence and loyalty ought to earn greater wages and indeed they do, and all this is explainable using standard supply and demand theory.

Given that the effect is specifically stated as beyond simple supply and demand, I think that efficiency wages must classified as a rent. If so, who benefits?

I think the current system pays rent to those employed in industries that benefit the most from retention and diligence without close supervision. They essentially get paid a bonus because having them stay put and perform moderately is preferable to the risk of trying to hire a better replacement. Lazy or disloyal employees who can talk themselves into a job during an interview also benefit.

Losers include customers, employers, and marginally unemployed workers, and possibly genuinely diligent and loyal employees.

You state "The law punishes honesty, not dishonesty, or silence." Ex-employees can already sue for honesty. Your remedy allows the new employer to sue for dishonesty. You will get option 3, silence, it being the only way to not get sued.

Jon writes:

Prof. Caplan really now advocates for 1) lower wages for employees, and 2) and removal of the right to sue for slander. This article in its misrepresentations is either malicious or naive. Most notably, Prof Caplan maintains that the right of an employee to sue for slander or libel is a punishment for "honesty." Actually, it is a punishment for dishonesty, as in the United States, truth is an absolute defense against libel or slander. Prof Caplan assumes that anytime someone is fired and sues, the employer is correct and the employee is wrong.

Many people are fired for incompetence; many also are fired because the boss is incompetent and malicious. We should be thankful that Mr. Caplan is locked safely in the ivory tower

Jon writes:

I should add, contrary to what Prof. Caplan implies, there already is a very strong stigma towards being fired, even when disguised as a resignation. As a manager, when I see a resume with gaps, or several short stints at various jobs, often followed by periods of "consulting", I wonder whether the individual is such a desirable potential employee. I have seen people voluntarily leave a position, and then regret that they did not hang on until they found another.

jim linnane writes:

It is not as bad as Caplan thinks. Folks doing the hiring learn to read between the lines when talking to a former employer. If the former employer says, "Yes, so-and-so worked here on the dates cited." and nothing more. It is a red flag. The job will go to the applicant whose former employer says, "Yes, so-and-so worked here and we really miss her. We tried to keep her, but we couldn't pay her what she deserved."

David Thomson writes:

The charge of theft on one’s work record is very serious, and should never be made unless there is ample proof. If an employer is unwilling to press charges and see that the culprit is convicted---then they deserve to be sued.

John writes:

As someone who has hired and fired people, I agree with Jim Linnane's comments about employers' being able to read between the lines.

In addition, I like Prof. Caplan's Seinfeld reference. It makes up for his praise of Ayn Rand as a novelist.

dsquared writes:

I must say I find it hard to regard the fact that employees are protected by common law against the tort of defamation to be a "government action".

Jon writes:

I should agree with John, as a manager and an employee I see both sides of the coin. We have an expression "damn with faint praise." that covers what John says. In fact, if a recommendation is too vitrolic, it may get viewed as a reflection on the employer! More likely, an employee committing theft will get off easy because he has "dirt" on the employer.

BTW, employers have been sued for given a good recommendation to an employee with a history of violent behavior.

Bernard Yomtov writes:

Apparently the complaint here is that firms are discouraged from providing honest information on ex-employees for fear of a lawsuit. Hence the available information has a positive bias.

But if such lawsuits were prohibited, or the ones Caplan would like to see were allowed, then the information would be biased negatively instead. After all, there is often animosity when an employee leaves. Lawsuit-immune ex-bosses could, and sometimes would, be unduly critical.

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