Career and Non-Career Jobs : Dangling the Carrot

Using a novel theoretical framework for a model economy with "career" and "non-career" jobs, this study investigates the effects on the labor market when the paymentstructure is according to rank which divides the workers into different classes basedon merit, with higher reward per unit of effort for the higher ranks. Labor effort inthe lower ranks thus depends not only on the wage but also on the probability to getpromoted to the higher positions. Therefore, the labor supply implies that the wageis lower than the marginal rate of substitution. Firms take advantage of the workers'ambition to climb the company's employment hierarchy and manage to offer a wageto the lower (higher) ranks that is lower (higher) than the marginal product. Theframework can provide interesting insights into various puzzles such as the wage gapbetween men and women, the cyclicality of the labor wedge and the low volatility ofthe real wage relative to hours and output along the business cycle without imposing ad-hoc nominal wage rigidities