A0519
Title: The macroeconomic effects of internal promotions
Authors: Demetris Koursaros - Cyprus University of Technology (Cyprus) [presenting]
Abstract: The purpose is to explore the macroeconomic implications of a hierarchical payment structure according to which a worker's wage within a firm depends on his job rank. A model of the labor market in which some firms offer "career" jobs is developed. Workers in career jobs start at a low rank and can get a wage increase through promotion to a higher rank. It is shown that it is optimal for career firms to incentivize their employees by increasing the wage spread between low- and high-rank positions. This way, they can elicit more effort from the mass of the workers in low ranks while rewarding handsomely only the very few that get promoted. As workers in low ranks are compensated for their higher effort through the option value of a promotion, the model departs from the standard assumption that wages increase with effort or outside option. It is shown that this payment structure, which has been largely overlooked in the macroeconomic literature, can provide interesting insights into various puzzles, such as the cyclicality of the labor wedge and the gender wage gap.
