The Impact of Supervision and Incentive Process in Explaining Wage Profile and Variance

Bank of Israel ,Discussion Paper Series, 2003 The implementation of a supervision and incentive process for identical workers may lead to wage variance that stems from employer and employee optimization. The harder it is to assess the nature of the labor output, the more important such a process becomes, and the influence of such a process on wage development growth. The dynamic model presented in this paper shows that an employer will choose to pay a worker a starting wage that is less than what he deserves, resulting in a wage profile that fits the classic profile in the human-capital literature. The wage profile and wage variance rise at times of technological advancements, which leads to increased turnover as older workers are replaced by younger workers due to a rise in the relative marginal cost of the former.