Resentment, Information, and Unemployment By Bryan Caplan

There’s one main problem with Tyler’s post on the unemployment of the poor. He writes:

Perhaps

low-skilled workers cannot be employed at lower wages because their

resentment at the low wage would be so high that they would impose

unacceptable morale costs on the organizations employing them. In other

words, insult them with a sub-par wage offer and they turn destructive

toward the entire organization. Companies of course prefer to keep

these workers at arms’ length under this hypothesis.

The problem? From context, it sounds like there’s symmetric information about resentment, so each individual’s resentment causes his own unemployment. In reality, though, there’s asymmetric information about resentment, so the average resentment poor workers feel causes unemployment for poor workers in general, including poor workers who are perfectly content.

Think about it like this. A firm asks job candidates, “You earned $15 per hour in your last job. This job pays $10 an hour, but you’ll work side-by-side with other workers who earn $15 an hour to do the same job you’ll be doing. Are these conditions going to make you resentful, reducing your productivity to less than $10 an hour?” Almost every candidate will respond, “Of course not! I just want to work.” But many of these candidates are lying – to the interviewer and possibly themselves. Since firms have trouble telling the liars from the truth-tellers, hiring anyone may be unprofitable. If so, a worker who genuinely feels zero resentment, who is worth more than the market wage, ends up involuntarily unemployed.

How the math works: Suppose that in the preceding example, resentful workers produce $5 per hour, while content workers produce $11 per hour. There are two resentful workers for every content worker. With symmetric information, the firm will hire the one-third of workers who are content, and spurn the rest. If the firm can’t distinguish the two types of workers in advance, however, the firm will look at the expected hourly productivity of $(2/3*5+1/3*11)=$7 and hire no one.

Why not just cut the wage to $7? The minimum wage aside, cutting the wage to $7 will provoke even more resentment. Resentful workers’ productivity might fall to $2, and the share of content workers might fall to 10%, reducing expected productivity to $2.90. And so on. As I’ve said before, “Encouraging individual workers to be more flexible in their wage

expectations is still helpful advice. But it would be even more helpful

for the average worker if the average worker became more flexible.”