Rat race redux: adverse selection in the determination of work hours

Abstract

According to textbook economic theory, market competition forces firms to link work hours tightly to the preferences of individual employees.Firms that more closely match the hours preferences of their employees will find that they can attract desirable employees at a lower wage.Conventional theory therefore predicts that most individuals will be working the utility maximizing number of hours (conditional on their wage) The reduction in work hours for less educated workers must then reflect an increase in the number of employees wanting reduced hours Similarly, the high and increasing number of work hours for college educated employees must reflect their continued and increasing preference for long hours.3 The interpretation of the hours trends suggested by the conventional model depends heavily on the assumption that employers can directly observe the relevant characteristics of employees In this paper, we show that when this assumption is violated, work hours may be determined through a process quite different from that described by the textbook model In particular, firms may use long work hours (or other performance measures that entail long work hours) as an indicator of some valuable, yet hard to observe, characteristics of employees.If this indicator plays a role in determining hiring or promotions, then issues of adverse selection may appear in the determination of work hours.Employees desiring short hours will have an incentive to camouflage themselves as long-hour workersperhaps by agreeing to more work hours than they would otherwise desire at their current wage.Firms will respond by establishing work norms with hours long enough to discourage a short-hour employee from pretending to be a long- hour employee.The result of this process is that employers may require too many work hours from employees.The employers also may not be able to quickly or easily adjust these hours as For both men and women, annual hours worked were longer for college than for high school educated employees in 1988.Annual hours worked for college educated white men was 2,243 in 1988 and 1,909 for high school educated employees.For women the comparable figures are 1,797 and 1,531 respectively.For men, much of the difference between education groups was found at the upper tail of the weekly hours distribution.For women, much of the difference was found in the lower tail of the weekly hours and weeks worked per vear distributions (Coleman and Pencavel, 1993a and 1993b Tables 3).

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