Case 8.3 The desire for rising consumption profiles Frank and Hutchens (1993) have investigated the factors that may cause wage profiles to rise in ways that are not explained by increases in productivity . In particular they examined the cases of airline pilots and intercity bus drivers, both of whom have relatively constant productivity over most of their careers, but who have average annual earnings at the end of their careers 600% higher and 50% higher respectively than at the start of their careers. The authors rejected four existing explanations of the rising wage profiles, relating to investment in firm-specific capital, binding contracts, risk-aversion and adverse selection, before proposing a theory relating to commitment. The workers involved had to commit to accepting lower earnings than was justified by their productivity in the early years of their careers. It was further argued that such commitment is more likely in circumstances where much of the social activity of the workers involved is with fellow workers, and they showed that this is indeed the case with the two groups of workers they studied. Although the evidence in the study was by no means conclusive, being limited to only two groups of workers, it is highly suggestive. Questions 1 What are the behavioral factors underlying a preference for rising wage and consump- tion profiles? career. 2 Explain why pilots and bus drivers have relatively constant productivity over their 3 Explain why investment in firm-specific capital cannot satisfactorily account for rising Wage profiles as far as airline pilots and intercity bus drivers are concerned. 4 Explain the role of commitment in causing rising wage profiles, and why social activity with fellow workers is important as far as the likelihood of commitment is concerned. Case 8.3 The desire for rising consumption profiles Frank and Hutchens (1993) have investigated the factors that may cause wage profiles to rise in ways that are not explained by increases in productivity . In particular they examined the cases of airline pilots and intercity bus drivers, both of whom have relatively constant productivity over most of their careers, but who have average annual earnings at the end of their careers 600% higher and 50% higher respectively than at the start of their careers. The authors rejected four existing explanations of the rising wage profiles, relating to investment in firm-specific capital, binding contracts, risk-aversion and adverse selection, before proposing a theory relating to commitment. The workers involved had to commit to accepting lower earnings than was justified by their productivity in the early years of their careers. It was further argued that such commitment is more likely in circumstances where much of the social activity of the workers involved is with fellow workers, and they showed that this is indeed the case with the two groups of workers they studied. Although the evidence in the study was by no means conclusive, being limited to only two groups of workers, it is highly suggestive. Questions 1 What are the behavioral factors underlying a preference for rising wage and consump- tion profiles? career. 2 Explain why pilots and bus drivers have relatively constant productivity over their 3 Explain why investment in firm-specific capital cannot satisfactorily account for rising Wage profiles as far as airline pilots and intercity bus drivers are concerned. 4 Explain the role of commitment in causing rising wage profiles, and why social activity with fellow workers is important as far as the likelihood of commitment is concerned