are: the atmosphere at that particular job, some sort of utility gained from working, some benefits package associated with that job, etc. Economists studying this phenomenon have been focusing their research on proving that the reasons hypothesized correlate with the lower wages actually observed in the for profit and non-profit industries. The dominant literature states that individuals take lower wages because of particular phenomenon called the donative labor hypothesis. From the very basic overview above, there are three objectives in this paper. First is to show the existence of wage differentials. The second objective is to investigate the reasons why individuals would take lower wages at a non-profit and try to show that these reasons exist empirically. Thirdly, to prove or disprove the postulate that the donative labor hypothesis is not as important as other factors when explaining wage differentials. To facilitate achieving these goals, this paper will begin by laying out the economic theory behind wages. Then it will move to looking at the current research on the topic of wage differentials, which will be followed by an econometric model. Lastly, to conclude there will be a discussion of the results. Labor Theory Firstly, there needs to be a discussion about economic labor theory, as it provides most of the backbone to this paper. Significantly, standard labor theory assumes that all jobs are the same. Each individual worker is indifferent to working between one firm and any another, assuming wages are the same. Although this is nice for simple modeling, we want to go a bit deeper. Thus we must amend our model. What will happen when a
are: the atmosphere at that particular job, some sort of utility gained from working, some benefits package associated with that job, etc. Economists studying this phenomenon have been focusing their research on proving that the reasons hypothesized correlate with the lower wages actually observed in the for profit and non-profit industries. The dominant literature states that individuals take lower wages because of particular phenomenon called the donative labor hypothesis. From the very basic overview above, there are three objectives in this paper. First is to show the existence of wage differentials. The second objective is to investigate the reasons why individuals would take lower wages at a non-profit and try to show that these reasons exist empirically. Thirdly, to prove or disprove the postulate that the donative labor hypothesis is not as important as other factors when explaining wage differentials. To facilitate achieving these goals, this paper will begin by laying out the economic theory behind wages. Then it will move to looking at the current research on the topic of wage differentials, which will be followed by an econometric model. Lastly, to conclude there will be a discussion of the results. Labor Theory Firstly, there needs to be a discussion about economic labor theory, as it provides most of the backbone to this paper. Significantly, standard labor theory assumes that all jobs are the same. Each individual worker is indifferent to working between one firm and any another, assuming wages are the same. Although this is nice for simple modeling, we want to go a bit deeper. Thus we must amend our model. What will happen when a
1359_FreidmanWhattheDifferenceWageDifferentialsandtheDonativeLaborHypothesisinNonProfitFirms.docx