The supply and demand of motivated labor: When should we expect to see nonprofit wage gaps?

Abstract

Nonprofit workers earn less on average than for-profit workers. Existing empirical work leaves open the question of whether this is driven by a willingness to work for less (the "labor donation hypothesis"). Wage gaps have consistently been found to be present in some industries and absent in others. In this paper, I consider when we should expect labor donations to nonprofits to generate wage gaps and, in doing so, offer an explanation for the previous inconsistent results. I highlight the importance of nonprofits' labor demand. Specifically, it is only in nonprofit employers' interest to maintain low wages if their labor demand does not exceed the number of workers who are willing to work for less. Otherwise, nonprofits must raise wages to attract other workers. This yields the prediction that wage gaps should be largest when the nonprofit share of labor within an industry is low. As nonprofit share increases, wages should equalize. Using economy-wide Census microdata, I provide evidence consistent with this prediction. I use more detailed data from the nursing home industry to better control for market conditions and rule out alternative explanations. I find that the quality of work in nonprofit nursing homes is highest in localities with low nonprofit share, where wage gaps are largest. This provides evidence that the relationship between wage gaps and nonprofit share is driven by "motivated types" sorting into nonprofit jobs.

Training and intrinsic motivation in nonprofit and for-profit organizations

“…See also Kreps (1997) for a discussion of intrinsic motivation versus external incentives. 4 Building on Preston (1989), Jones (2015) offers an alternative explanation for the mixed evidence concerning the sectoral wage differential and why it varies by occupation and industry; he does not consider variation by skill levels. A theoretical rationale for a negative FP-NP wage differential has been termed the "property rights hypothesis", which says the following.…”

Is Compassion a Good Career Move?

“…Firms can only rely on a labor donation from workers if the marginal worker is willing to accept lower wages for the warm glow of an employer (Rose-Ackerman 1996). Even if some workers would be willing to accept lower wages for employment at nonprofits in a given industry, labor markets with lots of nonprofit employment may have to raise wages to attract the marginal worker who is unaffected by warm glow (Jones 2015); this provides a plausible explanation for the divergence in the penalties across industry, but we find no evidence, for instance, that larger nonprofit sectors in an industry exhibit smaller penalties. Given that many workers misclassify the nonprofit status of their employer in commercial industries, labor donation, , may not be a significant factor in those settings.…”

Nonprofit Pay in a Competitive Market: Wage Penalty or Premium?

“…Given the large number of nonprofit hospitals, this is an additional reason to expect little impact of the donative labor hypothesis in this case. In sum, Ruhm and Borkoski (2003), Byrne (2014), and Jones (2015) suggest that selection bias is not a concern for our study, and Schumacher (2009) suggests that the selection bias should be very small. We perform additional sensitivity analyses, however, to ensure that selection bias does not affect our estimates.…”

“…Using data from the 2006 CPS, he finds a similar wage premium in religious and nonreligious nonprofit hospitals. Jones (2015) argues that the nonprofit wage penalty exists primarily in industries and locations where nonprofit demand is relatively low; when an industry or location has many nonprofits, they hire all the altruistically motivated workers and must raise their wages to attract additional employees. He finds that the nonprofit wage premium is highest in industries with the largest shares of nonprofits, especially for higher educated workers (using both the 5% sample from the 2000 Census and firm-level data for nursing homes), and that the difference between nonprofit and for-profit workers in job satisfaction and in engagement in prosocial activities is larger in industries with fewer nonprofit employers (using the National Longitudinal Survey of Youth 1997).…”