1 Wages and effort in the French for-profit and nonprofit sectors: Labor Donation Theory Revisited Joseph Lanfranchi* and Mathieu Narcy** 1 February 2006 Abstract: Labour donation theory postulates that nonprofit workers are intrinsically motivated workers. They would therefore offer to work for a significantly lower wages than for-profit workers. This compensating argument is however flawed if nonprofit workers do compensate lower wages with lower effort. This paper focuses on wage and absence differentials between nonprofit and for-profit sectors. Using the French Labor Force Survey over the 1994-2001 period, a switching simultaneous-equations model is estimated. Our main results suggest that workers do not choose nonprofit and for-profit employers at random. The average wage differential between for-profit and nonprofit sectors is 13.5%. Furthermore, the calculated “wage loss” for the average worker choosing the nonprofit sector in comparison of what he would have earned in the profit sector is 11%. In reverse, the average worker in the profit sector obtains a supplementary wage benefit of 14.5% in joining this sector. Those first results plead in favor of labor donation theory showing that the nonprofit sector workers deliberately accept a negative wage premium. The results of the absence regressions confirm this interpretation. The average nonprofit worker would be significantly more absent if he had to work for a profitable organization. The reverse is also true for the average for-profit worker who would be less present in the nonprofit sector. The reason for this new finding could be traced in specific monitoring of effort in both sectors. This interpretation is confirmed by the fact that the wage has a significantly negative effect on absence rates in the for-profit sector but no influence in the nonprofit one. Nonprofit organizations would then rely on intrinsically motivated employees and would not implement any monetary incentives for diminishing absence. JEL Classification: J31, L31 Keywords : non-profit organizations, wage and absence differentials, intrinsic motivation. 1 * Université Panthéon-Assas Paris II, ** ERMES-CNRS FRE 2887 – Université Panthéon-Assas Paris II – 12, place du Panthéon – 75230 PARIS Cedex 05 – Tél. : +33 (0)1 44 41 89 72 – Fax : +33 (0)1 40 51 81 30 Corresponding author : lanfranchi@u-paris2.fr The authors wish to thank M. Ercolani for providing us with all the technical details necessary to compute individual absence rates, J.G. Treble and participants to the JMA and AFSE congress and ERMES seminar for valuable comments. The usual disclaimer applies.