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

•Nonprofit wage gaps emerge in markets with low nonprofit labor demand.•Wages are equal across sectors when nonprofit labor demand is high.•Nonprofit productivity is highest when nonprofit wages are lowest.•This suggests sorting & screening of scarce motivated workers generate wage gaps.

Evidence on whether nonprofit workers earn less than for-profit workers is mixed. I argue that we should only expect wage gaps when labor demand of the nonprofit sector of an industry is low. When labor demand is high, there are not enough “motivated” workers to fulfill demand, so nonprofits must raise wages. I find empirical evidence consistent with these predictions. Penalties for working in a nonprofit are largest in areas where nonprofits require a small share of the labor force. In these same locations, the quality of work is higher than in for-profits.