Showing papers by "Institute for the Study of Labor published in 1982"

New Methods for Analyzing Structural Models of Labor Force Dynamics

Abstract: This paper takes a first step toward developing econometric models for the structural analysis of labor force dynamics. Our analysis is presented in continuous time, although most of the points raised here can be applied to discrete time models. We show that in previous attempts to estimate "structural" models of job search, a key source of information necessary to identify certain structural parameters has been neglected. We discuss the conditions under which structural search models can be estimated. In particular, the wage offer distribution must be recoverable -- i.e., it must be the case that the parameters of the untruncated wage offer distribution be estimable from the truncated accepted wage distribution. The wage offer distribution must be assumed to belong to a parametric family. Estimates of structural parameters are shown to be sensitive to the distributional assumption made. A partial equilibrium two state model of employment dynamics is estimated, using data from the National Longitudinal Survey of Young Men. We find employment and nonemployment rates implied by the structural parameter estimates to be generally consistent with those observed for the population of young males.

Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States

Abstract: This paper formulates and tests the hypothesis that the categories unemployed and out of the labor force are behaviorally distinct labor force states. Our empirical results indicate that they are. In the empirically relevant range the exit rate from unemployment to employment exceeds the exit rate from out of the labor force to employment. This evidence is shown to be consistent with a simple job search model of productive unemployment with log concave wage offer distributions. We prove that if unemployed workers receive job offers more frequently than workers out of the labor force, and if wage offer distributions are log concave, the exit rate from unemployment to employment exceeds the exit rate from out of the labor force to employment.

Models for the Analysis of Labor Force Dynamics

Abstract: This paper presents new econometric methods for the empirical analysis of individual labor market histories. The techniques developed here extend previous work on continuous time models in four ways: (1) A structural economic interpretation of these models is presented. (2) Time varying explanatory variables are introduced into the analysis in a general way. (3) Unobserved heterogeneity components are permitted to be correlated across spells. (4) A flexible model of duration dependence is presented that accommodates many previous models as a special case and that permits tests among competing specifications within a unified framework. We contrast our methods with more conventional discrete time and regression procedures. The parameters of continuous time models are in- variant to the sampling time unit used to record observations. Problems plague the regression approach to analyzing duration data which do not plague the likelihood approach advocated in this paper. The regression approach cannot be readily adopted to accommodate time varying explanatory variables. The functional forms of regression functions depend on the time paths of the explanatory variables. Ad hoc solutions to this problem can make exogenous variables endogenous to the model and so can induce simultaneous equations bias. Two sets of empirical results are presented. A major conclusion of the first analysis is that the discrete time Markov model widely used in labor market analysis is inconsistent with the data. The second set of empirical results is a test of the hypothesis that "unemployment" and "out of the labor force" are behaviorally different labor market states. Contrary to recent claims, we find that they are separate states for our sample of young men.

Pensions as Severance Pay

Abstract: Earlier claims that pensions serve as severance pay are corroborated by a new data set drawn from the 1980 Banker's Trust corporate pension plan study. A model is developed that shows how pension values which vary with the age of retirement make both workers and firms better off by moving the equilibrium in the direction of a perfect-information, first-best optimum. This requires that pension values decline with the age of retirement beyond a certain point. Evidence from the 1975 and 1980 data sets supports this claim. To the extent that any significant change has occurred between 1975 and 1980, most important is that the ratio of early retirement pension value to normal retirement pension value has increased.

Optimal Financial Aid Policies for a Selective University

Abstract: Recent federal cut-backs of financial support for undergraduates have worsened the financial position of colleges and universities and required them to debate how they will allocate their scarce financial aid resources.Our paper contributes to the debate by providing a model of optimal financial aid policies for a selective university-one that has a sufficient number of qualified applicants that it can select which ones to accept and the type of financial aid package to offer each admitted applicant.The university is assumed to derive utility from "quality-units" of different categories (race, sex, ethnic status, income class, alumni relatives, etc.) of enrolled students. Average quality in a category declines with the number of applicants admitted and the fraction of admitted applicants who enroll increases with the financial aid package offered the category.The university maximizes utility subject to the constraint that its total subsidy of students (net tuition revenue less costs including financial aid)is just offset by a predetermined income flow from nonstudent sources (e.g.,endowment). The model implies that the financial aid package to be offered to each category of admitted applicants depends on the elasticity of the fraction who accept offers of admission with respect to the financial aid package offered them, the propensity of the category to enroll, the elasticity of the categorys average quality with respect to the number admitted, and the relative weight the university assigns in the utility function to applicants in the category.While the latter must be subjectively determined by university administrators, the former parameters are subject to empirical estimation.The paper concludes with a case study of one selective institution's dataand illustrates how they may be estimated. Based upon data from the university's admissions and financial aid files, as well as questionnaire data which ascertained what alternative college most admitted freshman applicants were considering and the financial aid packages at the alternative, probit probability of enrollment equations are estimated as are equations that determine how average quality varies with the number admitted for each category. These estimates are then applied to illustrate what the"optimal" financial aid policy would be for the university.

Life-Cycle Effects on Consumption and Retirement

Abstract: The effects on consumption and retirement of characteristics of the life cycle, especially the length of the horizon, are examined. At any given age people will work more and consume less if they expect to live longer. This and other propositions are tested on several sets of data. The Terman sample of gifted individuals (320 in 1972, 228 in 1977) is used to relate work status to the length of the horizon, as proxied by parents' longevity. The results suggest the expected positive effect on effort, but its magnitude is quite small. The panel from the Retirement History Survey is used, and life-cycle effects on consumption and retirement are estimated jointly for 1973 and 1975. There is a weak small effect of a more distant horizon (proxied by the number of living parents) in increasing work effort and a stronger, but still fairly small effect in reducing consumption; goods and leisure are consumed jointly, suggesting their complementarity in household production; and spending propensities out of Social Security wealth are far below those out of pension wealth. The small effect of changes in the horizon on work effect suggests the rapid secular increase in longevity has produced a disproportionate increase in people's lifetime demand for leisure. The implied small increase in lifetime income and the slight reduction in consumption among persons with longer horizons indicate that increased longevity has not been met with sufficient spending cuts to enable people to maintain real consumption over their longer lifetimes.

The Excess Sensitivity of Layoffs and Quits to Demand

Abstract: Excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements: the specific nature of worker-firm relations creates a situation of bilateral monopoly. Institutions which have arisen to avert the associated inefficiency cannot mimic the separation decisions of a perfect-information, first-best allocation rule. Simple employment rules based on predetermined or indexed wages are in many cases the most desirable among the class of feasible employment arrangements. More complicated contracts which seem to deal more effectively with turnover issues are either infeasible because of informational requirements or create adverse incentives on some other dimension.

Cost-of-Living Adjustment Clauses in Union Contracts

Abstract: Our paper seeks to provide an explanation for why the prevalence of COLA provisions and their characteristics vary widely across U.S. industries. We develop models of optimal risk sharing between a firm and union that allows us to investigate the determinants of a number of characteristics of union contracts. These include the presence of wage indexation, the degree of wage indexation if it exists, the magnitude of deferred noncontingent (on the price level) wage increases, the duration of labor contracts and the trade-off between temporary layoffs and wage indexation. Preliminary empirical tests of some of the implications of the model are conducted using industry data on both the prevalence of COLA provisions and layoff rates, and using contract level data on the characteristics of COLA provisions and contract duration. One key finding is that the level of unemployment insurance benefits appears to simultaneously influence the level of layoffs and the extent of COLA coverage.

Consumption During Retirement: The Missing Link in the Life Cycle

Abstract: This study presents the first evidence on the relation of consumption to lifetime wealth, based on data from the 1973 and 1975 Retirement History Survey that have been linked to Social Security earnings records. Nearly 500 white, married, fully retired couples ages 62-69 form the basis of the analysis. On average their consumption early in retirement exceeds by 14 percent the income that their financial, pension and Social Security wealth can generate. This implies that their saving, both private and through Social Security, is insufficient to sustain consumption throughout the rest of their lives. Additional evidence based on changes in spending between 1973 and 1975 shows that these households respond by reducing their real consumption at a rate sufficient to generate positive changes in net financial worth within a few years after retirement. These two pieces of evidence can be rationalized by a rate of time preference much higher than the interest rate, coupled with either a bequest motive or uncertainty about the length of life. They also imply that, even when combined with private pensions and savings, Social Security in the United States today does not enable most recipients to maintain their living standard at the levels they enjoyed before they retired.

Severance Pay, Pensions, and Efficient Mobility

Abstract: This paper argues that pensions are used as severance pay devices in an efficient compensation scheme. The major points of the study are: (1) Severance pay, which takes the form of higher pension values for early retirement, is widespread. (2) A major reason for the existence of pensions is the desire to provide an incentive mechanism that can also function as an efficient severance pay device. It is incorrect to think of pensions merely as a tax-deferred savings account. (3) The wage rates that older workers receive exceed their marginal products. This is evidenced by the fact that employers are willing to buy them out with higher pensions if they retire early. These conclusions are based upon examination of a data set which was generated as part of this study. That data set contains detailed information on 244 of the largest pension plans in the country, covering about 8 million workers.

Expectations, Life Expectancy, and Economic Behavior

Abstract: Unlike price expectations, which are central to macroeconomic theory and have been examined extensively using survey data, formation of individuals' horizons, which are central to the theory of life-cycle behavior, have been completely neglected. This is especially surprising since life expectancy of adults has increased especially rapidly in Western countries in the past ten years. This study presents the results of analyzing responses by two groups--economists and a random sample--to a questionnaire designed to elicit subjective expectations and probabilities of survival. It shows that people do not extrapolate past improvements in longevity when they determine their subjective horizons, though they are fully aware of levels of and movements within today's life tables. They skew subjective survival probabilities in a way that implies the subjective distribution has greater variance than its actuarial counterpart; and the subjective variance decreases with age. They also base their subjective horizons disproportionately on their relatives' longevity, and long-lived relatives increase uncertainty about the distribution of subjective survival probabilities. As one example of the many areas of life-cycle behavior to which the results are applicable, the study examines the consumption-leisure choices of the optimizing consumer over his lifetime. It finds that shortfalls in utility in old age because people's ex ante horizons had to be updated as -- average longevity increased are relatively small. This implies that large subsidies to retirees under today's Social Security system cannot be justified as compensation for an unexpectedly long retirement for which they failed to save.

The Trade-Off between Wages and Employment in Trade Union Objectives

Abstract: This paper demonstrates that, contrary to a widely-held opinion, the determination of the goals of unions is fully amenable to empirical analysis. A characterization of the wage and employment-setting process in unionized markets is adopted and its qualitative implications examined. The first-order condition for this model is fitted to time- series data on the newspaper industry from ten cities. The Inter- national Typographical Union 's objective function reveals very restricted opportunities for substituting wages for employment in response to a change in the slope of the employer's labor demand function. Larger union locals place greater emphasis on wages versus employment than smaller union locals.

Malfeasance in Long Term Employment Contracts: A New General Model with an Application to Unionism

Abstract: This paper argues that the structure of long-term employment contractsis influenced by the possibility that at least four different kinds of opportunistic behavior, or "malfeasance,"may occur in them. While the consequences of some of these problems have been examined in various papers,no single model has yet treated all four and thus brought out their essential symmetry. In particular, a certain kind of malfeasance by firms has apparently been universally overlooked-an oversight we try to remedy by developing a simple model here. Other advantages of the present model are that, unlike other models, it endogenizes the path of both sides of the contract -wages and effort -and has fairly intuitive first-order conditions. It also shows how earlier conclusions, such as the notion that wages are likely to rise faster than marginal products in equilibrium, are the results of less-than-general model specification, and has some interesting implications when applied to unionism: by proposing that unions act as workers'equivalent to certain contract enforcement policies like the disciplinary dismissals used by firms, it provides what is to the author's knowledge the only consistent theoretical explanation of the quite commonly observed U-shaped pattern of the union wage effect by age and shows how unions might play a positive efficiency role in this regard.