Showing papers by "Institute for the Study of Labor published in 2009"

Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially

Abstract: This paper examines image motivation - the desire to be liked and well-regarded by others - as a driver in prosocial behavior (doing good), and asks whether extrinsic monetary incentives (doing well) have a detrimental effect on prosocial behavior due to crowding out of image motivation.By definition, image depends on one's behavior being visible to other people. Using this unique property we show that image is indeed an important part of the motivation to behave prosocially. Moreover, we show that extrinsic incentives interact with image motivation and are therefore less effective in public than in private. Together, these results imply that image motivation is crowded out by monetary incentives; this means that monetary incentives are more likely to be counterproductive for public prosocial activities than for private ones.

Was Weber Wrong? A Human Capital Theory of Protestant Economic History

Abstract: Max Weber attributed the higher economic prosperity of Protestant regions to a Protestant work ethic. We provide an alternative theory: Protestant economies prospered because instruction in reading the Bible generated the human capital crucial to economic prosperity. We test the theory using county-level data from late-nineteenth-century Prussia, exploiting the initial concentric dispersion of the Reformation to use distance to Wittenberg as an instrument for Protestantism. We find that Protestantism indeed led to higher economic prosperity, but also to better education. Our results are consistent with Protestants' higher literacy accounting for most of the gap in economic prosperity.

Present-Biased Preferences and Credit Card Borrowing

Abstract: Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints.

Occupational specificity of human capital

Abstract: We find that returns to occupational tenure are substantial. Everything else being constant, 5 years of occupational tenure are associated with an increase in wages of 12%–20%. Moreover, when occupational experience is taken into account, tenure with an industry or employer has relatively little importance in accounting for the wage one receives. This finding is consistent with human capital being occupation specific.

A Structural Analysis of Disappointment Aversion in a Real Effort Competition

Abstract: We develop a novel computerized real effort task, based on moving sliders across a screen, to test experimentally whether agents are disappointment averse when they compete in a real effort sequential-move tournament. Our theory predicts that a disappointment averse agent, who is loss averse around her endogenous expectations-based reference point, responds negatively to her rival's effort. We find significant evidence for this discouragement effect, and use the Method of Simulated Moments to estimate the strength of disappointment aversion on average and the heterogeneity in disappointment aversion across the population.

Happiness and Productivity

Abstract: The paper provides evidence that happiness raises productivity. In Experiment 1, a randomized trial is designed. Some subjects have their happiness levels increased, while those in a control group do not. Treated subjects have 12% greater productivity in a paid piece-rate Niederle-Vesterlund task. They alter output but not the per-piece quality of their work. To check the robustness and lasting nature of this kind of effect, a complementary Experiment 2 is designed. In this, major real-world unhappiness shocks - bereavement and family illness - are studied. The findings from (real-life) Experiment 2 match those from (random-assignment) Experiment 1.

Social Connections and Incentives in the Workplace: Evidence from Personnel Data

Abstract: We present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm's overall performance, we explore how the effects of social connections vary with the strength of managerial incentives and worker's ability. To do so, we combine panel data on individual worker's productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages, to bonuses based on the average productivity of the workers managed. We find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker's ability, but when they are paid performance bonuses, they target their effort towards high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, we find that favoring connected workers is detrimental for the firm's overall performance.

Google econometrics and unemployment forecasting

Abstract: The current economic crisis requires fast information to predict economic behavior early, which is difficult at times of structural changes. This paper suggests an innovative new method of using data on internet activity for that purpose. It demonstrates strong correlations between keyword searches and unemployment rates using monthly German data and exhibits a strong potential for the method used.

Choosing to Compete: How Different are Girls and Boys?

Abstract: Using a controlled experiment, we examine the role of nurture in explaining the stylized fact that women shy away from competition. Our subjects (students just under 15 years of age) attend publicly-funded single-sex and coeducational schools. We find robust differences between the competitive choices of girls from single-sex and coed schools. Moreover, girls from single-sex schools behave more like boys even when randomly assigned to mixed-sex experimental groups. Thus it is untrue that the average female avoids competitive behaviour more than the average male. This suggests that observed gender differences might reflect social learning rather than inherent gender traits.

Enforcement of Contribution Norms in Public Good Games with Heterogeneous Populations

Abstract: Economic and social interaction takes place between individuals with heterogeneous characteristics. We investigate experimentally the emergence and informal enforcement of different contribution norms to a public good in homogeneous and different heterogeneous groups. When punishment is not allowed all groups converge towards free-riding. With punishment, contributions increase and differ distinctly across groups and individuals with different induced characteristics. We show econometrically that these differences are not accidental but enforced by punishment. The enforced contribution norms are related to fairness ideas of equity regarding contribution possibilities but not regarding earnings. Individuals with different characteristics tacitly agree on the norm to be enforced, even if this leads to large payoff differences. Our results also emphasize the role of details of the environment that may alter focal contribution norms in an important way.

The Microeconomic Determinants of Emigration and Return Migration of the Best and Brightest: Evidence from the Pacific

Abstract: A unique survey which tracks worldwide the best and brightest academic performers from three Pacific countries is used to assess the extent of emigration and return migration among the very highly skilled, and to analyze, at the microeconomic level, the determinants of these migration choices. Although we estimate that the income gains from migration are very large, not everyone migrates and many return. Within this group of highly skilled individuals the emigration decision is found to be most strongly associated with preference variables such as risk aversion, patience, and choice of subjects in secondary school, and not strongly linked to either liquidity constraints or to the gain in income to be had from migrating. Likewise, the decision to return is strongly linked to family and lifestyle reasons, rather than to the income opportunities in different countries. Overall the data show a relatively limited role for income maximization in distinguishing migration propensities among the very highly skilled, and a need to pay more attention to other components of the utility maximization decision.

Globalization and Innovation in Emerging Markets

Abstract: Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 transition economies, the authors test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms' efforts to innovate (raise their capability) by upgrading their technology, improving the quality of their product or service, or acquiring certification. They find that competition has a negative effect on innovation, especially for firms further from the efficiency frontier, and we do not find support for an inverted U effect of competition on innovation. The authors show that the supply chain of multinational enterprises and international trade are important channels for domestic firms' innovation. They detect no evidence that firms in a more pro-business environment are more likely to display a positive or inverted U relationship between competition and innovation, or that they are more sensitive to foreign presence.

A Behavioral Account of the Labor Market: The Role of Fairness Concerns

Abstract: In this paper, we argue that important labor market phenomena can be better understood if one takes (a) the inherent incompleteness and relational nature of most employment contracts and (b) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm that, even if fairness concerns were to exert only weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers' wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws.

The Deterrent Effects of Prison: Evidence from a Natural Experiment

Abstract: In this paper we test for the theory of deterrence. We exploit the natural experiment provided by the Collective Clemency Bill passed by the Italian Parliament in July 2006. As a consequence of the provisions of the bill, expected punishment to former inmates recommitting a crime can be considered as good as randomly assigned. Based on a unique data set on post-release behaviour of former inmates, we find that an additional month in expected sentence reduces the propensity to recommit a crime by 1.24 percent: this corroborates the general deterrence hypothesis. However, this effect depends on the time previously served in prison: the behavioural response to an additional month of expected sentence decreases with the length of the prison spell. This second result can be hardly reconciled with the specific deterrence hypothesis according to which a stronger past experience of punishment should increase the sensitivity to future expected sanctions.

Alternative Measures of Offshorability: A Survey Approach

Abstract: This paper reports on a household survey specially designed to measure what we call the "offshorability" of jobs, defined as the ability to perform the work duties from abroad. We develop multiple measures of offshorability, using both self-reporting and professional coders. All the measures find that roughly 25% of U.S. jobs are offshorable. Our three preferred measures agree between 70% and 80% of the time. Furthermore, professional coders appear to provide the most accurate assessments, which is good news because the Census Bureau could collect data on offshorability without adding a single question to the CPS. Empirically, more educated workers appear to hold somewhat more offshorable jobs, and offshorability does not have systematic effects on either wages or the probability of layoff. Perhaps most surprisingly, routine work is no more offshorable than other work.

Competing on Good Politicians

Abstract: Is electoral competition good for political selection? To address this issue, we introduce a theoretical model in which ideological parties select candidates between party loyalists and experts, and allocate them into the electoral districts. Non-ideological voters, who care about national and local policies, strongly prefer experts. We show that parties compete on good politicians by allocating them to the most contestable districts. Empirical evidence on Italian members of parliament confirms this prediction. We find that politicians with higher ex-ante quality − as measured by years of schooling, previous market income, and local government experience − are more likely to run in a contestable district. Indeed, despite being different on average, the characteristics of politicians belonging to opposite parties converge to high-quality levels in close races. Furthermore, politicians elected in contestable districts make fewer absences in parliament; this is shown to be driven more by a selection effect than by reelection incentives.

Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation

Abstract: With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed’s response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.

Life Expectancy and Economic Growth: The Role of the Demographic Transition

Abstract: In this paper we investigate the causal effect of life expectancy on economic growth by explicitly accounting for the role of the demographic transition. In addition to focusing on issues of empirical identification, this paper emphasizes the role of the econometric specification. We present a simple theory of the economic and demographic transition where individuals' education and fertility decisions depend on their life expectancy. The theory predicts that before the demographic transition improvements in life expectancy primarily increase population. Improvements in life expectancy do, however, reduce population growth and foster human capital accumulation after the onset of the demographic transition. This implies that the effect of life expectancy on population, human capital and income per capita is not the same before and after the demographic transition. Moreover, a sufficiently high life expectancy is ultimately the trigger of the transition to sustained income growth. We provide evidence supporting these predictions using data on exogenous mortality reductions in the context of the epidemiological revolution.

Immigration and Housing Booms: Evidence from Spain

Abstract: We estimate empirically the effect of immigration on house prices and residential construction activity in Spain over the period 1998-2008. This decade is characterized by both a spectacular housing market boom and a stunning immigration wave. We exploit the variation in immigration across Spanish provinces and construct an instrument based on the historical location patterns of immigrants by country of origin. The evidence points to a sizeable causal effect of immigration on both prices and quantities in the housing market. Between 1998 and 2008, the average Spanish province received an immigrant inflow equal to 17% of the initial working-age population. We estimate that this inflow increased house prices by about 52% and is responsible for 37% of the total construction of new housing units during the period. These figures imply that immigration can account for roughly one third of the housing boom, both in terms of prices and new construction.

The Impact of Training on Productivity and Wages: Firm Level Evidence

Abstract: This paper uses firm level panel data of firm provided training to estimate its impact on productivity and wages. To this end the strategy proposed by Ackerberg, Caves and Frazer (2006) for estimating production functions to control for the endogeneity of input factors and training is applied. The productivity premium for a trained worker is estimated at 23%, while the wage premium of training is estimated at 12%. Our results give support to recent theories that explain work related training by imperfect competition in the labor market.

Reforming German Labor Market Institutions: A Dual Path to Flexibility

Abstract: Germany has always been one of the prime examples of institutional complementarities between social insurance, a rather passive welfare state, strong employment protection and collective bargaining that stabilize diversified quality production. This institutional arrangement was criticized for being the main cause of inferior labor market performance and increasing fiscal pressure on the welfare state while at the same time inhibiting institutional change. However, over the last 15 years, a sequence of institutional reforms has fundamentally modified the functioning of the German labor market and increased both flexibility and job creation capacities through two intimately linked processes that redefined the line between inactivity, the flexible and the standard segment of the labor market. On the one hand, policy changes facilitated the expansion of flexible or 'atypical' jobs, whereas increasing flexibility of the standard employment relationship resulted from wage moderation and working time flexibility. While at the outset of this reform sequence German had a small, but relatively egalitarian labor market, the number of jobs, but also their diversity has increased.

Who is hit hardest during a financial crisis? The vulnerability of young men and women to unemployment in an economic downturn

Abstract: The current financial and economic crisis has resulted in the worst global recession since World War II. The subsequent destruction of jobs and increased duration of joblessness will ensure that unemployment across the world will continue to rise and stay stubbornly high for some time to come, well after the economy has begun to recover. Beyond this generalization, such downturns have more adverse implications for vulnerable segments of the population such as youth. As presented in this paper, data for both the current and previous financial crises reveals that young people are indeed hit hardest as reflected by rising unemployment rates, which persist long after the economy is growing again. In the wake of the present downturn, young men have been particularly affected, which has been driven by a range of factors including the high proportion of young men in heavily impacted sectors such as construction. In response to this situation, policymakers should utilize targeted crisis interventions that aim to keep youth employed where possible, while also assisting new entrants and those who have lost jobs find employment (or at a minimum stay attached to the labour force), particularly as the economy recovers.

Labour Market Mismatch Among UK Graduates: An Analysis Using Reflex Data

Abstract: There is much disagreement in the literature over the extent to which graduates are mismatched in the labour market and the reasons for this. In this paper we utilise the Flexible Professional in the Knowledge Society (REFLEX) data set to cast light on these issues, based on data for UK graduates. REFLEX examines the labour market status of graduates five years after graduation and distinguishes between first and current job, vertical and horizontal mismatch, over/underqualification and over/underskilling as well as including a range of questions on the nature of work organisation and individual competences. We find substantial pay penalties for over-education for both sexes and for overskilling in the case of men only. When both education and skill mismatch variables are included together in the model only overskilling reduces job satisfaction consistently for both sexes. Using job attributes data it appears that the lower wages of the overqualified may in part simply represent a compensating wage differential for positive job attributes, while for men at least there are real costs to being overskilled.

Ageing, Health and Life Satisfaction of the Oldest Old: An Analysis for Germany

Abstract: This analysis uses data from the German Socio-Economic Panel (GSOEP) and the Survey on Health, Ageing and Retirement in Europe (SHARE) to assess the effect of ageing and health on the life satisfaction of the oldest old (defined as 75 and older). We observe a U-shaped relationship between age and levels of life satisfaction for individuals aged between 16 and approximately 65. Thereafter, life satisfaction declines rapidly and the lowest absolute levels of life satisfaction are recorded for the oldest old. This decline is primarily attributable to low levels of perceived health. Once cohort effects are also controlled for, life satisfaction remains relatively constant across the lifespan.

The Role of Labor Markets for Euro Area Monetary Policy

Abstract: In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behaviour and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.

Noncognative Skills, Occupational Attainment, and Relative Wages

Abstract: This paper examines whether men's and women's noncognitive skills influence their occupational attainment and, if so, whether this contributes to the disparity in their relative wages. We find that noncognitive skills have a substantial effect on the probability of employment in many, though not all, occupations in ways that differ by gender. Consequently, men and women with similar noncognitive skills enter occupations at very different rates. Women, however, have lower wages on average not because they work in different occupations than men do, but rather because they earn less than their male colleagues employed in the same occupation. On balance, women's noncognitive skills give them a slight wage advantage. Finally, we find that accounting for the endogeneity of occupational attainment more than halves the proportion of the overall gender wage gap that is unexplained.

Out of Sight, Out of Mind: Migration, Entrepreneurship and Social Capital

Abstract: The aim of this paper is to investigate whether return migrants are more likely to become entrepreneurs than non-migrants We develop a theoretical search model that puts forward the trade off faced by returnees since overseas migration provides an opportunity for human and physical capital accumulation but, at the same time, may lead to a loss of social capital back home We test the predictions of the model using data from Egypt We find that, even after controlling for the endogeneity of the temporary migration decision, an overseas returnee is more likely to become an entrepreneur than a non-migrant Although migrants lose their original social networks whilst overseas, savings and human capital accumulation acquired abroad over-compensate for this loss Our results also suggest that social networks have no significant impact on becoming entrepreneurs for returnees but matter for non-migrants

Tobit or Not Tobit

Abstract: Time-use surveys collect very detailed information about individuals' activities over a short period of time, typically one day. As a result, a large fraction of observations have values of zero for the time spent in many activities, even for individuals who do the activity on a regular basis. For example, it is safe to assume that all parents do at least some childcare, but a relatively large fraction report no time spent in childcare on their diary day. Because of the large number of zeros Tobit would seem to be the natural approach. However, it is important to recognize that the zeros in time-use data arise from a mismatch between the reference period of the data (the diary day) and the period of interest, which is typically much longer. Thus it is not clear that Tobit is appropriate. In this study, I examine the bias associated with alternative estimation procedures for estimating the marginal effects of covariates on time use. I begin by adapting the infrequency of purchase model, which is typically used to analyze expenditures, to time-diary data and showing that OLS estimates are unbiased. Next, using simulated data, I examine the bias associated with three procedures that are commonly used to analyze time-diary data ﾖ Tobit, the Cragg (1971) two-part model, and OLS ﾖ under a number of alternative assumptions about the data-generating process. I find that the estimated marginal effects from Tobits are biased and that the extent of the bias varies with the fraction of zero-value observations. The two-part model performs significantly better, but generates biased estimated in certain circumstances. Only OLS generates unbiased estimates in all of the simulations considered here.

The Public Health Costs of Job Loss

Abstract: We study the short-run effect of involuntary job loss on comprehensive measures of public health costs. We focus on job loss induced by plant closure, thereby addressing the reverse causality problem of deteriorating health leading to job loss as job displacements due to plant closure are unlikely caused by workers' health status, but potentially have important effects on individual workers' health and associated public health costs. Our empirical analysis is based on a rich data set from Austria providing comprehensive information on various types of health care costs and day-by-day work history at the individual level. Our central findings are: (i) overall expenditures on medical treatments (hospitalizations, drug prescriptions, doctor visits) are not strongly affected by job displacement; (ii) job loss increases expenditures for antidepressants and related drugs, as well as for hospitalizations due to mental health problems for men (but not for women); and (iii) sickness benefits strongly increase due to job loss.

Happiness and growth the world over: time series evidence on the happiness-income paradox

Abstract: There is no significant relationship between the improvement in happiness and the long term rate of growth of GDP per capita. This is true for three groups of countries analyzed separately - 17 developed, 9 developing, and 11 transition - and also for the 37 countries taken together. Time series studies reporting a positive relationship confuse a short-term positive association between the growth of happiness and income, arising from fluctuations in macroeconomic conditions, with the long-term relationship, which is nil.