Labor Studies Program Meeting

October 29, 2010 -
The NBER Labor Studies Program Director David Card of the University of California, Organizer

Hilary W. Hoynes, University of California, Davis and NBER, and Erzo F.P. Luttmer, Dartmouth College and NBER

The Insurance Value of State Tax-and-Transfer Programs (NBER Working Paper No. 16280)

Hoynes and Luttmer estimate the effective total value that individuals derive from their state's tax-and-transfer programs and show how this value varies by income. They decompose this total value into two components: redistributive value, which is attributable to predictable changes in income (and family circumstances); and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. They examine income and transfers net of taxes over a ten-year period and model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). They then make calculations using the Panel Study of Income Dynamics, and allowing for analysis of the determinants of changes in the value of state net benefits over a more than 30-year period. They find that the redistributive value of state tax-and-transfer programs declines sharply with income, but that the insurance value of transfers increases with income. The resulting effective total value is positive across the income distribution and is relatively flat across income groups. This latter finding may explain why mobility does not "undo" state redistributive spending.

Joshua Kinsler and Ronni Pavan, University of Rochester
College Quality, Educational Attainment, and Family Income

Many studies have estimated the impact of credit constraints on educational outcomes. Unfortunately, however, those studies have focused primarily on the effect of credit constraints on the likelihood of college attendance and graduation, neglecting the fact that students also can choose the type or quality of the college they attend. Using the National Longitudinal Survey of Youth 1979 and 1997 cohorts, Kinsler and Pavan address this shortcoming in the literature by examining how family income affects the quality of the college from which a student graduates. In an effort to quantify the importance of the quality channel, they map the effects of college graduation and college quality into future wages. They find that accounting for credit constraints in college quality increases the effect of family income on future wages by as much as 25 percent for high ability students. Comparing across the two cohorts, they find that constraints in the quality dimension of schooling have relaxed considerably for more recent college attendees.

Brigham Frandsen, MIT
Union Wage Setting and the Distribution of Employees' Earnings: Evidence from Certification Elections

Frandsen estimates the causal effect of unionization on the distribution of employee earnings using a regression-discontinuity design based on union certification elections. The results suggest that unions raise the lower end of the distribution by around 25 percent, with a much smaller, even negative effect on the upper tail, and little effect on average earnings. Results on worker retention suggest that unions decrease turnover among lower-productivity workers, but increase it among higher-productivity workers. The empirical results are consistent with a model of the political economy of union wage setting in which unions pursue a wage schedule to maximize the probability of winning a certification election, subject to a minimum profit constraint for the employer. The optimal union wage schedule pays low-skilled workers above marginal product but reduces the return to skill. The estimates suggest that around 13.5 percent of the increase in the variance of log earnings from 1979 to 2009 can be accounted for by falling U.S. private sector unionization rates.

Erling Barth, University of Oslo and NBER; Alex Bryson, London School of Economics; James C. Davis, U.S. Census Bureau and NBER; and Richard Freeman, Harvard University and NBER
The Contribution of Dispersion across Plants to the Increase in U.S. Earning Dispersion

Using an extensive set of establishment and individual data, Barth, Bryson, Davis, and Freeman estimate the extent to which the variance of earnings among establishments increased in 1977-2002 and its contribution to the increased dispersion of U.S. earnings among individuals. They find that more than 70 percent of the increase in the variance of earnings in this period occurred across establishments. More than two-thirds of the growth in establishment wage dispersion arises from changes within detailed industry and region. Two industries contributed disproportionately to earnings inequality. Business services accounted for a growing share of the total variance in log earnings across plants, while the increased variance in earnings in finance, insurance, and real estate accounted for one-fifth of the growth in variance in the whole economy. Decomposing the increase in earnings among establishments between rising inequality among existing establishments and changes in inequality attributable to the earnings of establishments that enter or exit the economy, they find that the bulk of the increase occurred among existing establishments. They reject explanations that attribute the increase in the variance among establishments to increased returns to human capital or increased sorting of observable skills across plants. The factor most closely related to the increased dispersion in earnings across plants is the increase in the dispersion in labor productivity among plants. Evidence of rent sharing and of the growing importance of inter-establishment wage dispersion, given the declining strength of unions, run counter to the usual analysis of wage-setting in a competitive market.

Daron Acemoglu and David Autor, MIT and NBER

Skills, Task and Technologies: Implications for Employment and Earnings (NBER Working Paper No. 16082)

A central organizing framework of the recent literature on changes in the returns to skills and the evolution of earnings inequality is what is referred to as "the canonical model", which elegantly and powerfully operationalizes the supply and demand for skills by assuming two distinct skill groups that perform two different and imperfectly substitutable tasks, or produce two imperfectly substitutable goods. Technology is assumed to take a factor-augmenting form which, by complementing either high- or low-skill workers, can generate skill-biased demand shifts. Acemoglu and Autor argue that despite its notable successes, the canonical model is largely silent on a number of central empirical developments of the last three decades, including: 1) significant declines in real wages of low skill workers, particularly low skill males; 2) non-monotonic changes in wages at different parts of the earnings distribution during different decades; 3) broad-based increases in employment in high-skill and low-skill occupations relative to middle skilled occupations (that is., job a "polarization" ); 4) rapid diffusion of new technologies that directly substitute capital for labor in tasks previously performed by moderately-skilled workers; and 5) expanding offshoring opportunities, enabled by technology, which allow foreign labor to substitute for domestic workers specific tasks. Motivated by these patterns, the researchers argue that it is valuable to consider a richer framework for analyzing how recent changes in the earnings and employment distribution in the United States and other advanced economies are shaped by the interactions among worker skills, job tasks, evolving technologies, and shifting trading opportunities. They propose a tractable task-based model in which the assignment of skills to tasks is endogenous and technical change may involve the substitution of machines for certain tasks previously performed by labor. They further consider how the evolution of technology in this task-based setting may be endogenized. They show how such a framework can be used to interpret several central recent trends, and suggest further directions for empirical exploration.

Victor Lavy, Hebrew University and NBER
Does Increasing Mother's Schooling Reduce Fertility and Increase Children's Education: Evidence from a Natural Experiment on Arabs in Israel,

Lavy studies the causal relationship between women's education and fertility and the transmission of human capital from mothers to children. He bases his evidence on a natural experiment that sharply increased the education of affected cohorts of children: the de facto revocation in October 1963 of the Military Government of Arabs in Israel, which immediately enabled a large part of the Arab population to regain access to schooling. The Military Government which was in effect from 1948 imposed severe restrictions on movement and travel and therefore sharply disrupted access to schooling of residents in localities that lacked education institutions. Regaining access to schooling increased female years of schooling by 1.02 for women ages 4-8 in 1964 and by 0.58 for women ages 9-13 at that time. The gain for the young affected cohorts reflects an increase of 8 percent in the probability of completing primary school and of 6 percent of completing at least two years of secondary schooling. These very large effects on schooling levels led to a sharp decline in completed fertility, 0.61 children for the younger affected cohorts and of 0.47 children for the older cohorts. The implied 2SLS estimates show that an increase in one year of maternal schooling caused a decline in fertility of 0. 6 children for the younger cohorts. Additional evidence suggests that labor force participation, age when married, marriage and divorce rates, as well as spouse's labor force participation and earnings, did not play any role in this fertility decline. However, spouse's education increased sharply as well through assortative matching, therefore playing a major role in declining fertility. In the second part of the paper. Lavy shows that the increase in mother's schooling also led to an increase in the education of children in the face of a decline in their number. The increase in schooling of children amounted to just over one third of the increase in schooling of their mothers.