Labor Studies

February 20, 2015
David Card of the University of California, Berkeley, Organizer

Hamish Low, University of Cambridge; Costa Meghir, Yale University and NBER; Luigi Pistaferri, Stanford University and NBER; and Alessandra Voena, University of Chicago and NBER

Marriage, Social Insurance and Labor Supply

Jesse Rothstein, University of California at Berkeley and NBER

Revisiting the Impacts of Teachers

Using teacher switching as a quasi-experiment, Chetty, Friedman,and Rocko (hereafter CFR) find that value added (VA) estimates of teacher effectiveness are not meaningfully biased by student sorting and are strongly correlated with students' later outcomes (CFR 2014a; 2014b). In this paper, Rothstein successfully replicates CFR's key results in a new sample. Further investigation, however, reveals that the quasi-experiment is invalid: Teacher switching is correlated with changes in student preparedness. Estimates that adjust for this indicate moderate bias in VA scores. The association between VA and long-run outcomes is not robust and quite sensitive to controls.

Ioana Marinescu, University of Chicago, and Roland Rathelot, University of Warwick

Mismatch Unemployment and the Geography of Job Search

To what extent can we reduce unemployment by relocating job seekers and jobs closer to each other? It depends on the degree to which job seekers are stuck in their current location. Using data from the leading job board, Marinescu and Rathelot estimate a job seeker's willingness to apply to a job as a function of the job's distance to the job seeker's zip code of residence. Plugging this estimate into a new theoretical model, the researchers find that optimally relocating job seekers would decrease unemployment by at most 5%, implying that geographic mismatch is a negligible driver of U.S. unemployment.

Lance Lochner, University of Western Ontario and NBER, and Youngki Shin, University of Western Ontario

Understanding Earnings Dynamics: Identifying and Estimating the Changing Roles of Unobserved Ability, Permanent and Transitory Shocks (NBER Working Paper 20068)

Lochner and Shin consider a general framework to study the evolution of wage and earnings residuals that incorporates features highlighted by two influential but distinct literatures in economics: (i) unobserved skills with changing non-linear pricing functions and (ii) idiosyncratic shocks that follow a rich stochastic process. Specifically, the researchers consider residuals for individual i in period t of the form: Wi,t = µt(Θi) + εi,t, where Θi represents an unobserved permanent ability or skill, µt (·) a pricing function for unobserved skills, and εi,t idiosyncratic shocks with both permanent and transitory components. The authors first provide nonparametric identification conditions for the distribution of unobserved skills, all µt (·) skill pricing functions, and (nearly) all distributions for both permanent and M A(q) transitory shocks. They then discuss identification and estimation using a moment-based approach, restricting µt (·) to be polynomial functions. Using data on log earnings for men ages 30-59 in the PSID, the researchers estimate the evolution of unobserved skill pricing functions and the distributions of unobserved skills, transitory, and permanent shocks from 1970 to 2008. They highlight five main findings: (i) The returns to unobserved skill rose over the 1970s and early 1980s, fell over the late 1980s and early 1990s, and then remained quite stable through the end of the sample period. Since the mid-1990s, the researchers observe some evidence of polarization: the returns to unobserved skill declined at the bottom of the distribution while they remained relatively constant over the top half. (ii) The variance of unobserved skill changed very little across most cohorts in the sample (those born between 1925 and 1955). (iii) The variance of transitory shocks jumped up considerably in the early 1980s but showed little long-run trend otherwise over the more than thirty year period of the study. (iv) The variance of permanent shocks declined very slightly over the 1970s, then rose systematically through the end of the sample by 15 to 20 log points. The increase in this variance over the 1980s and 1990s was strongest for workers with low unobserved ability. (v) In most years, the distribution of µt (Θ) is positively skewed, while the distributions of permanent and (especially) transitory shocks are negatively skewed.

Will Dobbie, Princeton University and NBER

The Impact of Loan Modifications on Repayment, Bankruptcy, and Labor Supply: Evidence from a Randomized Experiment

In this paper, Dobbie and Song use a randomized experiment and administrative tax and bankruptcy records to estimate the impact of loan modifications on subsequent outcomes. A large non-profit credit counseling organization and eleven unsecured creditors offered lower interest rates and longer repayment periods to a random subset of 80,000 distressed borrowers. Borrowers offered a lower interest rate were more likely to repay their debts and less likely to file for bankruptcy protection. Lower interest rates also increased the probability of being employed for the most heavily indebted borrowers. In contrast, there was little impact of a longer repayment period on debt repayment, bankruptcy, or employment.

Moshe Buchinsky, University of California, Los Angeles and NBER, and Alvaro Mezza, Federal Reserve Board

Illegal Drugs, Education, and Labor Market Outcomes

In this paper, Mezza and Buchinsky investigate the causal effects of consuming illegal drugs on educational attainment, employment and wages. To identify these effects, they develop and estimate the first dynamic structural model to jointly consider decisions of whether to consume drugs, attend school, participate in the labor force, and save. Using data from the National Longitudinal Survey of Youth 1997 (NLSY97), the researchers focus the analysis on males; the period of analysis begins at age 13, when they are young enough to have had no experience with drugs. Contrary to findings in the literature, non-drug users have higher wages than marijuana and/or hard drug users. This effect is small for individuals who consume marijuana in low doses but increases with the frequency of drug use. Results from a counterfactual experiment suggest that a 30 percent increase in the price of marijuana each period would reduce the number of marijuana consumers among the 13- to 29-year-olds by 23 percent. Individuals who are dissuaded from consuming marijuana due to the higher price would also increase their annual income by an amount, on average, of $2,763 by age 29. The reduction in drug use also has a positive effect on school attendance and employment for this group.

Henry Farber, Princeton University and NBER

Why You Can't Find a Taxi in the Rain and Other Labor Supply Lessons from Cab Drivers (NBER Working Paper 20604)

In a seminal paper, Camerer, Babcock, Loewenstein, and Thaler (1997) find that the wage elasticity of daily hours of work New York City (NYC) taxi drivers is negative and conclude that their labor supply behavior is consistent with target earning (having reference dependent preferences). In this paper, Farber replicates and extends the CBLT analysis using data from all trips taken in all taxi cabs in NYC for the five years from 2009-2013. Using the model of expectations-based reference points of Koszegi and Rabin (2006), Farber distinguishs between anticipated and unanticipated daily wage variation and presents evidence that only a small fraction of wage variation (about 1/8) is unanticipated so that reference dependence (which is relevant only in response to unanticipated variation) can, at best, play a limited role in determining labor supply. The overall pattern in the data is clear: drivers tend to respond positively to unanticipated as well as anticipated increases in earnings opportunities. Additionally, using a discrete choice stopping model, the probability of a shift ending is strongly positively related to hours worked but at best weakly related to income earned. These results are consistent with the neoclassical optimizing model of labor supply and suggest that consideration of gain-loss utility and reference dependence is not an important factor in these labor supply decisions. Farber explores heterogeneity across drivers in their labor supply elasticities and considers whether new drivers differ from more experienced drivers in their behavior. He finds substantial heterogeneity across drivers in their elasticities, but the estimated elasticities are generally positive and only rarely substantially negative. Farber also finds that new drivers with smaller elasticities are more likely to exit the industry while drivers who remain learn quickly to be better optimizers (have positive labor supply elasticities that grow with experience).