Labor Studies Program Meeting

February 24, 2012
David Card of the University of California, Berkeley, Organizer

Mary Daly and Bart Hobijn, Federal Reserve Bank of San Francisco, and Theodore Wiles, The Analysis Group

Aggregate Real Wages: Macro Fluctuations and Micro Drivers

Using data from the Current Population Survey from 1980 through 2010, Daly, Hobijn, and Wiles examine what drives variation and cyclicality in the growth rate of real wages over time. They use a novel decomposition technique that allows them to divide the time series for median weekly earnings growth into the part associated with the wage growth of persons employed at the beginning and end of the period (the wage growth effect) and the part associated with changes in the composition of earners (the composition effect). The relative importance of these two effects varies widely over the business cycle. When the labor market is tight job switchers get large wage increases, making them account for half of the variation in median weekly earnings growth over our sample. Their wage growth, as well as that of job-stayers, is procyclical. During labor market downturns, this procyclicality is largely offset by the change in the composition of the workforce, leading aggregate real wages to be almost noncyclical. Most of this composition effect works through the part-time employment margin. Remarkably, the unemployment margin neither accounts for much of the variation in nor much of the cyclicality of median weekly earnings growth.

John M. Abowd, Cornell University and NBER, and Ian M. Schmutte, University of Georgia

Endogenous Mobility

Abowd and Schmutte establish a method of correcting for endogeneity bias in fixed-effects estimates of worker and firm-specific earnings heterogeneity using longitudinal employer-employee data. The problem arises because realized job assignments may be endogenous if they are partially determined by unobservable components of earnings. The authors exploit the network structure of the data to model the process by which the labor market selects job matches from the universe of possible employment relationships. Specifically, they model the evolution of the matched data as an evolving bipartite graph in a Bayesian latent class framework. They estimate the model using data from the LEHD program of the U.S. Census Bureau. Their results suggest that the correction for endogeneity is meaningful but does not overturn the qualitative findings from previous analyses that assumed mobility to be exogenous.

Johannes Schmieder, Boston University; Till M. von Wachter, Columbia University and NBER; and Stefan Bender, Institute for Employment Research

The Effect of Unemployment Insurance Extensions on Reemployment Wages

Does the search subsidy provided by unemployment insurance (UI) help workers find better jobs by, or does the resulting increased time out of work lead to skill depreciation and lower reemployment wages? Schmieder, von Wachter, and Bender investigate this question by exploiting strict age thresholds in the German UI system that determine workers' maximum potential UI benefit duration. Using a large administrative data set to implement a regression discontinuity (RD) design, they show that longer potential benefit durations lead to sharp increases in non-employment durations while lowering post-unemployment wages. In order to interpret this finding, they present a new theoretical result that shows how the average effect of UI extensions on reemployment wages can be decomposed into a reservation wage effect and an effect that comes from changes in the wage offer distribution throughout the non-employment spell. This decomposition can be implemented using information on how reemployment wages, conditional on non-employment durations, are affected by UI extensions. The authors show empirically that reemployment wages conditional on time out of work are not affected by increases in potential durations. This theoretical result implies that the negative effect of UI extensions on average wages may be entirely attributable to changes in the wage offer distribution over time. Furthermore, one can estimate the change in mean offered wages over time by regressing reemployment wages on non-employment durations and then instrumenting for time out of work with the increase in potential UI durations at the age discontinuity. This IV estimate implies that each month out of work reduces wage offers (and reemployment wages) by 0.9 percent, pointing to very high costs of long-term unemployment. Furthermore, about half of the average wage loss of 25 percent of the unemployed in this sample is explained by time spent out of work.

Gregorio S. Caetano, University of Rochester, and Vikram Maheshri, University of Houston

School Segregation and the Identification of Tipping Points

Caetano and Maheshri present a novel approach to identify tipping points and stable equilibria in social interaction models, and they implement it to analyze racial segregation in Los Angeles schools from 2002 to 2006. They estimate distinct demands for schooling for white and minority parents using instrumental variables and based on historic county-level trends in racial migration. Tipping points and stable equilibria are identified via a simulation process that allows for heterogeneity in the existence and locations of tipping points and stable equilibria across schools and within schools over time. The authors find that over 60 percent of schools feature a tipping point ranging from 15-to-85 percent minority share. Over 80 percent of schools have a stable, segregated, minority equilibrium; a similar proportion of schools also possess a stable, segregated, white equilibrium. These results are robust to alternative, general specifications of social interaction.

Thomas Buser and Hessel Oosterbeek, University of Amsterdam, and Muriel Niederle, Stanford University and NBER

Gender, Competition and Career Choices

Gender differences in psychological attributes -- specifically gender differences in competitiveness and risk aversion -- are often discussed as potential explanations for gender differences in labor market outcomes. Buser, Niederle, and Oosterbeek assess the extent to which educational choices reflect academic performance and psychological attributes. Specifically, they correlate an experimental measure of competitiveness with the first important career choice of secondary school students in the Netherlands. At the age of 15, these students have to pick one out of four study profiles: a science-oriented profile, a health-oriented profile, a social science-oriented profile, and a humanities-oriented profile. The choices of boys and girls are clearly different: the boys concentrate in the science-oriented profile, the girls in the health- and humanities-oriented profiles. The authors replicate the finding that boys are much more competitive than girls. They also find that competitiveness significantly affects profile choice. Gender differences in competitiveness can explain as much as 25 percent of gender differences in career choices. This supports the extrapolation of laboratory findings on competitiveness to labor market settings.

Ernesto Dal Bo, University of California at Berkeley and NBER; Frederico Finan, University of California at Berkeley; and Martin Rossi, Universidad de San Andres

Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service

Dal Bo, Finan, and Rossi study a recent recruitment drive for public sector positions in Mexico in which different salaries were announced randomly across recruitment sites and job offers subsequently were randomized. Screening relied on exams designed to measure applicants' intelligence, personality, and motivation, which allowed for the first direct documentation of the trade-offs facing government in its attempt to attract various personal qualities to enhance state capabilities. The authors examine the effects of financial incentives on attracting individuals to the public sector, and in so doing they present the literature's first experimental estimates of the elasticity of the labor supply facing the employer. They find that higher wages attract more able applicants as measured by their IQ, personality, and proclivity towards public sector work - that is, there is no evidence of motivational adverse selection from higher wages. Higher wage offers also increase acceptance rates, implying a labor supply elasticity of around 2, and some degree of monopsony power. The random nature of job offers apparently allows for the first causal estimates of the negative effects on recruitment of job location disadvantages, including commute distance or marginality, and of the role of wages at overcoming the resulting recruitment gap.

Eric A. Hanushek, Stanford University and NBER; Ludger Woessmann, University of Munich; and Lei Zhang, Tsinghua University

General Education, Vocational Education, and Labor-Market Outcomes over the Life-Cycle (NBER Working Paper No. 17504)

Policy debates about the balance of vocational and general education programs focus on the school-to-work transition. But with rapid technological change, gains in youth employment from vocational education may be offset by less adaptability and thus diminished employment later in life. To test their main hypothesis that any relative labor-market advantage of vocational education decreases with age, Hanushek, Woessmann, and Zhang use a difference-in-differences approach that compares employment rates across different ages for people with general and vocational education. Using micro data for 18 countries from the International Adult Literacy Survey, they find strong support for the existence of such a trade-off, which is most pronounced in countries emphasizing apprenticeship programs. These results are robust to accounting for ability patterns and to propensity-score matching.

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