On the negative correlation between effort and pay

It would seem natural that in a system where pay is linked to performance, better performers are rewarded more handsomely. Yet, there are plenty of examples where this does not work. If it is difficult to find a metric of performance, then the selected metric may give wrong incentives. The classic example is programmers paid by the number of code lines written, which leads to bloated and confusing code. Another one is with many civil servant jobs where the output is not related to a marketed good. The issue can be so bad that a negative correlation between performance and pay emergence.

Ola Kvaløy and Trond Olsen show that this could happen in another way that is not related to monetary and non-monetary rewards, yet has an impact on intrinsic motivation: weak enforcement probability. Suppose the latter is variable. Then high monetary rewards may be associated with a low probability that the scheme will actually be used. Workers may then just slack off. The above hypothesis is not completely insane, as one can imagine situations where there is moral hazard on the side of the worker, and the work contract tries provide the worker both with incentives and with some insurance. It works also without worker risk aversion if there is limited liability.

Spouses and unemployment duration

When unemployed, some people search more intensely for a new job than others. That will of course depend on their personal circumstances. The urgency of getting some income is obviously more pressing when there is little alternative income, and one such alternative is the spouse.

Stefania Marcassa studies French couples where one spouse works and the other is unemployed. It turns out unemployed men search longer for a job if their spouse earns less, while it is reversed for unemployed women. That turns out to be consistent, in a standard labor search model, with a breadwinner stigma for men. French men do not seems to be able to bear the thought of having a successful wife while being unemployed, while women see no hurry to work if their husband is doing well. Clearly, the sexist ones here are the men.

On the secularization of America

How committed to religion are people? This is rather difficult to establish as surveys can be biased by social pressure. For example, it is nowadays perfectly acceptable to be an atheist in Europe, but an atheist would be a social outcast in many parts of the United States. Hence, many stay in the closet in the US and are not visible, for example by still attending church because of social pressure or because it is the only social activity in their area.

As so often, actions are more revealing than opinions. Fernando Lozano uses an indirect indicators of religiosity that is based of economic choices: working hours on religious holidays over the last 30 years in the US. A few interesting trends emerge: Jewish holidays have become more observed, while Christian ones have become more observed if they have been secularized (like St. Patrick) and less if not (Good Friday). This is consistent with the renewal of Judaism and the commercialization of Christian holidays.

Cobwebs on the law professor market

Law professors were among the first in universities, and Economics emerged in many places from Law Schools. This make the study of laws an old and established profession, but this is not why I am mentioning cobwebs here. I am rather referring to the cobweb model, where price and quantity bounce around along the path of a spiral to reach an equilibrium.

According to Christoph Engel and Hanjo Hamann, this is what is happening on the market for Law professors in Germany. Say there are a lot of open positions in the German university system. This pikes the interest of law students, who after their doctorates require to go through a "habilitation" process that takes 6-9 years before they can apply for a professor position. And lo and behold, about eight years later, there is a surplus of candidates, which discourages younger students to choose this career, and we enter the other part of the cycle. Engel and Hamann show that this is not just theory, but applies remarkably well to the data, as it has before to cattle, whose biology leads to a similar market (ROsen, Murphy and Scheinkman 1994).

When do employers support minimum wages?

Germany does not have minimum wages, but there is currently a renewed debate about their introduction. As collective bargaining is largely handled at the sectoral level, one idea is to adopt sectoral minimum wages, for example by negotiating them within collective bargaining. In some sectors, there is already an informal wage this way, but this could be formalized. Given this idea of sectoral minimum wages, it is of interest to see which sectors would support them.

Ronald Bachmann, Thomas Bauer and Hanna Kröger use a survey of 800 firms in 8 sectors and uncover some interesting patterns. It looks like minimum wages are most supported where they would raise barriers of entry for competitors. This means that agreeing on a minimum wage is getting very close to cartelization. This is a feature of the fact that negotiations are done at the sectoral level. It would lead to a reduction in the number of firms, and likely to a reduction in employment as well, but for a different reason than usual with minimum wages: the cartelization reduces output and thus the labor force required for production. I suspect that if the minimum wage were set nationwide, though, this kind of support would largely vanish.

The origin of de-unionization in the United States

For better or worse, union are particularly weak in the United States. This was not always so. Why unions declined is not limited to Reaganism which merely accelerated a trend already present in the data. The difficulty is to explain this trend which is for example only present in some other countries and nowhere as pronounced.

Emin Dinlersoz and Jeremy Greenwood explore whether this has to do with the distribution of income, at least in the US. Indeed, over the past century and a half, union membership rates followed an inverted U-shape, while the income share of the top 10% did the opposite. Greenwood and Dinlersoz think that both can be explained by the evolution of skill-biased technical change: basically, while the assembly-line was the main means of production, unskilled labor garnered a higher higher income share and unions were strong, but both decline since as information technology became important. Nice story, but I wonder whether it can apply to more observations (i.e., countries). Also, I wonder whether the timing of events works out. Indeed, the ratio of of unskilled to skilled workers went into a tailspin starting in 1945, while union membership started decreasing only in 1955 and the income distribution started getting more skewed in the 1980's.

The impact of recessions on economist productivity

In recessions, those who have the hardest time finding jobs are those who try for the first time. Facing these difficulties, many decide to pursue their studies in graduate school. From this, one should expect future productivity to be higher in the future, because of the higher level of human capital. But for a given level of human capital, labor productivity should be lower post-recession, because the marginal new graduate is of lower quality.

Michael Boehm and Martin Watzinger look at the performance of PhD economists and find that those who studied or graduated during a recession over-perform the others as measured by publication records. That would not surprise me for those who graduated during tough times, as only the best get jobs. Indeed, the study matches those who graduated with those who are still members of the American Economic Association. Thus, there is some selection bias. But for those who start in a recession, and thus would graduate in "normal" times, given the average length of a recession, this is more surprising. Boehm and Watzinger can justify this with the good old Roy model of reallocation of talent: in a recession, people switch to recession proof sectors, and those who can do this the most easily are those who are about to choose in which sector to work: students. As the number of graduate students slots does not change much, at least in Economics, the quality of those admitted is higher, if the admission officers do their work well. As the publication record many years later shows, they do.

Why are seasonal immigrant worker programs so unpopular?

Immigration policy is difficult to optimize, first because some economic rents are at stake, second because people do not want to share the luck of being born in the right place and at the right moment with foreigners who do not have that luck. But even within that context, a policy of seasonal immigration should be easy to adopt, as everybody wins: immigrants are let in only when labor demand is very high and cannot be met by locals, and the immigrants leave when the labor demand is back to normal. And the immigrants are willing to go for it, as it provides good income that is valued as they return home. This is a winning proposition for everyone, yet such policies are rare, and when they exist, they are little used. Why?

Danielle Hay and Stephen Howes take the example of Australia, where such a policy has been adopted for the horticulture industry but little used. It appears growers are reluctant to hire seasonals even when they have trouble finding workers. Either they are unaware, or they are afraid of red tape, or they prefer to hire back-packers (illegals) who show up on their doorstep. So it appears that once more, the fact that illegals can be exploited runs counter to good policy. Again, I appeal that we should give give each worker, legal or not, the same rights. Another win-win proposition.

The cost of hiring in Germany

How much does it cost to hire someone? This question is surprisingly difficult to answer. It is not sufficient to keep a log of all the recruitment expenses, the time spent and the training costs. Indeed, there are a lot of implicit costs that may, or may not, appear in the future. Indeed, when you commit to employ someone, you also commit to insuring this person in many ways. In the US, health care insurance is a factor. In many jurisdictions, rules regarding firing may also entail substantial costs, for example if they force you to retain an underperforming employee. And you often also commit to provide some insurance against productivity changes by paying a relatively stable wage. Summing up, figuring out the cost of a hire is damn hard.

Samuel Muehlemann and Harald Pfeifer try to figure out some of these costs for skilled workers in Germany. They find a cost worth on average eight weeks of pay, and that is only taking into account time and expenses during the recruitment process as well as the monetary and time costs of training. Strangely, there are no economies of scale, as the elasticity with respect to the number of hires is 1.3. Even worse, the cost doubles from small to large firms. Labor market institutions do not seem to be blamed for this convexity. I am not sure how to rationalize all this. Large firms can hire several workers simultaneously, and this must save some costs. Same for training programs.

Why less secure jobs pay less

In financial markets, risk is generally rewarded with higher returns. On labor markets, this is much less obvious. While some public jobs like police officers, jail guards and firefighters are rewarded with early retirement packages, the private labor markets is ironically much less willing to reward risk. Just compare miners and white collars. It is even worse for those facing unemployment risk, especially within firms. How could such an equilibrium come about?

Roberto Pinheiro and Ludo Visschers can explain this with a labor search model where firms differ in job separation probabilities. In firms with short expected job tenures, the value of a job is low for both workers and firms. As workers can search for better opportunities while on the job, they are willing to accept low wages with the riskiest firms, who thus also remain competitive. But some workers also get scarred but getting stuck with such jobs. Of course, this logic is not valid for low risk firms. This leads to wage heterogeneity across firms and workers. Coincidentally, workers tends to move to safer jobs, thereby increasing the average job tenure as they age, a nice feature of the model.

On the difficulty of implementing right-to-work legislation

The chronically poor have a low labor-market attachment, to a large extend because of a lack of skills and experience. This is thus a vicious circle. One way to break this vicious circle is to offer them employment and hope this turns into a virtuous circle. This is what India implemented in 2005, a program that guarantees any rural adult 100 works days on public projects at minimum wage (thereby getting the richer people to self-select out). Does the theory work out in practice?

Puja Dutta, Rinku Murgai, Martin Ravallion and Dominique van de Walle report that it worked, sort of. The poorest families do indeed use the scheme most, but here remains unmet demand, thus the state was not able to fulfill its work guarantee. In fact, this rationing was most prevalent in the poorest Indian states, where the guarantee is the most needed, and where the resulting public works would also be of the highest benefit. And while the scheme seems to motivate more rural women to participate in the labor market, the rationing still privileges men. All in all, the program seems to roughly target the right people, although there is substantial scope for improvement. But we still need to wait for more data to see whether it works to alleviate chronic poverty.

On the advantages of hiring undocumented workers

There is a long standing debate in the United States about undocumented workers, and a more recent one in Europe as well. The debate is on two fronts: the public services they receive without paying taxes (in most cases), and the jobs they take away from local and the resulting pressure on local wages. In the second case, an easy solution would be for firms to stop hiring undocumented workers. But the incentives are not aligned for that, unless one puts prohibitive fines on firms doing illegal hiring.

Indeed, David Brown, Julie Hotchkiss and Myriam Quispe-Agnoli find, using administrative data from Georgia, that such firms have a competitive advantage over those the do not hire undocumented workers, or fewer. This advantage translates into a much higher survival rate, especially for little diversified firms requiring low-skilled workers. This looks like a prisoner's dilemma: if your competitor hires illegals, you have to as well, and vice-versa. But you would both be better off without, as there are legal ramifications.

Maybe those legal ramifications need to be trumped up. Indeed, the advantage of hiring illegals is often that they are willing to undercut minimum wages or various benefits legal workers have rights to. One way to avoid this this is to give illegal workers the same rights as legal workers, as I have argued before. This is actually in the interest of documented workers, as there is then less demand for undocumented workers.

Why Scandinavian social policies work

Scandinavia is a mystery: marginal tax rates on labor income are astronomical, yet labor force participation is high, even higher than in the United States where tax rates are much lower. In addition, they is an impressive social safety net, which should also depress the labor supply, yet it is high. No standard economic model would be able to predict anything close to this, and the question is thus what is so special about Scandinavia.

Torben Andersen (the one living in Denmark) has an answer. He claims that this has to do with how the social safety net is designed. First, it is build in a way to never exclude anyone, thus there is much less marginalization and fewer people who have abandoned the labor market. Second, the social safety net provides services in a large part only conditionally on participating in the labor force. But this is not like workfare in the United States. The level of support is much higher, and thus there is a stronger incentive to try to work. But high support acts like an implicitly high minimum wage, which has consequences for labor demand. To overcome this, a strong emphasis is put on education to keep the proportion of working poor small. Education is basically free and retraining for adults is also offered (and used).

All this points towards an implicit social contract where the state provides education and insurance, and in return is getting paid through taxes when income is available. Whether this works out better than a model where the state does not intervene and people have stronger incentives to improve their well-being, but not necessarily the ability, is ultimately an empirical question. And it is not clear their is a middle ground. Considering the corner-solutions (US and Scandinavia), it is not obvious one Pareto-dominates the other.

Unemployment insurance only for the rich

Designing an unemployment insurance system is tricky, because you want to discourage shirkers (cheaters who refuse job offers or search too little, yet get benefits) while still providing well-being enhancing insurance. There is a big literature on this, with now a new paper with a rather odd result.

Sebastian Koehne and Moritz Kuhn look at an economy where households cannot borrow, but can accumulate assets. People who save well ahead do not need to be that much insured, so the moral hazard of shirking should not be that important. Also, you want more savings to generate more capital in the economy. The results is that unemployment insurance benefits should rise with wealth, as they implicitly increase the return on assets. But this also increases the unemployment rate. I suspect it is the rich who are now shirking in larger numbers, and as they are rich, the results loss in consumption does not matter much for welfare, as the have a lower marginal utility of consumption. I am still surprised, though, that a one percentage point increase in the average unemployment rate can increase welfare. Maybe it has to do with the assumption that UI benefits in the US average at 50%, which may be true for those who are eligible, but is much lower when you factor in those not eligible.

Country size and the unemployment rate

When firms merge, they mention economies of scale and sharing of fix costs. They also sometimes imply increased market power. When firms shed business lines to shrink, they put forward concentrating on core business. From this, it is not very clear where it is an advantage to have a large or small firm. What about countries? Are large countries more successful? One way to look at it, is to compare the unemployment rate to country size. Why not.

Norbert Berthold and Klaus Gründler did that and find that small is beautiful. Indeed they find a positive correlation of the unemployment rate with population and with area, looking at subcontinents, countries and regions within countries. How could that be? They first offer a bizarre explanation, using a Cobb-Douglas production function where they substitute labor by population times the employment rate, then isolating the unemployment rate. Of course, if you leave the other factors constant, increasing population will increase the unemployment rate. The problem is that the other factors are not constant. The paper later ties the correlations in a parabolic way to collective bargaining and the size of the government, the reasoning being rather obscure.

What bugs me more about the paper, though, is first the underlying assumption that each data point (a region) is treated like a closed economy. Regions trade with each other, and this implies that labor markets are linked. This is especially the case when you look at Europe today where borders have much less significance than just ten years ago. Second, the analysis is performed for 2010, not long term averages. All what is said is thus valid for a particular point in the business cycle. Finally, nowhere in the text it is mentioned that populous regions may have different characteristics that could matter for unemployment, say they are more urban, have more manufacturing, are more diversified. After all, these regions are accidents of geography and history, and both lend some economic characteristics to them. And these are the ones that matter. Otherwise, you would get the idea that you just need to administratively split up countries, and immediately a labor market miracle happens.

Detection of wage under-reporting

The recent publication by Greece of the names of the most notorious tax cheat is the latest event in a recent trend by tax authorities across the world as they try to secure more revenue. Of course, it is difficult to evaluate how much underreported taxable income there is. One way, recently reported here, is to look at money circulation. A "natural experiment" can be much more illuminating.

Péter Elek, János Köllő, Balázs Reizer and Péter Szabó look at a recent reform in Hungary, wherein a minimum contribution to social security is imposed for any wage below twice the minimum wage. Firms paying below this threshold also face more scrutiny from tax authorities. One has to understand that one feature of wage under-reporting is that it can lead to a the declaration of an official wage at the minimum wage with the rest paid under the table. The Hungarian reform had the potential to change this for cheaters, who would then want to declare twice the minimum wage.

Using a double-hurdle model, because there is also a censoring problem with the minimum wage in additions to the tax cheating selection, the authors find that about 50% of the minimum wage job before the reform were fraudulent. With about a third of workers declaring a minimum wage, that is a considerable share of cheaters. And there may of course be more, who declare more than minimum.

Are government workers more motivated?

In times if tight fiscal conditions, it is easy to criticize public employees. Civil servant have the reputation of being overpaid, underworked, lazy, unmotivated and enjoying too many benefits. I will not address all of this concerns here. I already covered overpaid, let us talk about unmotivated.

Using the World Values Survey, Sarah Smith and Edd Cowley find that public sector workers are intrinsically more motivated. To some extend this is not surprising, as one self-selects into the public sector when one is not that motivated by profits and money, but rather what public service stands for: serving others. But this does not apply to every country. The more corruption there is, the less motivated are civil servants. Indeed, in a corrupt government, public service takes a back seat to earning more money (or influence). How can one the explain the bad rap civil servants gets from private sector workers in the least corrupt economies? Maybe it is the public just reflecting its own values about work on the public workers, unjustifiably.

More on the long term consequence of slavery in Africa

Since the start of this blog, one of the most popular posts has been one that analyzes the long-term costs of slavery in Africa. Of course, it is about the consequences in regions where slaves were taken from. There is also a region where they have been taken to, that is South Africa. What has been the impact there?

Johan Fourie writes that farmers taking slaves prospered thanks to economies of scale of specialization, to the point that they were considered by some to be the richest in the world at the time. But this advantage did not last long, as the use of slave labor discouraged further immigration from Europe. And as education opportunities were limited to (free) whites, large inequalities were maintained through a period where human capital became more important. These inequalities and the large fraction of poorly educated citizens, even after emancipation and the end of apartheid, stills drags the South African economy down, because institutions emerged to perpetuate these inequities.

This persistent impact of inequality in human capital is consistent with evidence from the US, as I reported in a previous post, with a recent update by the same authors just published recently. Graziella Bertocchi and Arcangelo Dimico expand on their use of US panel data. In short, they find that the education gap between whites and blacks at the county level today is determined by the initial gap in 1940, with only little convergence since. And the initial gap is largely explained by prevalence of slavery in earlier years.

Recessions are costly

Robert Lucas has pushed the idea that business cycles are not that costly that they would need intervention, and the real business cycle literature, at least the early one, has anyway advocated that the government should stay out of this kind of business. It is true that long term growth and understanding why some countries are so poor are more important questions, yet one cannot shake the feeling that recessions are costly. The recent one is more severe than usual and can highlight how its costs can be high, and those costs may persist for some time if the much longer than usual unemployment durations translate into significant losses in human capital and ultimately wages.

Steve Davis and Till von Wachter provide some new evidence of a somewhat different kind. Studying US workers displaced in mass-layoffs, they calculate the present value of a job loss in terms of pre-loss wage years. When the unemployment rate is below 6 percent, the loss is of 1.4 years. Above six percent, as is typical in a recession, the loss is 2.8 years, i.e., much much more than the increase in unemployment duration. One can only imagine that these numbers are going to be much worse for the last recession. And keep in mind that these higher numbers apply to more people in a recession. And it matters in aggregate: if the unemployment rate goes from 5 to 10%, it means 5% of the population loses 1.4 additional years of wages. That is 0.7% of national labor income, or 0.5% of GDP. Not peanuts, and I have not even factored in anything about curvature in utility.

Anonymous applications on the Economics PhD market. Really?

There is unfortunately still some discrimination left in labor markets. Literature has shown that in particular race and gender may matter in some cases, as well as beauty. While this is usually demonstrated by looking at the significance of some characteristic dummies that should not matter in hiring or wage decisions, another way to test for discrimination, at least in hiring, is to compare anonymous job applications to open ones. This is costly to do, and it may infringe some ethical issues, hence this is a rare exercise.

Annabelle Krause, Ulf Rinne and Klaus Zimmermann did this for applications of Economics PhDs to a position in a European institution. I am really puzzled what they expected to learn from such a peculiar market. Indeed, part of the recruitment pool was anonymized before being submitted to the recruitment team. This is very difficult to do properly, as CV, papers and reference letter have plenty of mentions of names and gender. And how to hide that when a candidate has published or is previously known to recruiters? And of course, this can only test up to the selection for the live interview, which is very early in the recruitment process.

In addition, it is very unlikely to find discrimination in such a specialized market. One, recruiting in an academic environment is usually closely scrutinized for discrimination. In fact I have been highly annoyed by the burden it takes to prove one has not discriminated. Two, I would even argue there is reverse discrimination, as recruitment committees are often under strong pressure to hire from "under-represented" groups. Three, the institution that agrees for this exercise is not discriminating consciously, or it is very foolish.

The results are not surprising. No discrimination is found, except a little reverse discrimination for women. It is impossible to generalize the results, as the sample is so small and so specific to this recruiting institution. I really do not see the point of this paper.