Job referrals can be more efficient than open search

I a perfect world with heterogeneous workers and jobs, the matches are those that maximize efficiency. But when information about the quality of either is private and cannot be revealed credibly, the economy quickly looses efficiency. The solution is then to make hiring and firing easy, so that good matches can be found by trial and error. Employers also try to gather information about their potential employees, and their socio-demographic characteristics are certainly among them. While this looks like discrimination, it is OK if it is only statistical discrimination. But one can improve on this.



Christian Dustmann, Albrecht Glitz, and Uta Schönberg study job referrals from co-workers. They find that typically shunned minority workers are more likely to be hired the more other minority workers are already present, a clear sign of job referral. In addition, these workers earn on average higher wages and are more likely to stay in such firms. In some sense, this shows that job search networks can be better than open competition under some circumstances. One could even stretch the argument to claim that favoritism could be beneficial.

Obesity on the German labor market

Being obese makes you a social outcast, especially in countries were obese people are relatively rare. This can have consequences on the labor market, as there is plenty of evidence that handsomeness matters, for example. So are obese people discriminated against on the labor market?

Marco Caliendo and Wang-Sheng Lee look at newly employed people in Germany and find that there is not much evidence of discrimination there. Only obese (but not overweight) women may be suffering in the land of beer and wurst. Of course, one may question the validity of a study that must be relying on very few observations for a subgroup of the sample. Yet, surprisingly, half of the men and 37% of the women are considered overweight or obese, proportions I would never have imagined from walking around German towns. And with sample ages averaging in the thirties, they are relatively young too. As the survey sample is based on people who have been unemployed, I wonder whether the discrimination is rather in unemployment rather than employment.

The curse of the more trustworthy gender

It sucks to be a female entrepreneur. You are more likely to repay your loan, but you still keep getting smaller loans. As a consequence, your business is smaller than that of your male counterparts. Of course, all this could be due to some common correlates that cause women to be more trustworthy and yet get smaller loans. Or it could be just plain and simple discrimination.

Isabelle Agier and Ariane Szafarz test the latter hypothesis using rich data from microfinance in Brazil. The idea is to verify whether women are discriminated against in the loan application process. Testing for discrimination is not easy as apparent inequities may make economic sense. But if across to populations a lower or equal loan default rate is associated to a higher or equal loan denial rate, then we have an ethical issue. This what Agier and Szafarz test. Sadly, the news are not good. There is significant discrimination and despite being better creditors, they get smaller loans. Even worse, repeat applicants who could thus prove their trustworthiness get even more discriminated. Of course, there could still be some unobserved variable explaining all this, but I cannot imagine what that could be.

Affirmative action and stereotypes

The ghetto culture is a very strong absorbing point. Once you are there, it is very difficult to get out, and your children will also have a very hard time. The problem with the ghetto culture is that is harbors values that a very different from mainstream culture, in particular regarding work habits. Those values are instilled by your environment (family, neighbors, community) and when you grow up around peers with poor work habits, it is difficult to acquire better habits.

Maria Sáez-Martí and Yves Zenou make this point and add that even when parents are forward-looking and care about their offspring, they will not make the investment to teach their children good habits if employers take the cultural environment of a potential employee as a signal of work habits. They discriminate, and because they discriminate they turn out to be correct. That is a vicious circle that is difficult to beat, but initiatives like affirmative action can overcome this. The condition is that quotas be high enough.

Affirmative action can be implemented in two ways, imposing quotas on good jobs, and imposing quotas in the majority group (putting some of the ghetto in the mainstream group of applicants). Low quotas are also improving work habits in the ghetto in the second case, but are detrimental in the first case. This is because the advantage of better work habits is absent, wages of good workers are lower and parents put less effort in educating their kids. With the second case, wages of good workers remain high, and parents will help their kids who have then a chance to prove themselves. An alternative policy, integration is only beneficial to the ghetto, and obviously the others will resist integration because it hurts their work habit.

On the wisdom of Groupon

For those who are just coming back from their sabbatical in the middle of the Amazon forest, Groupon is an obnoxious coupon provider that recruits members by validating coupons only when a predefined number of users promise to use them. Also, users prepay and obtain vouchers for the purchased good. The scheme seems remarkably popular among consumers, and Groupon recently turned down a US$6 billion buyout offer from Google. While it is successful among buyers, what about sellers? There is at least anecdotal evidence that some retailers regret participating in the scheme, for example when they get swamped by vouchers.

Benjamin Edelman, Sonia Jaffe and Scott Duke Kominers analyze why businesses would want to participate. First, as for any coupon, there needs to be a reason to discriminate between customers, that is, those that consistently looks for good deals from those who do not bother. Second, it is a good way to get a new business known, and thus accept temporary losses on those deals (if you are patient enough). Third, as those coupons are primarily increasing sales, it is important that the marginal cost of the product be rather low. You do not want to be in Groupon to sell personalized cakes. And I would add that you need to either cap the number of available vouchers or be ready to increase capacity in a moment's notice. You cannot reject customers with a voucher, while you could those with only a coupon.

On the consequences of slavery

I reported now long ago on the consequences of slavery in Africa, where it is shown that countries where more slaves were taken still have lower levels of development. It is quite amazing that this can have an impact on average income for so long. But what about the receiving end of the slave trade?

Graziella Bertocchi and Arcangelo Dimico look at county data for the US and find that current average incomes are not related to the inflow of slaves. However, income inequality is. Why would that be? It could be because slave could not own land, and this still has an impact today. Or it could be because of discrimination. Or it could be because of persistent differences in human capital.

Now using a panel data set, Bertocchi and Dimico find the last one is the most likely one. The education gap between blacks and whites has never recuperated, and segregation was certainly part of it. But this strongly persistent effect means that affirmative action still has a reason to be.

Homosexuals and savings

Do homosexuals save more or less than heterosexuals. As gays typically do not have children, one may think that they care less about the future and that this leads to lower savings. This is a prevalent intuition that even brought Hans-Herrmann Hoppe trouble over academic freedom with his administration. But is this idea true?

Brighita Negrusa and Sonia Oreffice claim it is true based on an analysis of the 2000 US census, showing that homosexuals couples accumulate significantly more retirement and social security savings. They save more than heterosexual co-habiting couples, who themselves save more than heterosexual married couples. The same can be concluded from mortgage to house value ratios.

Note that savings are not directly measured in those datasets. retirement and social security savings are inferred from retirement and social security income for retirees, and household wealth is inferred from the share of mortgage payments to the house value. And homosexual couples are also inferred by have to same gender adults in the same household. But even with all the measurement errors involved, the results are pretty clear and should at least give us to rethink some unfounded intuitions.

So why would homosexuals save more? The fact that they have fewer children, which would have accounted for the lack of altruistic bequests, may also mean that they cannot count on support from descendants. This is consistent with unmarried couples (who have less children) saving more than married couples. But why then do homosexual (unmarried, this is the year 2000) couples save more than unmarried heterosexual couples? The authors rule out discrimination on credit markets. An open question.

Women's rights and development

It is sometimes puzzling when someone in power relinquishes it, especially when this person can take advantage of institutions to stay in power. One such case is when males, who were the only ones to have property rights, gave property rights to females. Why would they allow this, given that males had monopoly on votes and government?

Raquel Fernández comes up with an elegant story. The important trade-off is between appropriating all rights to oneself and how descendants, who include daughters, get. Looking at history, there are two major effects. The first is a decline of fertility, which under a patriarchal system allows fathers to bequeath more per son. But this increases the disparity between sons and daughters, and thus reduces the advantage over equal distribution, through the concavity of utility. The second effect comes from the general increase in wealth, with a similar logic.

In both cases the father becomes better off sacrificing some wealth to his wife in order to force sons-in-law to be more generous with his daughters. The prediction is then that lower fertility and more advanced economic development both force earlier adoption of female property rights, something Fernández finds across US states, which have adopted such laws at various times between 1846 and 1920 (and four states still missing by then). And the theoretical prediction is obtained without assuming changes in altruism towards children, which I find remarkable.

Price discrimination drives industry leaders to further innovate

Quality-ladder models in the innovation literature describe how firms try to outdo each other in research and development in order to become market leaders by producing the most advanced products. One log-standing result of this literature is that leaders have no incentives to innovate because it would cannibalize their own business, a result that flies in the face of overwhelming evidence to the contrary.

Hélène Latzer builds a model where firms can price discriminate in a specific market. The difference with standard quality ladder models is that consumers differ by wealth, preferences are non-homothetic and only full units of technology goods can be consumed. In standard models, it is always winner-takes-all. Here, because a slightly obsolote product still has a market, a market leader may still want to innovate to capture also the market for the second-best good.

Tall people get paid more despite sedentary work

I have reported previously that tall people have an edge on the labor market, and about some speculation why this would be the case. One theory is that they are better at performing some tasks because they are tall, or at least appear to because height is associated with strength and health.

Petri Böckerman, Edvard Johansson, Urpo Kiiskinen and Markku Heliövaara use a Finnish survey and find that smaller people are doing more strenuous work, while taller people typically have jobs where they sit. The height premium does vary with the strenuousness of the job, after controlling for all sorts of indicators that typically determine wages. Would this mean that the wage premium does not come from actual strength used, but rather from intimidation? That would surprise me from Finns, who seem to be leaders in equal opportunity. Is it that they are healthier, as my original post seemed to indicated. May be, but this data had no other indicators of health.

Introduce real time electricity pricing?

Prices are a wonderful mechanism to allocate scarse resources, especially as it is a really cheap mechanism compared to command and control. But there are times where the price mechanism is not good enough. Take for example congestion pricing. In principle, charging higher tolls when many people are on the road, or raising public transportation prices during peak times, should entice those who have other options to travel at other times or in other ways, thus reduceing the need to accomodate peek demad with oversized infrastructure. But this is only going to work if consumers are sufficiently price elastic and congestion pricing is not too expensive to implement.

The same reasoning would apply to residential electricity supply. Hunt Allcott studies this and comes to the conclusions that consumers are not sufficently price elastic to justify the additional metering costs. While households react to higher prices in peak periods, they do not adapt during more inexpensive off-peak periods. Thus, their welfare decreased. But seeing how large parts of the world have differentiated pricing for electricity and have remarkably adapted to this, for example with heating systems that accumulate heat in off-peak periods, one has to wonder whether there are multiple equilibria. Uniform pricing with no incentive to start an industry that takes advantage of off-peak periods, and congestion pricing where such an industry is in place. Maybe with some initial costs, a switch to congestion pricing could be worth it in the long run.

Do not buy American

Whenever a major bump on the road to economic prosperity is hit, say a Great Depression or a Great Recession, governments resort to protectionism. During the Great Depression, it happened with import tariff wars, and it took decades with GATT and WTO to undo the damage. In the current recession, resisted tariff hikes, but still called for buying local, especially for any stimulus money expenses. Does this work?

Mario Larch and Wolfgang Lechthaler say no it does not, but government cannot resist to the temptation. They do this by looking at a macro model (which can look at fluctuations, instead of a trade model (which can only look at steady states), in other words a model à la Ghironi and Melitz. Temporary protectionist measures heart both the domestic and foreign economies (in aggregate) because they shifts production from efficient foreign firms to inefficient domestic ones, and the domestic consumer faces thus higher prices. But domestic, non-trading firms gains, and if the economy is sufficiently closed or if those firms have a strong lobby, politicians will still favor such policies. Once again, do not leave politicians in charge of running an economy.

College fraternities and the labor market

I have always considered college fraternities to be a nuisance. They appear to be mostly about drinking and making a mess on campus, although they also organize some activities for the public good. As any social club, there may also be some value of being a member beyond the socializing.

Sergey Popov and Dan Bernhardt build a model of two-sided selection of fraternities and its members. Candidates may differ by ability, and membership in a fraternity may be viewed as a signal of ability by employers. The paper shows that anything can happen in terms of equilibrium: informative, uninformative, good students, bad students or no students in fraternities. But using data about student grades at the University of Illinois, Popov and Bernhardt show that the following equilibrium is most likely: The best students shy away from fraternities while the worst ones do not get in. Fraternities only have students with medium abilities. But would these students have better grades if they did not spend significant time in fraternity activities?

Optimal unemployment insurance monitoring

Setting up a good unemployment insurance system is awfully difficult. You need to take into account that there may be significant moral hazard, as workers may shirk their effort to find a new job or hide job rejections. But you still want to provide some level of insurance. Hugo Hopenhayn and Juan Pablo Nicolini have realized in 1997 that "one dimension" is not sufficient to get closer to first best. In addition to benefits that decline with unemployment duration, they devise a tax and subsidy scheme once you have a job, a scheme that depends on your unemployment duration.

Ofer Setty adds a third dimension, monitoring. Specifically, the idea is to monitor the job-search effort with a probability that depends on some observables. Monitoring is costly, by provides a somewhat informative signal, on which insurance benefits depend. In other words, if a case worker thinks you are lazy, he can spy on you and depending on what he observes, he may penalize or supplement you. Knowing this, you provide more effort to look good. The result: significantly better insurance, measured by the variance of consumption that is divided by three, and half the cost of insurance. Not bad.

One rationale for the public provision of public goods

Amidst all the current talk about nationalization, it is worthwhile to think when the provision of private goods by public entities is indicated. Generally the argument is that the good is a natural monopoly and the particular industry is difficult to regulate. But are there other reasons?

Hanming Fang and Peter Norman provide an intriguing alternative explanation: when a government provides a private good, it learns more about the consumer and is thus better able to tax in the sense of optimal taxation. The basic idea is that it is difficult to configure properly a tax system because of information problems. In this particular case, there is private information about how much households value different goods, and the government tries to determine the optimal price à la Ramsey pricing. In addition, Fang and Norman show that the optimal pricing would call for a tax on the private good to subsidize the public good. This tax would be dependent on whether the household also consumes the public good.

While this is an interesting argument, one can question how this translate into practice. The authors suggest that the government should bundle the goods. This is something that is done aplenty in the private sector (think of bundling phone, cable TV and internet access), but this is done for similar goods. I cannot think of examples where public and private goods could be bundled in a reasonable way and that would be informative.

Gender based taxation

If governments need to raise revenue, it is well known that the best thing they can do is through sin taxes, such as for carbon emissions in general, gas in particular, alcohol, tobacco or workalcoholism (or subsidize fitness). If this is not sufficient, the most inelastic goods should be taxed, i. e., goods whose quantity is little influenced by changes in its after tax price. In the context of labor income taxation, this means men should be taxed more than women. Indeed, the female labor supply is much more responsive to after tax wages, as men work anyway.

Alberto Alesina, Andrea Ichino and Loukas Karabarbounis expand on this idea, noting first that is common to discriminate by gender, say through affirmative action, different retirement policies or maternal leaves. So why not discriminate more efficiently through the price system instead of quotas? From an economic point of view, this seems obvious. But somehow this is not popular with the general public. Is it because the basic economic model is missing something?

Alesina, Ichino and Karabarbounis test the robustness of gender based taxation to all sort of bells and whistles, and its optimality remains. In particular, they assume that men and women have identical characteristics and preferences but for the fact that men have higher bargaining power at home and can thus avoid household chores by working in the market. As long as household chores are unbalanced, taxing men makes more sense and improves overall welfare.

That said, there is no reason to stop at gender. I have argued before that luck at birth should be taxed, such as for tall people. Others have made similar argument for beauty. In fact, the strongest argument for development aid can be made on the grounds that where you are born is not something you have earned, and one should share one's luck with unlucky ones. And your birth place certainly is inelastic.

Optimal bureaucratic hassle

This week-end I had a conversation with a person complaining about the seemingly useless bureaucracy and hold times to obtain social assistance, and in that particular case unemployment insurance. He then went on railing against those inefficient bureaucrats. But what if they did that on purpose?

I am not saying that those civil servants have a manic pleasure at seeing all those applicants despair in their impatience. They rather follow rules within a system that purposely makes people wait and spend time applying for privileges. The bureaucratic hassle is essentially a discrimination tool. Indeed, those who really need help are those that have plenty of time on their hands (think unemployed) and can afford, even if they do not like it, to go through this hassle. But those, for example, who already have a job and try to defraud the unemployment insurance system will not want to go through the hassle, or at least they will be discouraged to do so.

Monitoring who can and who cannot obtain government services that are destined to the needy is difficult. Part of the bureaucracy is about monitoring, but it also has this added side effect that it allows people to self-select. Those who do not need help will not bother.

The advantage of being tall

It is well known that tall people have more success on the labor market, see for example T. Paul Schultz. The big question is whether this is due to discimination, say, because tall people are considered more beautiful, or because being tall is a signal of other positive characteristics. Schultz, for example, has highlighted that being tall is a sign of health.

The articles of Anne Case and Christina Paxson in the Journal of Political Economy and the American Economic Review detail how tall people have actually more cognitive abilities. It is not because the air is better higher up, it has to do, they demonstrate, with the fact that children that are taller at age 3, before school had any influence, already show better cognitive skills. Jere Behrman and Mark Rosenzweig also demonstrated that higher birth weights lead to better school attainment. This just reinforces the point that James Heckman has been pushing so hard, that schooling and labor market outcomes are to a large extend determined even before children are going to school.

In economies where nutrition is more important for developmental issues, Carl-Johan Dalgaard and Holger Strulik show with an intriguing biologically micro-founded model that tall people have distinct labor market advantages: They have higher wages and are less unemployed. It is, however, not clear whether this can translate to an economy with little food security issues.

What prompted me to write about this? Reading about tall people being upset at so-called discrimination in some airlines. Indeed, some of the latter are charging a fee for the priviledge of sitting in the front row or on an exit row where the legroom is larger. Tall people view this as a tax against them. In fact, one should tax them, as shown by Tomer Blumkin, Yoram Margalioth and Efraim Sadka, and as such tax does not exist, they should count themselves lucky. And by the way, if tall people need those seats so badly, why would they not pay for them? And if they are more expensive, they are less likely to be taken by short people.

The music industry can do better

CD sales are down, and the music industry is complaining it is losing out with the online business (the legal one and the illegal file-sharing). It turns out the music industry could do much better with its online business if it just tried a little bit harder.

Benjamin Shiller and Joel Waldfogel show that price discrimination could improve profits by 10% while increasing consumer surplus, a win-win scheme. The idea is very simple. The current uniform pricing at $0.99 leaves surplus on the table for some songs were people would be willing to pay more, while a lower price for some songs would increase sales significantly. In addition, by offering various bundling scheme, it is possible to increase sales and surplus simultaneously.

Specifically, they consider component pricing (prices differentiated by song, but not consumer), pure bundling (one price for a set of songs, in particular larger sets), two-part tariff (a fixed fee plus a per song price) and nonlinear bundling (fixed fee plus a variable price). Shiller and Waldvogel use survey data on song valuation to establish optimal prices for all schemes, and find that in all cases profits and consumer surplus can be improved.

How long will iTunes maintain uniform pricing? The study show that some songs could be sold at a substantially higher price (for example $4.89 for "See You Again" by Miley Cyrus). Amazon seems to be trying such schemes, but with the competition of iTunes, only discounts will work for the moment...

Illegal immigrants have rights that need to be defended

A series of cases have been brought to court recently where illegal immigrants sue abusive employers. The typical reaction on the street: illegal have no right to complain, they should just be deported. Oh, how wrong this attitude is.

First, it is in the self-interest of the local (legal) labor force to see these cases go to court. If employers can continue to abuse illegals workers without impunity, they will prefer hiring illegals over legals. This reduces the demand for legal workers, and thus the number of employed legal residents and/or their wages.

Second, I hold little esteem for any policy that discriminates against the unlucky. The illegal immigrants in question were unlucky in that they were born in the wrong country. Being harassed by the lucky ones is not what I envision as a realization of human society, and specifically human right. It is not a question of an Economist having a heart, think about it an insurance against being born in the wrong place. Illegals should be helped, not discriminated against.