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.

Do unemployed and employed compete for the same jobs?

In times like now, it is easy to forget that job seekers are not only the unemployed, but also the currently employed. On-the-job search is rather common but difficult to measure, as it is often not openly conducted. But it is important to understand it for policy, for example to evaluate the impact of job creation programs.

Simonetta Longhi and Mark Taylor just finished a couple of papers that offer some insights about these two types of job seekers in the United Kingdom. In the first one, they compare their characteristics and search behavior and conclude that employed and unemployed job seekers are different. My reading is that the unemployed are often stuck in a sequence of low paying jobs and drift in and out of employment. The employed job seekers are rather on the way up and improve their situation at each change. Thus these two types are not substitutes and do not compete for the same jobs.


In the second paper, they compared the job finding probability of both types. Consistently for search theory, they observe that on-the-job seekers take much longer to find jobs, reflecting that they can afford to wait for the perfect match. The unemployed, however, have content themselves with the first offer, especially since unemployment insurance criteria have tightened in the UK. The presence of the former has no impact on the search success of the latter, confirming that they are not substitutes.

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.

Razor innovation in macroeconomics

Macroeconomics is sometimes like Gillette razors. There is regularly an innovative razor that happens to have more blades than the previous one. And once it gets out of hand, the new razor goes back to fundamentals and has only one blade, before the cycle starts again. In macroeconomics, there was this fad of adding more an more shocks to models until everything became very confusing and unidentifiable. So we returned to simple models (Occam's razor was the innovation) that became more powerful because of the presence of a market friction. Now, these search frictions are appearing everywhere, one-by-one or in pairs, and the latest generation of models has three frictions.

In a pair of papers, Etienne Wasmer alone and then with Nicolas Petrosky-Nadeau introduces search frictions on labor, credit and goods markets. The first is more of an exercise of style, showing it can be elegantly solved in steady-state thanks to block-recursiveness. The second paper is more interesting, as it looks at the dynamic properties of the model and shows that is can better account for the persistence of fluctuations in the data (what frictions are good at) and the volatility of labor flows. Interesting results, especially in the light of the pronounced lag in the recovery of employment in the US these days.

I am waiting for the four-friction model now.

The marital college premium

There are a lot of good reasons to marry an educated partner. Among them is that his/her income is higher, and theory has consistently pointed to the fact that one's own returns to education should be higher. This is known as the supermodularity of the marriage return function: the second derivative of outcomes with respect to both education levels is positive. This implies that the return to education becomes even higher, as the couple's surplus increases even more due to the supermodularity. But how much?

Pierre-André Chiappori, Bernard Salanié and Yoram Weiss use an extract of the US Census to confirm that supermodularity is present is very significant manner. It varies by cohort, though, with in particular younger females seeing stronger returns than young males. This means that women have done better in three dimensions in recent decades: they closes a large part of the wage gap with men, they get a higher marital college premium and they marry better. All this compounds to remarkable progress for women, who also work more and get a larger share of the marital surplus.

The pitfalls of $1 CEO salaries

CEO how agree to be paid no salary, or a minimal one, are viewed as heroes in media and the public. But in all the cases I know off, they are of course also compensated with stock options and other deferred pay schemes. So does it really make a difference to being paid a substantial salary?

Gilberto Loureiro, Anil Makhija and Dan Zhang find that not everything is rosy abut these $1 CEOs: They tend to be overconfident and thus expect to have very high compensation in the future. As a consequence, they try to deflect future criticism about their earnings by putting on an angel face now. Also, their overconfidence implies that shareholders do not fare well with them, probably the reason institutional investors avoid them. In other words, be wart of $1 CEOs!

Minimum wage and tax evasion

While the minimum wage is seen by many as an easy way to prevent poverty, it has its pitfalls. Apart from the fact that it may increase unemployment, it may lower wages and attract more immigrants. Now add to this that minimum wages may decrease disposable income and thus consumption.

Mirco Tonin looks at the case of a country with a significant underground economy. As only declared labor income is taxed, introducing a minimum wages means that everyone must declare at least the minimum wage as income. For at least some people this will reduce disposable income. Now increase that minimum wage, then everyone who was declaring such an income has to pay more taxes. Is this significant? Tonin looks at Hungary where there was a significant increase in the minimum wage in 2001 and it is believed half of those declaring minimum wage on their tax return actually earn more. Looking at the gap between consumption and income on household data, a common way to identify underground income, he finds that the effect on consumption was quite significant for those who were affected by the minimum wage hike.

Search effort under mass unemployment

As discussed previously here, one good reason for prolonging the duration of unemployment insurance insurance coverage in a deep recession like the last one is that it would be unfair to expect from the unemployed workers to find as easily a job as in normal circumstances. Or, in other words, even if they apply the same work effort, they have a smaller chance of finding a job given the labor market tension and should be allowed to be protected for a longer time.

Alan Krueger and Andreas Mueller study what happens to search effort when there is a smaller change of finding a job. Specifically, they interviewed several thousand unemployed weekly during the last recession about their reservation wage and their search effort. They find that the reservation wage is essentially constant, expect for older workers with sufficient cash reserves, but workers are willing to go below that reservation wage for part-time work. The time devoted to search, however, dips quickly over the unemployment spell. That should not be surprising given how little time people spend looking for a job (from a study by the same authors). What is more interesting is how all this compares to a normal recession. Unfortunately, Krueger and Mueller offer no discussion in this regard.

Waiting for the perfect job does not work

We usually think that one advantage of unemployment insurance is that it allows unemployed workers to take more time to find an appropriate job and not rush to the first available job for which they may not be qualified. As Acemoglu and Shimer have forcefully argued, the absence of unemployment insurance could lead to important mis-allocations for this reason, and thus losses of efficiency in the economy. This argument implies that workers with longer unemployment durations, after controlling for other characteristics, should be getting better jobs. Is this true?

Miki Kohara, Masaru Sasaki and Tomohiro Machikita test this for Japan using job tenure as a signal of job quality. It turns out the hypothesis above is easily rejected. Indeed, the longer the unemployment duration, the shorterthe subsequent employment duration. So it appears that other factors, like loss of skills and human capital during unemployment and stigma matter more than the search for the perfect job. Of course, it could also be due to some missing control variables, but the effect is so strong I doubt it can be overturned.

The impact of the extension of unemployment insurance benefits in the US

Given the depth of the last recession and the obvious difficulties unemployed workers have to find new jobs, the US government has successively and temporarily extended the usual 26 week period during which unemployment insurance benefits are given, up to 99 weeks for some workers. On consequence that has been worrying some is that this will leads job seekers to seek less jobs, as there is less urgency to be employed. But pointing to the longer duration of unemployment is not appropriate, as this depends to a (very large?) extent on the general business climate. Just looking at data is not sufficient, you need to put in some structure in the form of a theory.

Makoto Nakajima builds an elaborate model that features job search à la Mortensen-Pissarides with variable search effort, consumption-saving decisions, borrowing constraints, skill depreciation in unemployment and appreciation in employment. This complex model is then calibrated to the average state of the US economy, and set to start in a state as close as possible to the one in 2007. Then the transition paths are computed as the economy is hit by shocks, with and without benefit extensions, assuming economic agents did not expect the extensions. All in all an impressive exercise. The conclusion: about a quarter of the 4.8 point increase in the unemployment rate is due to the longer duration of benefits. This is not insignificant, but it could be an acceptable price to pay for the exceptional circumstances.

You want to restrict bankers' pay

There has been and there still is much outrage about the large bonus payments bankers get. What the public does not understand is that bonus pay is a very large part of total pay, and it is so to encourage bankers to perform really well. And they certainly put in the hours. For example, bonus pay has been criticized because there is most often no "malus," but given that base pay is relatively low, this should capture it. The main criticism is aimed at the disparity of these bonus payments with respect to the average pay of a worker. This is, however, not something that should be regulated at the level of bonus pay, but through redistribution with income taxes. In this regard, whether it is regular pay or bonus pay makes no difference. So, should then bonus pay in banking be left unregulated?

John Thanassoulis does not think so. He argues that as bank compete for top bankers and try to shift the risk on them, they end up paying them too much and all in bonuses. This is optimal for the bank as it lowers its costs right when things get critical. But as a consequence, the bank gets too much into risky activities, as competition for bankers drives bonuses up higher than socially optimal, especially if there is a contagion risk of default for other banks. So you want a regulator to limit bonuses, but in a flexible way, or the benefit of having bonuses in the first place gets eroded. Indeed, it is the top brass that sets the bank level risk, whereas other employees all the way down to secretaries (who also get bonuses) are less influential, even collectively, on the aggregate risk. Thus the idea is not to cap bonuses individually, but at the bank level as a proportion of the balance sheet (which is what matters in terms of default). The pay structure would then presumably be readjusted by the bank, relying more on bonuses where it matters the most. Taxing bonuses has no risk impact, though, except for reducing bankers' pay.

Another possibility could be the dynamic incentive accounts I mentioned before.

The impact of job search monitoring

Unemployment insurance is thought to be ripe with abuse, especially as job seekers do not appear to seek jobs that much. For example, time use surveys have established that they spend very little time on job search, the median being even zero minutes on any given day (see previous post on this). So it seems natural that you want to make sure the job seekers give sufficient effort to obtain benefits. But how effective is such monitoring?

Bart Cockx and Muriel Dejemeppe study this imposition of stronger monitoring on long term unemployed workers in 2004 in Belgium. For all practical purposes, there is no limit to the duration of unemployment insurance benefits there, so it seems baffling that only recently has there been some serious monitoring, and this only happens after eight months of unemployment. And then, it is only in the form of a stern letter threatening monitoring. Before this, monitoring was only targeted on those unemployed for more than 21 months...

This means that before 2004, the unemployed had essentially free rein. After that, there is a supposedly credible threat of monitoring after eight months. In Wallonia, the letter is followed up two months later with a counseling session. In Flanders, there is no systematic counseling That is probably what can be considered a clean natural experiment of a transition from no monitoring to some monitoring. What impact did it have? In Flanders, the transition to employment after eight months of unemployment increased by 28%. In Wallonia, this is 22%, the authors conjecture it is lower despite the more credible threat due to worse labor market conditions. But especially in Flanders, it appears the shorter duration implies that workers end up with worse jobs than before, both in terms of wage and duration of employment. And Walloon females are more likely to transition into sickness insurance, which has the same benefits as unemployment insurance.

On the decline of the US manufacturing wage

It is always interesting to see how real wages evolve, as they allow to understand how much a worker can buy from his income. Usually, this is done by dividing the nominal wage by a price index, usually the commodities said worker would typically buy. The results may vary considerably, as a different price index is needed for different workers, and the basket of goods may also vary over time. The latter is particularly important when the sample period is long. It also depends whether you look a hourly, weekly or annual income, and how benefits are included.

John Pencavel reviews a centuries old literature on the topic that came to the conclusion that except for some periods on stagnation, real wages generally were upward bound. He then comes up with his own indexing procedure, and finds that real wages in the US manufacturing sector have declined by 40% since 1960. Wow, this seems to be a real big result, and this requires understanding how this was computed. Indeed, Pencavel does not measure the real wage in the conventional way, but rather the ratio of what workers get to what they could get if the firm made no profit. This does not necessarily mean that the buying power of the worker has decreased by 40%. but rather that a smaller share of firm income goes to labor. With the increased mechanization of manufacturing, this evolution should not surprise many people. But this is not necessarily a 40% fall in real wages as advertised in the paper's abstract.

Another French experiment with work hours going bad

The French have a special knack in messing with labor markets. The last spectacular failure was the law that limited almost everyone's workweek to 35 hours in the hope this would spread the total hours to more people, lead to more employment and solve a chronic unemployment problem. Well, it did not and lead to loss of productivity and ridiculed controls. And I doubt many economists were surprised. With the election of Sarkozy, this law was quickly scraped and an equally ridiculous law from the other end of the spectrum was introduced.

Pierre Cahuc and Stéphane Carcillo discuss the French policy of making overtime work tax exempt. One can really question what Sarkozy had in mind with this policy, as the adverse consequences are all too obvious. First what is overtime is easily manipulated, and suddenly many regular hours became overtime hours. Second, if the intend was to increase the total hours of work, it was bound to fail if most of the overtime is coming from workalcoholics who would work no matter what the wage is. This is why you need to tax them instead of subsidizing them. And Cahuc and Carcillo find that indeed total hours hardly changed. So what all this amounted to is a generous lump-sum subsidy to highly-skilled workalcoholics. Great.

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.

Are hot teachers better teachers?

It is well known that beautiful and tall people have better lives and are better paid. This is especially thought to be true in activities where skills are relatively unimportant. What about economics professors?

Anindya Sen, Marcel Voia and Frances Woolley use the hotness indicators from student evaluations at ratemyprofessor.com in Ontario and find hot economics university professors are paid a whooping 10% more than their less attractive counterparts. Not only is this a large number, it also runs counter to previous results that such effects are limited to unskilled professions. This effect is especially strong for men and not present for women, Indeed women who negotiate hard are not deemed attractive.

In addition, hotter teachers also get better student evaluations, even after controlling for all what the authors could put their hands on. For other indicators of professor productivity, it turns out that hotness affects positively women for citations, although this could be due to a few highly cited women (citation counts are always very skewed). But neither men nor women publish significantly more when hot, but they tend to attract more co-authors. I really need to be careful with my appearance.

Does part-time employment increase firm productivity?

In many countries, encouraging part-time work is seen as a way to reduce unemployment, as the a job is split among several people, and as a way to keep mothers on the job and thus preventing loss of human capital. Firms do not like these policies because they perceive that part-time workers are less productive due to the time lost during the daily settling in routine and the transitions between shifts. However, some argue that shorter work time allows workers to work more intensely.

Annemarie Nelen, Andries De Grip and Didier Fouarge look at this from the firms' perspective and sift through the evidence using records from the Dutch pharmacy sector. By estimating production functions, they find that part-time work in fact increases productivity. The reason is that part-time workers allow the firm to allocate labor where is the most urgently needed, for example during lunch breaks or to fill the difference between opening hours and work hours. So, at least in the retail sector, part-time work is a benefit. I wonder though about manufacturing and office work.

Are minimum wages attracting immigrants?

Immigrants typically compete on the labor market with the low-skilled domestic labor force. Along with global competition through offshoring, this is probably the main reason why real wages have stagnated or even decreased over the last decades for the least educated. One way to counteract this development is to raise minimum wages, which may, however, have the adverse effect of encouraging even more outsourcing to abroad. There may be more reasons for concern.

Corrado Giuletti shows that increasing minimum wages also attracts more immigrants, which puts even more pressure on the least educated workforce. This is not obvious, as the higher wages could also imply lower job prospects, and thus be discouraging for immigrants. To come to this conclusion, Giuletti uses the Current Population Survey and analyzes the responses to the minimum wage increases in 1996-97 in the United States, which differed substantially by state, and lead to different expectations about future wage increases. Those that had the highest increases saw an immigration inflow four times larger than those with the lowest increases, if one focuses on the low-skilled. No impact is seen for the high-skilled. What the implications are for the domestic low-skilled workers remains to be seen, however.

Minimum wages in Nicaragua

Should a poor country adopt minimum wages? On the one hand, such legislation could increase welfare of employed workers by giving higher wages, and it could lead to higher paying jobs. On the other hand, underemployment is often severe in such economies, and you want to give jobs even to those with low marginal productivity to give them a chance. Also, imposing minimum wages increases the size of the informal sector and thus shrinks the tax base and potentially worsens working conditions. And you can probably imagine other consequences of imposing or not minimum wages in poor countries.

Enrique Alaniz, Thomas Gindling and Katherine Terrell try to make sense of all this for Nicaragua. They have at their disposal household and individual panel data that allows to trace employment and income across minimum wage changes. As the minimum wage is relatively high compared to average wages, the impact of changes should be easier to notice than elsewhere. They find no evidence that an increase in the minimum wage increases wages for those beyond the vicinity of that minimum wage, and it reduces formal employment (elasticity of 0.5). This decrease in employment comes partly from reduced hiring, partly from layoffs, and those result typically in unpaid family work (and thus switch to the informal sector). However, an increase in the minimum wage improves the probability of a household to transition out of poverty, especially if the head of household is affected, as he is less likely to lose his job. Getting people out of poverty is what matters most, so minimum wages appear to be a good policy, at least in Nicaragua.

Unskilled workers stay unskilled

Learning is a lifelong experience, as one has to adapt to new technologies and circumstances. Those who are the most flexible in the acquisition of human capital do best. This is not only a private benefit, employers also realize that it is important that their workforce continues training and give opportunities for training to their employees. While employers appear to give equal opportunities for such training to high and low skilled workers, it turns out low skilled workers disproportionately do not take advantage of them. Why so?

Didier Fouarge, Andries de Grip and Trudie Schils find this has nothing to do with lower returns, in fact returns to training are about the same for high and low skill workers, at least in the Netherlands. It appears it has much more to do with personal preferences. Low skill workers have in particular a higher preference for leisure (or, they do not like their job as much), exhibit more exam anxiety and dislike trying new things. In other words, they find it welfare reducing to get more training. Should policies still try to get them into training?