nep-lma New Economics Papers
on Labor Markets - Supply, Demand, and Wages
Issue of 2016‒09‒18
seventeen papers chosen by
Joseph Marchand
University of Alberta

  1. Social Experiments in the Labor Market By Jesse Rothstein; Till von Wachter
  2. The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High By Bergolo, Marcelo; Cruces, Guillermo
  3. Work-related learning and skill development in Europe: Does initial skill mismatch matter? By Ferreira Sequeda, Maria; Künn, Annemarie; de Grip, Andries
  4. CEO pay and the rise of relative performance contracts: a question of governance By Brian Bell; John Van Reenen
  5. Self-Employment, Wealth and Start-up Costs: Evidence from a Financial Crisis By Koffi Elitcha; Raquel Fonseca Benito
  6. The Returns to Elite College Education: A Quasi-Experimental Analysis By Anelli, Massimo
  7. Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance By Brice Corgnet; Joaquín Gómez-Miñambres; Roberto Hernán-Gonzalez
  8. Women Working Longer: Facts and Some Explanations By Claudia Goldin; Lawrence F. Katz
  9. Measuring and decomposing the distance to the Shapley wage function with limited data By Aguiar, Victor; Pongou, Roland; Tondji, Jean-Baptiste
  10. Wage flexibility and employment fluctuations: evidence from the housing sector By Jörn-Steffen Pischke
  11. Recent Flattening in the Higher Education Wage Premium: Polarization, Skill Downgrading, or Both? By Valletta, Robert G.
  12. The Labor Market Consequences of Refugee Supply Shocks By Borjas, George J.; Monras, Joan
  13. Barriers to Skill Acquisition: Evidence from English Training in India By Jain, Tarun; Maitra, Pushkar; Mani, Subha
  14. Executive Lawyers: Gatekeepers or Strategic Officers? By Adair Morse; Wei Wang; Serena Wu
  15. Urbanization, Inequality, and Poverty in the People’s Republic of China By Zhang, Yuan
  16. The Welfare Cost of Retirement Uncertainty By Frank N. Caliendo; Maria Casanova; Aspen Gorry; Sita Slavov
  17. The Mismeasure of Mammon: Uses and Abuses of Executive Pay Data By Matt Hopkins; William Lazonick

  1. By: Jesse Rothstein; Till von Wachter
    Abstract: Large-scale social experiments were pioneered in labor economics, and are the basis for much of what we know about topics ranging from the effect of job training to incentives for job search to labor supply responses to taxation. Random assignment has provided a powerful solution to selection problems that bedevil non-experimental research. Nevertheless, many important questions about these topics require going beyond random assignment. This applies to questions pertaining to both internal and external validity, and includes effects on endogenously observed outcomes, such as wages and hours; spillover effects; site effects; heterogeneity in treatment effects; multiple and hidden treatments; and the mechanisms producing treatment effects. In this Chapter, we review the value and limitations of randomized social experiments in the labor market, with an emphasis on these design issues and approaches to addressing them. These approaches expand the range of questions that can be answered using experiments by combining experimental variation with econometric or theoretical assumptions. We also discuss efforts to build the means of answering these types of questions into the ex ante design of experiments. Our discussion yields an overview of the expanding toolkit available to experimental researchers.
    JEL: H53 I38 J22 J24 J31 J65
    Date: 2016–09
  2. By: Bergolo, Marcelo (IECON, Universidad de la República); Cruces, Guillermo (CEDLAS-UNLP)
    Abstract: The disincentive effects of social assistance programs on registered employment are a first order policy concern in developing countries. Means tests determine eligibility with respect to some income threshold, and governments can only verify earnings from registered employment. The loss of benefit at some level of formal earnings is an implicit tax that results in a strong disincentive for formal employment. We study an income-tested program in Uruguay and extend previous literature by developing an anatomy of the behavioral responses to this program. Our identification strategy is based on a sharp discontinuity in the program's eligibility rule and uses information from the program's records, social security administration data, and a follow-up survey. First, we establish that beneficiaries respond to the program's incentives by reducing their levels of registered employment by about 8 percentage points. Second, we find the program induces a larger reduction of formal employment for individuals with a medium probability to be a registered employee, suggesting some form of segmentation – those with a low propensity to work formally do not respond to the financial incentives of the program. Third, we find evidence that the fall in registered employment is due to a larger extent to an increase in unregistered employment, and to a lesser extent to a shift towards non-employment. Fourth, we find an elasticity of participation in registered employment of about 1.7, implying a deadweight loss from the behavioral responses to the program of about 3.2% of total registered labor income.
    Keywords: welfare policy, labor supply, registered employment, labor informality
    JEL: H31 I38 J22 O17
    Date: 2016–09
  3. By: Ferreira Sequeda, Maria (General Economics 2 (Macro)); Künn, Annemarie (ROA / Dynamics of the labour market); de Grip, Andries (Research Centre for Educ and Labour Mark)
    Abstract: This paper provides more insight into the relevance of the assumption of human capital theory that the productivity of job-related training is driven by the improvement of workers’ skills. We analyse the extent to which training and informal learning on the job are related to employee skill development and consider the heterogeneity of this relationship with respect to workers’ skill mismatch at job entry. Using data from the 2014 European Skills Survey, we find – as assumed by human capital theory – that employees who participated in training or informal learning show greater improvement of their skills than those who did not. The contribution of informal learning to employee skill development appears to be larger than that of training participation. Nevertheless, both forms of learning are shown to be complementary. This complementarity between training and informal learning is related to a significant additional improvement of workers’ skills. The skill development of workers who were initially underskilled for their job seems to benefit the most from both training and informal learning, whereas the skill development of those who were initially overskilled benefits the least. Work-related learning investments in the latter group seem to be more functional in offsetting skill depreciation than in fostering skill accumulation.
    Keywords: training, informal learning, skill development, skill mismatch, human capital
    JEL: J24 M53
    Date: 2016
  4. By: Brian Bell; John Van Reenen
    Abstract: Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this, we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders’ return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial “pay-for-luck” as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this “compensation effect” is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance.
    Keywords: CEO; pay; incentives; equity plans
    JEL: G30 J31 J33
    Date: 2016–07
  5. By: Koffi Elitcha; Raquel Fonseca Benito
    Abstract: Financial constraints affect in important ways the decision of individuals to become entrepreneur (self-employed). This implicitly suggests a positive relation between the propensity of individuals to become entrepreneur and their personal wealth. Recent theoretical work and empirical evidence confirm this hypothesis. More interestingly, it has been shown that the slope of the entrepreneurship-wealth relationship increases with the extent of liquidity constraints and flattens with the magnitude of start-up costs. Using individual level data from 3 surveys (SHARE, ELSA and HRS) in Europe and the United States, as well as the World Bank’s Doing Business data, this paper empirically zeroes in on the impact of start-up costs on the self-employment-wealth relationship. The dynamic nature of the data enables us to investigate potential effects of the last global financial crisis. Results confirm the strong positive relationship between the entrepreneurial choice and wealth, as well as the negative effect stemming from the increase in start-up costs. Interestingly, although there is no strong evidence that wealth in itself played a bigger role during the crisis, we find that the negative impact of start-up costs on wealth proved to be significantly pronounced during the last crisis.
    Keywords: Self-Employment, Occupational Choice, Wealth, Liquidity Constraints, Start-up Costs, Financial Crisis,
    JEL: E02 E21 J21 J24
    Date: 2016–09–09
  6. By: Anelli, Massimo (Bocconi University)
    Abstract: I take advantage of a sharp discontinuity in the probability of admission to an elite university at the admission score threshold, to estimate causal returns to college education quality. I use a newly constructed dataset, which combines individual administrative records about high school, college admission, college attendance and tax returns. Students with score just above the admission threshold have 52% higher yearly income with respect to just-below-threshold students. This premium is equivalent to a jump from the 44th percentile to the 74th percentile of the income distribution. The richness of the data allows me to explore the counterfactual college career of not admitted students and the potential mechanisms underlying the estimated income premium. I find that students with a just-above-threshold score are less likely to be college dropouts, take six fewer months to graduate, choose different majors and are more likely to have income in the top quartile of the distribution. Cumulated over fifteen years, the time span of income data for my sample, the net premium of attending the elite university amounts to around $120,000.
    Keywords: education quality, returns to education, human capital
    JEL: I21 I22 I23 I28 J24 J31
    Date: 2016–09
  7. By: Brice Corgnet (EMLYON Business School, Univ Lyon, GATE L-SE UMR 5824, F-69131 Ecully, France); Joaquín Gómez-Miñambres (Bucknell University, Department of Economics, One Dent Drive, Lewisburg, PA 17837. Chapman University, Economic Science Institute. One University Drive, Orange, California 92866); Roberto Hernán-Gonzalez (Nottingham University, Business School, Nottingham, UK)
    Abstract: We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agents’ performance. We show that average performance of agents is higher in the presence of goal setting than in its absence despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. It follows that recognizing the pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives.
    Keywords: Principal-agent models, incentive theory, non-monetary incentives, goal setting, reference-dependent utility, laboratory experiments
    JEL: C92 D23 M54
    Date: 2016
  8. By: Claudia Goldin; Lawrence F. Katz
    Abstract: American women are working more, through their sixties and even into their seventies. Their increased participation at older ages started in the late 1980s before the turnaround in older men’s labor force participation and the economic downturns of the 2000s. The higher labor force participation of older women consists disproportionately of those working at full-time jobs. Increased labor force participation of women in their older ages is part of the general increase in cohort labor force participation. Cohort effects, in turn, are mainly a function of educational advances and greater prior work experience. But labor force participation rates of the most recent cohorts in their forties are less than those for previous cohorts. It would appear that employment at older ages could stagnate or even decrease. But several other factors will be operating in an opposing direction leading us to conclude that women are likely to continue to work even longer.
    JEL: J21 J22 J26
    Date: 2016–09
  9. By: Aguiar, Victor; Pongou, Roland; Tondji, Jean-Baptiste
    Abstract: We study the Shapley wage function, a wage scheme in which a worker's pay depends both on the number of hours worked and on the output of the firm. We then provide a way to measure the distance of an arbitrary wage scheme to this function in limited datasets. In particular, for a fixed technology and a given supply of labor, this distance is additively decomposable into violations of the classical axioms of efficiency, equal treatment of identical workers, and marginality. The findings have testable implications for the different ways in which popular wage schemes violate basic properties of distributive justice in market organizations. Applications to the linear contract and to other well-known compensation schemes are shown.
    Keywords: Shapley wage function, firm, fairness violations, linear contract, bargaining, limited data
    JEL: C71 C78 D20 D30 J30
    Date: 2016–08–30
  10. By: Jörn-Steffen Pischke
    Abstract: Many economists suspect that downward nominal wage rigidities in ongoing labor contracts are an important source of employment fluctuations over the business cycle but there is little direct empirical evidence on this conjecture. This paper compares three occupations in the housing sector with very different wage setting institutions, real estate agents, architects, and construction workers. I study the wage and employment responses of these occupations to the housing cycle, a proxy for labor demand shocks to the industry. The employment of real estate agents, whose pay is far more flexible than the other occupations, indeed reacts less to the cycle than employment in the other occupations. However, unless labor demand elasticities are large, the estimates do not suggest that the level of wage flexibility enjoyed by real estate agents would buffer employment fluctuations in response to demand shocks by more than 10 to 20 percent compared to completely rigid wages.
    Keywords: Wage setting; wage rigidity; commissions; real estate agents; architects; construction workers
    JEL: E24 J20 J44
    Date: 2016–07
  11. By: Valletta, Robert G. (Federal Reserve Bank of San Francisco)
    Abstract: Wage gaps between workers with a college or graduate degree and those with only a high school degree rose rapidly in the United States during the 1980s. Since then, the rate of growth in these wage gaps has progressively slowed, and though the gaps remain large, they were essentially unchanged between 2010 and 2015. I assess this flattening over time in higher education wage premiums with reference to two related explanations for changing U.S. employment patterns: (i) a shift away from middle-skilled occupations driven largely by technological change (“polarization”); and (ii) a general weakening in the demand for advanced cognitive skills (“skill downgrading”). Analyses of wage and employment data from the U.S. Current Population Survey suggest that both factors have contributed to the flattening of higher education wage premiums.
    JEL: I23 J23 J24
    Date: 2016–08–17
  12. By: Borjas, George J. (Harvard University); Monras, Joan (CEMFI, Madrid)
    Abstract: The continuing inflow of hundreds of thousands of refugees into many European countries has ignited much political controversy and raised questions that require a fuller understanding of the determinants and consequences of refugee supply shocks. This paper revisits four historical refugee shocks to document their labor market impact. Specifically, we examine: The influx of Marielitos into Miami in 1980; the influx of French repatriates and Algerian nationals into France at the end of the Algerian Independence War in 1962; the influx of Jewish émigrés into Israel after the collapse of the Soviet Union in the early 1990s; and the exodus of refugees from the former Yugoslavia during the long series of Balkan wars between 1991 and 2001. We use a common empirical approach, derived from factor demand theory, and publicly available data to measure the impact of these shocks. Despite the differences in the political forces that motivated the various flows, and in economic conditions across receiving countries, the evidence reveals a common thread that confirms key insights of the canonical model of a competitive labor market: Exogenous supply shocks adversely affect the labor market opportunities of competing natives in the receiving countries, and often have a favorable impact on complementary workers. In short, refugee flows can have large distributional consequences.
    Keywords: immigration, refugee supply shocks
    JEL: J15 J61 J2
    Date: 2016–09
  13. By: Jain, Tarun (Indian School of Business); Maitra, Pushkar (Monash University); Mani, Subha (Fordham University)
    Abstract: Skill development is increasingly viewed as a way to escape the low education – high unemployment trap in developing countries. Consequently, policy makers in these countries are extensively investing in skill development programs. However, participation and completion rates in many of these programs remains low. This paper investigates factors that prevent individuals from acquiring spoken English, an important skill with potentially high returns in the labor market. Using data from a field experiment in India that subsidizes the cost of learning spoken English, we find that full subsidy (compared to partial or no subsidy) positively effects the probability of participating in a spoken English training program. Conversely, distance to the training center, pre-existing knowledge of spoken English, and past enrollment in a similar course act as significant barriers to take-up. These findings suggest that multidimensional policy solutions are required to overcome the barriers to skill development in developing countries.
    Keywords: skill development, vocational training, spoken English, field experiment, India
    JEL: I25 J24 J44
    Date: 2016–09
  14. By: Adair Morse; Wei Wang; Serena Wu
    Abstract: Lawyers now serve as executives in 44% of corporations. Although endowed with gatekeeping responsibilities, executive lawyers face increasing pressure to use time on strategic efforts. In a lawyer fixed effects model, we quantify that lawyers are half as important as CEOs in explaining variances in compliance, monitoring, and business development. In a difference-in-differences model, we find that hiring lawyers into executive positions associates with 50% reduction in compliance breaches and 32% reduction in monitoring breaches. We then ask whether firms’ optimal contracting of lawyers into strategic activities implies less lawyer gatekeeping effort. Using a design comparing executive lawyers hired from law firms to lawyers poached from corporations, we find that lawyers hired with high compensation delta (indicative of the importance of strategic goals in compensation contracts) do less monitoring, preventing 25% fewer breaches than are typically mitigated by having an executive gatekeeper. Reassuringly, lawyers do not compromise compliance.
    JEL: G32 G34 J33 K22 M52
    Date: 2016–09
  15. By: Zhang, Yuan (Asian Development Bank Institute)
    Abstract: Relying on the present literature, official statistics, and household survey data in the People’s Republic of China (PRC), this paper summarizes research findings on the relationship between urbanization, urban–rural inequality, and poverty, and provides further empirical evidence on the role of urbanization and government policies in urban poverty. Several conclusions can be drawn from this paper. First, urbanization has a significant effect on reducing both poverty of rural residents and poverty of migrating peasants, and, consequently, has a positive effect on narrowing the rural–urban income/consumption gap. Urban labor markets play an important role in this effect. Second, urbanization is positively correlated to urban poverty. This can be explained by the competition between migrating peasants and urban workers in the labor market, and the failure of the government’s anti-poverty policies in urban areas. Third, the existence of an informal sector has a negative effect on the poverty of urban citizens. Being employed by the informal sector significantly increases the probability of falling into poverty for urban citizens. Fourth, the minimum wage has a positive effect on reducing urban poverty, while the effect of other policies, such as Di Bao and Minimum Living Standard, is limited.
    Keywords: Inequality; poverty; urban; rural; labor market; urbanization; PRC; migration; households; peasants; workers; minimum wage; living standard; income; government policy; income gap
    JEL: D63 I32 J42 R23
    Date: 2016–09–13
  16. By: Frank N. Caliendo; Maria Casanova; Aspen Gorry; Sita Slavov
    Abstract: Uncertainty about the timing of retirement is a major financial risk with implications for decision making and welfare over the life cycle. Our conservative estimates of the standard deviation of the difference between retirement expectations and actual retirement dates range from 4.28 to 6.92 years. This uncertainty implies large fluctuations in total wage income. We find that individuals would give up 2.6%-5.7% of total lifetime consumption to fully insure this risk and 1.9%-4.0% of lifetime consumption simply to know their actual retirement date at age 23. Uncertainty about the date of retirement helps to explain consumption spending near retirement and precautionary saving behavior. While social insurance programs could be designed to hedge this risk, current programs in the U.S. (OASI and SSDI) provide very little timing insurance.
    JEL: C61 E21 H55 J26
    Date: 2016–09
  17. By: Matt Hopkins (The Academic-Industry Research Network.); William Lazonick (University of Massachusetts Lowell and The Academic-Industry Research Network.)
    Abstract: On April 7, 2016, the Wall Street Journal ran an article headlined “CEO pay shrank most since financial crisis,†while on May 27, 2016, a similar New York Times story declared “Top CEO pay fell – yes, fell – in 2015.†Unfortunately, both the Journal and the Times mismeasured the actual take-home pay of each and every one of these CEOs in 2014 and 2015. The reason for this mismeasure is that both articles relied on “fair value†estimates of the stock-based pay of these CEOs as reported in the Summary Compensation Table of the definitive proxy statement (Form DEF 14A) that each publicly listed company files annually with the U.S. Securities and Exchange Commission (SEC). Yet the very same proxy statements also report the actual realized gains of these CEOs in the Option Exercises and Stock Vested Table. It is the realized gains on stock-based pay, not fair-value estimates, that enter into the total compensation that a CEO actually takes home and reports as income in his or her income-tax return. Moreover, including actual realized gains instead of estimated fair value of stock– based pay in the measure of total executive compensation can make a big difference. In 2014 average total compensation of the 500 highest-paid executives named on corporate proxy statements based on actual realized gains was $34.3 million, with 81 percent coming from stock-based pay. But average total compensation of the 500 highest paid based on estimated fair value was $19.3 million, with 62 percent attributable to stock- based pay. The excess of total actual realized-gains compensation over total estimated fair-value compensation was greatest in those years when the stock market was booming. Why would the Wall Street Journal and the New York Times report estimates of executive pay when they could be reporting the CEOs’ actual pay? In this paper, we answer this question by explaining the origins of the “fair value†estimates of stock-based pay and how the obsession with these estimates by the SEC, relying on the business-run Financial Accounting Standards Board (FASB), has relegated to statistical obscurity executives’ readily available, accurate, and actual realized gains from stock-based pay. We use Standard & Poor’s ExecuComp database to document that a) stock-based pay, in the forms of realized gains from stock options and stock awards, dominates both the size of and the changes over time in the total compensation of the highest-paid senior executives; and b) the fair-value estimates of stock-based pay tend to understate, often substantially, the realized gains from stock-based pay that these executives actually receive. An irony is that even critics of excessive executive pay, most notably the AFL-CIO on its Executive Paywatch website, use the fair-value estimates when the actual CEO compensation numbers would reveal a much larger ratio of CEO pay to the earnings of the average worker. Indeed, as we discuss in the conclusion to this paper, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, this mismeasure of executive pay has become institutionalized in U.S. government policy in the SEC’s Pay Ratio Disclosure Rule, which beginning in 2017 requires every company to publish the ratio of CEO to median-worker pay. Under this rule, the SEC requires companies to use the fair-value measure of CEO pay. The Pay Ratio Disclosure Rule is supposed to provide the public with a company-level indicator of income inequality. Instead it will tend to underestimate inequality, substituting fictitious estimates for actual known amounts of income that CEOs put into their bank accounts and declare in their income-tax returns.
    Keywords: Executive compensation, stock-based pay, stock options, stock awards, estimated fair value, actual realized gains, ExecuComp, SEC, FASB
    JEL: D22 D31 G35 J33 K22 L21 M41 M52
    Date: 2016–08

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