nep-lma New Economics Papers
on Labor Markets - Supply, Demand, and Wages
Issue of 2017‒03‒12
23 papers chosen by
Joseph Marchand
University of Alberta

  1. The Extent of Rent Sharing along the Wage Distribution By Matano, Alessia; Naticchioni, Paolo
  2. I Can't Get No Satisfaction: The Power of Perceived Differences in Employee Retention and Turnover By Gevrek, Deniz; Spencer, Marilyn; Hudgins, David; Chambers, Valrie
  3. Much ado about nothing? The wage penalty of holding a Ph.D. degree but not a Ph.D. job position By Gaeta, Giuseppe Lucio; Lavadera, Giuseppe Lubrano; Pastore, Francesco
  4. Apprentice poaching in regional labor markets By Stockinger, Bastian; Zwick, Thomas
  5. When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men By Autor, David; Dorn, David; Hanson, Gordon
  6. Occupational Choice and Matching in the Labor Market By Mak, Eric; Siow, Aloysius
  7. Promotion Incentives in the Public Sector: Evidence from Chinese Schools By Karachiwalla, Naureen; Park, Albert
  8. Short Notice, Big Difference? The Effect of Temporary Employment on Firm Competitiveness across Sectors By Giuliano, Romina; Kampelmann, Stephan; Mahy, Benoît; Rycx, Francois
  9. Minimum Wages and the Distribution of Family Incomes By Dube, Arindrajit
  10. Do Migrants Lower Workplace Wages? By White, Michael; Bryson, Alex
  11. The productivity effects of worker replacement in young firms By Murmann, Martin
  12. Assessing the Distributive Effects of Minimum Wage By Borraz, Fernando; González Pampillón
  13. Nonprofit Wages: Theory and Evidence By Hirsch, Barry; Macpherson, David A.; Preston, Anne E.
  14. Does random selection of commissioners improve the quality of selected candidates? An investigation in the Italian academia By Daniele Checchi; Silvia De Poli; Enrico Rettore
  15. A Firm of One's Own: Experimental Evidence on Credit Constraints and Occupational Choice By Brudevold-Newman, Andrew; Honorati, Maddalena; Jakiela, Pamela; Ozier, Owen
  16. The Effectiveness of Incentive Schemes in the Presence of Implicit Effort Costs By Goerg, Sebastian J.; Kube, Sebastian; Radbruch, Jonas
  17. Deconstructing income inequality in Costa Rica: An income source decomposition approach By Alberto González Pandiella; Mabel Gabriel
  18. Welcome Home in a Crisis: Effects of Return Migration on the Non-migrants' Wages and Employment By Ljubica Nedelkoska; Ricardo Hausmann
  19. The Effect of Workplace Inspections on Worker Safety By Ling Li; Perry Singleton
  20. The Lasting Legacy of Seasonal Influenza: In-Utero Exposure and Labor Market Outcomes By Schwandt, Hannes
  21. Asymmetries in earnings, employment and wage risk in Great Britain By Konstantinos Angelopoulos; Spyridon Lazarakis; James Malley
  22. Globalization and Social Change: Gender-Specific Effects of Trade Liberalization in Indonesia By Kis-Katos, Krisztina; Pieters, Janneke; Sparrow, Robert
  23. Genetic Ability, Wealth, and Financial Decision-Making By Barth, Daniel; Papageorge, Nicholas W.; Thom, Kevin

  1. By: Matano, Alessia (University of Barcelona); Naticchioni, Paolo (University of Rome 3)
    Abstract: The relation between rent sharing and wages has generally been evaluated on average wages. This paper uses a unique employer-employee panel database to investigate the extent of rent sharing along the wage distribution in Italy. We apply quantile regression techniques and control for national level bargaining, unobserved worker and firm heterogeneity and endogeneity. Our findings show that the extent of rent-sharing decreases along the wage distribution, suggesting that unskilled workers benefit most from firms' rents. By applying quantile regressions by occupational categories, we show that the decreasing pattern is mainly driven by blue collar workers, while estimates for white collars are higher and basically constant along the wage distribution. We also provide evidence that unions might represent one of the driver of our findings.
    Keywords: rent sharing, wage distribution, quantile regressions, IV quantile regressions, quantile fixed effects regressions
    JEL: C33 J31 J41 L25
    Date: 2017–02
  2. By: Gevrek, Deniz (Texas A&M University Corpus Christi); Spencer, Marilyn (Texas A&M University Corpus Christi); Hudgins, David (Texas A&M University Corpus Christi); Chambers, Valrie (Stetson University)
    Abstract: This study explores the role of salary raises and the perception of employees of these salary raises on employees' intended retention and turnover. By using a unique survey data set from an American university, this study investigates a novel hypothesis that faculty perceptions of salary raises, relative to their perceptions of other faculty members' assessments of the raises, influences their labor supply. Using both Ordered Probit and OLS modelling frameworks, we focus on the impact of salary raises and the relative perception of these raises on intended labor supply behavior. We explore a hypothesis that a mismatch between one's ranking of the salary raise and the perception of others' rankings causes dissatisfaction. Our results provide evidence that salary raises themselves are effective monetary tools to reduce turnover; however, our results also suggest that relative deprivation as a comparison of one's own perceptions of a salary raise with others affects employee retention. We find that employees who have less favorable perceptions of salary adjustments, compared to what they believe their colleagues think, are more likely to seek another employer, holding their own perception of raises constant. Conversely, more favorable views of salary raises, compared to how faculty members think other's perceived the salary raises, does not have a statistically significant impact on retention. Our results indicate that monetary rewards in the form of salary raises do impact employee retention; however, perception of fairness of these salary raises is also as important as the actual raises. Given the high cost of job turnover, these findings suggest that employers would benefit from devoting resources toward ensuring that salary- and raise-determining procedures are generally perceived by the vast majority of employees as being fair. This is the first study that explores the employee satisfaction with salary raises relative to perceptions of other employees' satisfaction with salary raises, and intended labor supply in an American university.
    Keywords: employee turnover, labor supply, higher education, job satisfaction, ordered probit model, relative perception, relative deprivation
    JEL: I23 J22 J28 M52
    Date: 2017–02
  3. By: Gaeta, Giuseppe Lucio; Lavadera, Giuseppe Lubrano; Pastore, Francesco
    Abstract: This paper contributes to the literature on overeducation by empirically investigating the wage penalty of job-education mismatch among Ph.D. holders who completed their studies in Italy; a country where the number of new doctoral recipients has dramatically increased over recent years while personnel employed in R&D activities is still below the European average. We use cross-sectional micro-data collected in 2009 and rely on different definitions of education-job mismatch such as, overeducation, overskilling and dissatisfaction with the use of skills. We find that overeducation and skills dissatisfaction are associated with significantly lower wages but there is no wage penalty from overskilling. Furthermore, those who simultaneously report overeducation and skills dissatisfaction experience a particularly high wage penalty.
    Keywords: job-education mismatch,overeducation,overskilling,job satisfaction,wages,Ph.D. holders
    JEL: C26 I23 I26 J13 J24 J28
    Date: 2017
  4. By: Stockinger, Bastian; Zwick, Thomas
    Abstract: A number of studies have found that firms provide less training if they are located in regions with strong labor market competition. This finding is usually interpreted as evidence of a higher risk of poaching in these regions. Yet, there is no direct evidence that regional competition is positively correlated with poaching. Building on a recently established approach to ex-post identify poaching of apprenticeship completers, our paper is the first to directly investigate the correlation between regional labor market competition and poaching. Using German adminis-trative data, we find that competition indeed increases training establishments' probability of becoming poaching victims. However, poaching victims do not change their apprenticeship training activity in reaction to past poaching. Instead, our findings indicate that the lower training activity in competitive regions can be attributed to lower retention rates, a less adverse selection, and lower labor and hiring costs of apprenticeship completers hired from rivals.
    Keywords: poaching,firm-sponsored training,apprenticeship,regional labor markets,labor market competition
    JEL: J24 M51 M53 R23
    Date: 2017
  5. By: Autor, David; Dorn, David; Hanson, Gordon
    Abstract: The structure of marriage and child-rearing in U.S. households has undergone two marked shifts in the last three decades: a steep decline in the prevalence of marriage among young adults, and a sharp rise in the fraction of children born to unmarried mothers or living in single-headed households. A potential contributor to both phenomena is the declining labor-market opportunities faced by males, which make them less valuable as marital partners. We exploit large scale, plausibly exogenous labor-demand shocks stemming from rising international manufacturing competition to test how shifts in the supply of young "marriageable" males affect marriage, fertility and children's living circumstances. Trade shocks to manufacturing industries have particularly negative impacts on the labor market prospects of men and degrade their marriage-market value along multiple dimensions: diminishing their relative earnings - particularly at the lower segment of the distribution - reducing their physical availability in trade-impacted labor markets, and increasing their participation in risky and damaging behaviors. As predicted by a simple model of marital decision-making under uncertainty, we document that adverse shocks to the supply of "marriageable" men reduce the prevalence of marriage and lower fertility but raise the fraction of children born to young and unwed mothers and living in in poor single-parent households. The falling marriage-market value of young men appears to be a quantitatively important contributor to the rising
    Keywords: Fertility; Household Structure; import competition; Local Labor Markets; Marriage Market; Single-Parent Families; Trade Flows
    JEL: F16 J12 J13 J21 J23
    Date: 2017–02
  6. By: Mak, Eric (Shanghai University of Finance and Economics); Siow, Aloysius (University of Toronto)
    Abstract: Integrating Roy with Becker, this paper studies occupational choice and matching in the labor market. Our model generates occupation earnings distributions which are right skewed, have firm fixed effects, and large changes in aggregate earnings inequality without significant changes in within firm inequality. The estimated model fits the earnings distribution both across and within firms in Brazil in 1999. It shows that the recent decrease in aggregate Brazilian earnings inequality is largely due to the increase in her educational attainment over the same years. A simulation of skilled biased technical change in the model also qualitatively fits the recent changes in earnings inequality in the United States.
    Keywords: occupational choice, matching, earnings distribution, inequality
    JEL: J31
    Date: 2017–02
  7. By: Karachiwalla, Naureen (IFPRI, International Food Policy Research Institute); Park, Albert (Hong Kong University of Science & Technology)
    Abstract: We provide evidence that promotion incentives influence the effort of public employees by studying China's system of promotions for teachers. Predictions from a tournament model of promotion are tested using retrospective panel data on primary and middle school teachers. Consistent with theory, high wage increases for promotion are associated with better performance, teachers increase effort in years leading up to promotion eligibility, and reduce effort if they are repeatedly passed over for promotion. Evaluation scores are positively associated with teacher time use and with student test scores, diminishing concerns that evaluations are manipulated.
    Keywords: teacher incentives, promotions, China
    JEL: J31 J33 J45 M51
    Date: 2017–02
  8. By: Giuliano, Romina (University of Mons); Kampelmann, Stephan (Free University of Brussels); Mahy, Benoît (University of Mons); Rycx, Francois (Free University of Brussels)
    Abstract: This paper is one of the first to examine how the use of fixed-term employment contracts (FTCs) affects firm competitiveness (i.e. productivity, wages and profits) while controlling for key econometric issues such as time-invariant unobserved workplace characteristics, endogeneity and state dependence. We apply dynamic panel data estimation techniques to detailed Belgian linked employer-employee data covering all years from 1999 to 2010. Results show that the effects of FTCs on firm competitiveness vary across sectors: while temporary employment is found to enhance productivity and profits in (labour-intensive) services, this is not the case in manufacturing and construction.
    Keywords: fixed-term contracts, productivity, wages, profits, sectors, linked panel data
    JEL: D24 J24 J31 M12
    Date: 2017–02
  9. By: Dube, Arindrajit (University of Massachusetts Amherst)
    Abstract: Using the March Current Population Survey data from 1984 to 2013, I provide a comprehensive evaluation of how minimum wage policies influence the distribution of family incomes. I find robust evidence that higher minimum wages shift down the cumulative distribution of family incomes at the bottom, reducing the share of non-elderly individuals with incomes below 50, 75, 100, and 125 percent of the federal poverty threshold. The long run (3 or more years) minimum wage elasticity of the non-elderly poverty rate with respect to the minimum wage ranges between -0.22 and -0.55 across alternative specifications that subsume most of the approaches used in the literature to construct valid counterfactuals. Inverting the policy's effect on the cumulative distribution, I estimate minimum wage elasticities for unconditional quantiles of family incomes. The long run minimum wage elasticities for the 10th and 15th unconditional quantiles of equivalized family incomes range between 0.15 and 0.49 depending on specification. A reduction in public assistance partly offsets these income gains, which are on average 72% as large when using an expanded income definition including tax credits and non-cash transfers.
    Keywords: minimum wages, income inequality, poverty
    JEL: J38 J88 D31
    Date: 2017–02
  10. By: White, Michael (Policy Studies Institute); Bryson, Alex (University College London)
    Abstract: Using nationally representative workplace data for Britain we identify the partial correlation between workplace wages and the percentage of migrants employed at a workplace. We find wages are lower in workplaces employing a higher percentage of migrants, but only when those migrants are non-EEA migrants. However, the effects are no longer apparent when we condition on the ethnic complexion of employees at the workplace. Instead, the wage penalty is attached to the percentage of non-white employees, a finding that is consistent with employer discrimination on grounds of race, or lower worker bargaining power when employees are ethnically diverse.
    Keywords: migrants, migration, ethnicity, race, wages, earnings, low pay, discrimination
    JEL: J31 J61 J71
    Date: 2017–02
  11. By: Murmann, Martin
    Abstract: Existing management research has so far dealt with the consequences of labor turnover for established firms, but has not addressed its effect on young entrepreneurial businesses. In this paper I assess, both theoretically and empirically, the productivity effects of worker replacement in young firms. Worker replacement isolates labor turnover due to employee replacement as a separate category of turnover and has been shown to positively affect the productivity of established firms in previous research. Using a large and representative sample of German start-ups, I show that worker replacement has negative effects on young firms' productivity that remain even when controlling for moderating factors. These effects are even more negative when the founder does not have prior managerial experience.
    Keywords: Firm productivity,Labour turnover,Churning,Entrepreneurship
    JEL: L26 M13 J24 J63 D22
    Date: 2017
  12. By: Borraz, Fernando; González Pampillón
    Abstract: This paper analyzes the role of Uruguay’s sharp minimum wage increases after 2004 amidst the country’s slight wage inequality decrease. We found that the minimum wage increase has contributed to the reduction of wage inequality for formal workers mainly. However, we also found a negative impact on employment outside the capital city, Montevideo, and observed a reduction in working hours. These results raise doubts about the effectiveness of minimum wage as a redistribution instrument in developing countries.
    Keywords: minimum wage,wage inequality,instrumental variables,employment effect,difference in difference
    JEL: J20 J31 J38
    Date: 2017
  13. By: Hirsch, Barry (Georgia State University); Macpherson, David A. (Trinity University); Preston, Anne E. (Haverford College)
    Abstract: The nonprofit sector's share of wage and salary employment in the U.S. has increased over time, from about 5½ percent in the mid-1990s to 7 percent in 2015. This paper surveys the literature and presents new evidence on the employment and earnings of workers in the nonprofit sector since 1994. As compared to the private for-profit sector, nonprofits have a more educated and older workforce, with employment concentrated in health, education, and service occupations and industries. Standard wage level analysis indicates lower wages for men employed in nonprofits compared to male for-profit workers with similar measured attributes. No such penalty is found for women. Based on panel estimates of wage changes, we find no substantive wage penalties for either women or men moving between jobs in and outside the nonprofit sector. We conclude that wages in the nonprofit and for-profit sectors, on average, differ little for similar workers and jobs.
    Keywords: nonprofit wage differentials, nonprofit employment, Current Population Survey (CPS)
    JEL: J21 J31 L33
    Date: 2017–02
  14. By: Daniele Checchi; Silvia De Poli; Enrico Rettore
    Abstract: We study a reform occurred in Italy in 2008 in the formation of selection committees for qualifying as university professor. Prior to the reform members of the selection committees were elected by their peers, after the reform they have been randomly drawn. This policy was intended to increase the equality of opportunities of candidates via a reduction of the role played by connections to commissioners. Results show that the reform was ineffective in reducing the probability contribution of being an insider, but attenuated the impact of being connected to a commissioner without significantly raising the impact of scientific quality of candidates on the outcome of competitions. We also find that candidates internalised the changed environment and adapted their strategy of application.
    Keywords: University Recruitment, Incentives, Negotiation, Formal procedures
    JEL: M51 I23 D82 J45
    Date: 2017–03
  15. By: Brudevold-Newman, Andrew (University of Maryland); Honorati, Maddalena (World Bank); Jakiela, Pamela (University of Maryland); Ozier, Owen (World Bank)
    Abstract: We conducted a randomized evaluation of two labor market interventions targeted to young women aged 18 to 19 in three of Nairobi's poorest neighborhoods. One treatment offered participants a bundled intervention designed to simultaneously relieve credit and human capital constraints; a second treatment provided women with an unrestricted cash grant, but no training or other support. Both interventions had economically large and statistically significant impacts on income over the medium-term (7 to 10 months after the end of the interventions), but these impacts dissipated in the second year after treatment. Our results are consistent with a model in which savings constraints prevent women from smoothing consumption after receiving large transfers – even in the absence of credit constraints, and when participants have no intention of remaining in entrepreneurship. We also show that participants hold remarkably accurate beliefs about the impacts of the treatments on occupational choice.
    Keywords: youth unemployment, microenterprises, entrepreneurship, credit constraints, cash grants, training, Africa, gender
    JEL: J24 M53 O12
    Date: 2017–02
  16. By: Goerg, Sebastian J. (Florida State University); Kube, Sebastian (University of Bonn); Radbruch, Jonas (IZA)
    Abstract: Agents' decisions to exert effort depends on the provided incentives as well as the potential costs for doing so. So far most of the attention has been on the incentive side. However, our lab experiments underline that both the incentive and cost side can be used separately to shape work performance. In our experiment, subjects work on a real-effort task. Between treatments, we vary the incentive scheme used for compensating workers. Additionally, by varying the available outside options, we explore the role of implicit costs of effort in determining workers' performance. We observe that incentive contracts and implicit costs interact in a non-trivial manner. Performance reacts significantly to changes in implicit effort costs under low-powered piece-rate and target-based bonus contracts, but not under a high piece rate contract. In addition, comparisons between the incentive schemes depend crucially on the implicit costs.
    Keywords: workers' performance, work environments, implicit cost, opportunity costs, incentive schemes
    JEL: C91 D01 D03 D24 J22 J24 J33 L23 M52
    Date: 2017–02
  17. By: Alberto González Pandiella (OECD); Mabel Gabriel (OECD)
    Abstract: Despite an improvement in overall macroeconomic performance in Costa Rica, income inequality has risen and is currently at its maximum historical value. This is in stark contrast with other Latin American countries, which have recently made significant progress in reducing inequality. This study analyses the drivers of inequality in Costa Rica by decomposing the Gini coefficient by income source, finding that the main contributor to inequality in Costa Rica is labour income. In the period 2010-2014, public sector wages made the largest contribution to inequality, in particular wages of qualified workers. Within the public sector, wages of those working in public agencies outside central government contributed the most. Inequality has also been driven by a large and increasing skills premium in the private sector. Workers holding a tertiary degree earn, on average, nearly four times as much as those with only primary education. Social programmes, such as non-contributory pensions, do contribute to reduce inequality but their impact is limited given its small share in households’ total income. The analysis also quantifies the marginal effect on inequality of the different income sources, finding that an increase in wages of low qualified workers in the private sector would have the largest marginal impact to reduce inequality. Conversely, increases in wages of qualified workers in public and private sector would result in the highest increases in inequality.
    Keywords: gini coefficient, income inequality, income source decomposition, skills premium, wages
    JEL: D31 H53 J30 J31 O15
    Date: 2017–03–07
  18. By: Ljubica Nedelkoska (Center for International Development at Harvard University); Ricardo Hausmann (Center for International Development at Harvard University)
    Abstract: Albanian migrants in Greece were particularly affected by the Greek crisis, which spurred a wave of return migration that increased Albania’s labor force by 5% between 2011 and 2014 alone. We study how this return migration affected the employment chances and earnings of Albanians who never migrated. We find positive effects on the wages of low-skilled non-migrants and overall positive effects on employment. The gains partially offset the sharp drop in remittances in the observed period. The employment gains are concentrated in the agricultural sector, where most return migrants engage in self-employment and entrepreneurship. Businesses run by return migrants seem to pull Albanians from non-participation, self-employment and subsistence agriculture into commercial agriculture.
    JEL: J21 J23 J24 J31 J61
    Date: 2017–01
  19. By: Ling Li (Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244); Perry Singleton (Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244)
    Abstract: The Occupation Safety and Health Administration enforces safety regulations through workplace inspections. To identify the effect of inspections on worker safety, this study exploits quasi-experimental variation in inspections due to OSHA’s Site Specific Targeting plan. The SST plan used establishment-level data on accidents and injuries to target establishments for inspection. The primary inspection list consisted of establishments with case rates exceeding a cutoff. This cutoff generated a discontinuous increase in inspections, which is used to identify the effect of inspections on worker safety. Using the fuzzy regression discontinuity design and local linear regression, the estimated effect of an inspection on cases involving days away from work, job restrictions, and job transfers is -1.607 per 100 full-time equivalent workers. The effect is most pronounced among manufacturing establishments below the 90th percentile of the case-rate distribution.
    Keywords: OSHA; Worker Safety; Regression Discontinuity
    JEL: J28 K32
    Date: 2017–02
  20. By: Schwandt, Hannes (University of Zurich)
    Abstract: Pregnancy conditions have been shown to matter for later economic success, but many threats to fetal development that have been identified are difficult to prevent. In this paper I study seasonal influenza, a preventable illness that comes around every year and causes strong inflammatory responses in pregnant women. Using administrative data from Denmark, I identify the effects of maternal influenza on the exposed offspring via sibling comparison, exploiting both society-wide influenza spread and information on individual mothers who suffer strong infections during pregnancy. In the short term, maternal influenza leads to a doubling of prematurity and low birth weight, by triggering premature labor among women infected in the third trimester. Following exposed offspring into young adulthood, I observe a 9% earnings reduction and a 35% increase in welfare dependence. These long-term effects are strongest for influenza infections during the second trimester and they are partly explained by a decline in educational attainment, pointing to cognitive impairment. This effect pattern suggests that maternal influenza damages the fetus through multiple mechanisms, and much of the damage may not be visible at birth. Taken together, these results provide evidence that strong infections during pregnancy are an often overlooked prenatal threat with long-term consequences.
    Keywords: pregnancy conditions, seasonal influenza, labor market outcomes
    JEL: I10 J24 J3 J13
    Date: 2017–02
  21. By: Konstantinos Angelopoulos; Spyridon Lazarakis; James Malley
    Abstract: This paper examines the relationship between idiosyncratic earn- ings, employment and wage risk and fluctuations in aggregate labour market quantities for Great Britain. We use data from the British Household Panel Survey (BHPS) for 1991-2008 and from the BHPS sub-sample of Understanding Society for 2010-2014. We measure idio- syncratic risk by the relevant moments of the distribution of earnings, employment and wage shocks across individuals. Our main finding is that each of these measures of idiosyncratic labour income risk re- spond asymmetrically to fluctuations in the labour market aggregates. Furthermore, we find evidence of insurance, both within the household and in the form of public insurance.
    Keywords: Idiosyncratic income risk, employment, social insurance policy
    JEL: D31 E24 J31
    Date: 2017–02
  22. By: Kis-Katos, Krisztina (University of Goettingen); Pieters, Janneke (Wageningen University); Sparrow, Robert (Wageningen University)
    Abstract: We analyse the gender-specific effects of trade liberalization on work participation and hours of work and primary participation in domestic duties in Indonesia. We show that female work participation increased in relative terms in regions that were more exposed to input tariff reductions, whereas the effects of output tariff changes were much less pronounced. When looking at the potential channels for these effects, we find that in Indonesia the structure of initial protection was considerably more female-biased than skill-biased and hence reductions in input tariffs have especially benefited sectors with a larger initial concentration of female workers. This has led to a relative expansion of more female intensive sectors as well as to a decrease in gender segregation of occupation, especially among the low skilled. We also find that labour markets are a key channel through which trade liberalization affects marriage decisions. Delayed marriage among both sexes is related to input tariff liberalization, especially in the younger cohorts, as the improved labour opportunities for women reduce the returns to marriage.
    Keywords: labour force participation, gender inequality, marriage, trade liberalization, Indonesia
    JEL: F13 F16 J12 J16 J21
    Date: 2017–02
  23. By: Barth, Daniel (University of Southern California); Papageorge, Nicholas W. (Johns Hopkins University); Thom, Kevin (New York University)
    Abstract: Recent advances in behavioral genetics have enabled the discovery of genetic scores linked to a variety of economic outcomes, including education. We build on this progress to demonstrate that the same genetic variants that predict educational attainment independently predict household wealth in the Health and Retirement Study (HRS). This relationship is partly explained by higher earnings, but a substantial portion of this association cannot be explained mechanically by income flows or bequests. This leads us to explore the role of beliefs, financial literacy and portfolio decisions in explaining this genetic gradient in wealth.We show that individuals with lower genetic scores are more prone to reporting "extreme beliefs" (e.g., reporting that there is a 100% chance of a stock market decline in the near future) and they invest their savings accordingly (e.g., avoiding the stock market). Our findings suggest that genetic factors that promote human capital accumulation contribute to wealth disparities not only through education and higher earnings, but also through their impact on the ability to process information and make good financial decisions. The association between genetic ability and wealth is substantially lower among households receiving a defined benefit pension. Policies that transfer greater responsibility to individuals to manage their wealth might therefore exacerbate the consequences of labor market inequality.
    Keywords: wealth, inequality, portfolio decisions, beliefs, education and genetics
    JEL: D14 D31 G11 H55 I24 J24
    Date: 2017–02

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