Are wages posted or bargained?

Modeling the labor market, we tend to postulate that wages are either posted by employers or negotiated, typically by Nash bargaining. This is especially true of search and matching models, which often study business cycles. Results depend to some degree on this assumption, thus it should be a good idea to check against the empirical evidence how wages are determined in the matching process.

Hanna Brenzel, Hermann Gartner and Claus Schnabel use employer data from Germany and find that it is a mixed bag. But how wages are set in not random. To quote from their abstract:

Wage posting dominates in the public sector, in larger firms, in firms covered by collective agreements, and in part-time and fixed-term contracts. Job-seekers who are unemployed, out of the labor force or just finished their apprenticeship are also less likely to get a chance of negotiating. Wage bargaining is more likely for more-educated applicants and in jobs with special requirements as well as in tight regional labor markets.

This implies in particular that the mix may change over the business cycle (as labor-market tightness changes), and that models that assume that one must be unemployed to apply for jobs and then get Nash bargaining are inconsistent with the data, at least in Germany.

Groom yourself to publish better research?

There is plenty of evidence that being beautiful helps you on the job market. First impressions count a lot, and physical appearance is likely the main factor in first impressions. But does beauty matter in situations where there are no such first impressions? Take the case of scholarly publishing: editors and referees do not see a picture of the author(s), thus it should not matter. If it still matters, it must be that beauty is correlated with something that makes your more likely to get published, say, confidence or more subtly that beautiful people are more healthy, and thus should have had less illness disruptions in schooling and have more human capital. Anyway, we need some evidence.

Alexander Dilger, Laura Lütkenhüner and Harry Müller want to offer some. They asked attendees at a conference of business researchers about their happiness, took their pictures and had others judge these mug shots. They then looked for the publication records of their subjects over the next two years. It turns out that happy people publish more, but of course the causality could run the other way, as you may be happy that your research agenda is progressing well, especially when you are asked about your happiness at a conference in your research field. Maybe more interesting is that a trustworthy appearance is correlated with a better publication record. Is it really the appearance that matters here, or simply that a person who is capable of keeping himself in order is also more likely to be well organized to publish well? Also the population under study (n=49, by the way) is faculty from business schools. It is notorious that in business schools appearances matter a lot, and after law schools it is where it matters the most. Not the kind of sample I would use to make general claims about the research productivity of scholars as it relates to appearance.

Protestantism and economic growth

Among Christians, Protestants have a reputation of hard workers. This is motivated by the preachings of the early reformers who have emphasized literacy and hard work, to the disadvantage of wasteful fun and decorum. This was quite a break from Catholicism, where decorum and the arts are very important. I am likely not alone in thinking that this explains why the South of Europe, predominantly Catholic, is poorer than the North.

Davide Cantoni makes me doubt that now but using a dataset that has fewer confounding factors than European national data: the Holy German Empire. Indeed, it was fractures in many fiefdoms of various religious orientations. Of course, economic data is rather limited for the sample periods of 1300 to 1900, so Cantoni does what economic historians typically do in such a situation: use population data, a presumably good proxy for economic development in a Malthusian world. There is rather good data for cities, and we know how they switched their religious denomination over time. And Cantoni finds nothings. No matter how he turns the data, Protestantism has no impact. Why? Maybe because we think of the teachings of Calvin when thinking about Protestantism, while Calvin was of limited impact? But what about the emphasis on literacy?

How much do spouses suffer from unemployment?

Unemployment spells not only reduce income, they can have lasting consequences. The next job has a lower wage than the preceding one. Unemployed workers lose human capital. They are less healthy, in particular in terms of mental health.

Jan Marcus shows that an unemployment spell also has lasting consequences on others: the spouses. Using data from the apparently inexhaustible German Socio-Economic Panel, he finds that spouses of workers who have bee laid off suffer from worse mental health outcomes. Specifically, he looks at plant closures, where the layoff should not correlate with previous private conditions of the worker or spouse (although I can imagine a plant closure is not a complete surprise and may influence their mental state). While it is understandable that the unemployed worker may suffer, for example, from depression, it is interesting to see that spouses suffer almost as much from adverse mental health. This means not only that the cost of unemployment is higher than we think, but also that spouses should also have access to the mental health benefits the unemployed get.

Disclosing hospital quality works

Usually, better information leads to better outcomes (well except for those people who could exploit some information asymmetry). People can better evaluate their options, and they do not like uncertainty. The impact of information on behavior, however, is ambiguous. For example, I recently discussed the case of a supervision contract that needs artificial uncertainty to be constraint-efficient. Disclosing the quality of some goods provided by the state, such as schools, is contentious. In that case, it turns out to be beneficial.

The same seems to apply for hospitals. Lapo Filistrucchi and Fatih Cemil Ozbugday study data from German hospitals when mandatory quality reports were introduced. This new policy improved overall quality, and more so in hospitals that were initially graded inferior. Those that were initially better had more patients thereafter, thus the public looked at those grades. And where there was more hospital density, the authors can see more quality improvements, indicating that competition is at work in beneficial ways. An improvement in overall well-being is thus likely (we cannot be sure, as the use of resources to reach quality improvements is not measured).

Working times of spouses and well-being

It is now the norm that both partners of a couple work, and with that come issues about coordinating work time around children and allowing for "together-time." While everyone's circumstances are different, policy makers ought to be interested in which work time arrangements yield the most satisfaction, and if the marketplace is not providing for such arrangements, how policy can make it happen.

Christoph Wunder and Guido Heineck use this fantastic tool, the German Socio-Economic Panel, to determine which work schedules couples prefer. Overall, they prefer matching working hours. What I find more interesting is that females prefer it when their partner works full-time, while male are largely unaffected by the number of their partner's working hours. One can find several explanations for this asymmetry, but it is difficult to discount some form of sexism in seeing male work essential, while female work is not, and even females seem to agree with this. But if people are happy with this, why should policy intervene?

Wind farms: Is NIMBY justified?

Personally, I find wind farms to be beauties. They are very elegant and even in large numbers the wind mills offer a sumptuous spectacle. But not everyone shares this point of view, and especially the windmills' neighbors are railing against their visual impact, their shade and their noise. If it is so bad, it must then have an impact on property values. It turns out that it is actually quite difficult to find a significant effect. So is all this NIMBY talk a big fuss for nothing?

Yasin Sunak and Reinhard Madlener point out that the small literature on the topic uses OLS estimates of hedonic models. That is how property valuation studies are usually done, but they find that results can change if one uses geographically weighted regressions, and one takes into account spatial autocorrelation. The analysis is performed for a particular area of Western Germany. It would have been more convincing if this study would have overturned the results of an earlier one. The study also excludes re-sales, for technical reasons. But of course, one could also concentrate on re-sales to see the impact of the windmill proposal and then its construction. Still, their specification can tease out some interesting results. OLS estimates reveal a negative impact that becomes more complex with a more general specification: the negative impact is much stronger in one city compared to the other, all else equal. Some areas even benefit. It would be interesting to see whether this is from internal migration away from the windmills.

The power of check-up reminders

I think dental checkups are the best deal in terms of dental health. They cost relatively little, allow to detect dental problems early and before they turn into root canal procedures, and the dental cleaning gives me the impression that I have new teeth. Yet, because they are rather infrequent (every six months), one tends to forget about them or postpone them. The, how effective are reminders?

Steffen Altmann and Christian Traxler did a little field experiment, sending to clients of a German dentist no reminder, a neutral reminder or a reminder with an explanation of the benefits of a dental checkup. It turns out the reminder is very effective, and a neutral one is just as good as a "promotional" one. Indeed, people know checkups are a good deal, at least people who respond to reminders. No particular difference is detected between those with and without dental insurance.Interestingly, the impact of the reminder is so strong that it is still significant 100 days after sending it: Sending one is enough, people must be keeping it next to the telephone.

How to wreak havoc in sovereign debt seniority

With the European sovereign debt crisis continuing to linger with the frustrating hesitation waltz of the politicians, it may be a good idea to look back at somewhat similar situations in the past to learn what worked and what did not. There is actually a particularly striking example of how not do to things, the German debt between World War I and the rise of Nazism.

Albrecht Ritschl takes a fresh look at this, with the current crisis in mind. The Great Depression in Germany was particularly severe and has been blamed on the reparation payments that were imposed on the country after the war. Ritschl argues the true reason is more subtle than that. Until 1929, commercial credit to Germany had seniority of reparation payments. This meant that lending to Germany was relatively safe, and Germany took advantage of that with an unprecedented borrowing spree. Then came the Young Plan in 1929, which was supposed to reschedule the reparation payments that were absolutely crushing (after all, reparations amounted to over half the gold ever mined on earth). While the reorganization of the debt included a lower principal, it also gave reparation payments seniority over commercial debt. Suddenly, lending to Germany was much more risky. Of course, the balance of payments and private investment collapsed, and Germany slid into a deep depression.

Lesson: be very careful with changing debt seniority. But it can still make sense to use wisely this instrument, as discussed before.

The imprint of socialism on entrepreneurship

It is often difficult for immigrants to integrate in a new culture, including economic culture. Yet, those who immigrated self-selected themselves as people most likely to succeed in such a change. Imagine how difficult it would be for people who did not choose for a change of culture but have it imposed on them. This is what happened to East-Germans with the reunification of Germany. Almost from one day to the other, they switched from one economic dogma to the other and had to adapt to very different circumstances. One aspect of this is entrepreneurship, which was non-existent in the previous regime for several decades. So how is entrepreneurship doing in Eastern Germany now?

A pair of recent papers looks into this. Michael Fritsch, Elisabeth Bublitz, Alina Rusakova and Michael Wyrwich show that it has taken fifteen years for self-employment rates to converge in both parts of Germany. Part of it was out of necessity: Eastern Germany had a high unemployment rate after the reunification. And it is mostly the young who became entrepreneurs, the old seeming too used to be told what to do. What is not clear from the study is how internal migration may have contributed to the evolution of regional entrepreneurship levels.

Michael Fritsch and Alina Rusakova look at the socio-economic determinants of entrepreneurship. Usually, parental role-models are very important. If one of your parent was self-employed, you are much more likely to become self-employed as well. This relationship seems to have been severely damaged in East-Germany, especially among those with tertiary education, who are also the ones who got the most indoctrinated by the regime.

Cobwebs on the law professor market

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

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

When do employers support minimum wages?

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

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

Looking at the transition from Malthus to industrialization in Germany using real wages

A standard model with a production function concave in labor will tell you that the marginal productivity of labor, and hence the real wage, decreases as labor increases. This the core relationship in the Malthusian model and has been the reason brought forward why some have observed that England enjoyed relative prosperity after the many deaths due to the Great Plague (and why some think the same will happen to Africa due to the AIDS epidemic). Of course, empirical evidence is somewhat thin for such old times.

Ulrich Pfister, Jana Riedel and Martin Uebele add an new data point to this by construction measured of real wages in Germany for the years 1500 to 1850, which they compare to population size. And they confirm the above. The Thirty Year War, which lead to significant population loss, was a period of significantly higher welfare for the survivors than before. This kind of relationship weakened over time though, probably reflecting that new factors became important in production. And it appears this change happened before the typical date we set for the Industrial Revolution in Germany.

Universities as catalysts of the commercial revolution in the Middle Ages

Universities can have a profound impact on the economy of a region, Silicon Valley being a prime recent example. But this is usually difficult to see as they are spread pretty much everywhere now. Hence the interest in looking at older data, where universities were less common and economic activity differed a lot more across regions.

Davide Cantoni and Noam Yuchtman go way back, up to the 14th century in Germany. They compare the establishment of new market places to the founding of universities and find a surprisingly strong correlation when looking at the distance from the nearest university. Of course, you may think this is all endogenous. If a city or region develops, new market places emerge and there is critical mass or wealth for an institution of higher learning. But the authors argue there is causation from universities to markets. Indeed, the Papal Schism of 1386 was an exogenous shock that allowed the creation of universities, and they exploit the trend shift in the granting of markets around this date. The intuition of the causation is that universities provided training in law, which facilitated the creation of legal institutions and ultimately the enforcement of contracts. So, once more, institutions matters, but this is also an interesting counterexample to the intuition that lawyers create demand for there services with no economic or social benefit.

The cost of hiring in Germany

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

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

Sustainable retirement pension reform?

With increasing longevity, it is obvious that something needs to be done to keep pension systems around the world sustainable. The main options are postponing the normal retirement age, lowering retirement benefits or increasing contributions. The typical studies that compare these options and are thrown around in the public arena are done by accountants and actuaries, who do not take into account the changing incentives of market participants. Economists can do better.

Peter Haan and Victoria Prowse take up the challenge and estimate a very complex life-cycle model for Germany. It includes idiosyncratic risk, consumption and labor supply decisions and a complex tax structure. They find that the 6.4 year increase in life expectancy over the next 40 years needs to be met either by an increase in the full-pension age by 4.3 years or a reduction of benefits by 38%. The first approach markedly increases the unemployment rate. This is ironic in Europe where a reduction of that age is typically viewed as a way to reduce chronic unemployment among the young. The other option would markedly increase savings, as people have to fend for themselves more. Consumption of retirees is higher in the first option though.

Am I satisfied with this study? It is much better than what you typically see, yet I want more. The easy bit is that one could actually determine whose welfare increases under which option. That could help in understanding the (political) feasibility of such reforms. And maybe a combination of them turns out best. More critically, the model does not attempt to consider the consequences in the changes in aggregate supply. Lengthening the work age this much increases the work force dramatically and must have consequences for aggregate, and thus individual, wages. Also, while the matching probabilities and wages of retirement age workers are estimated from current data, I do not think these estimates apply once more previous retirees are forced into this pool. The new ones have different qualities compared to those who would have continued working anyway. Therefore, I see more work to be done.

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 Internet did not raise a generation of loners

The image of the basement-dwelling World-of-Warcraft-playing loner is often shown as an example of the adverse impact of the Internet on social capital and in particular social interactions. Whether this is true is not so obvious, as the Internet also makes possible social interactions that could not exist before, as this blog shows in a limited way.

Stefan Bauernschuster, Oliver Falck and Ludger Woessmann study the impact of broadband Internet on social capital using a natural experiment in Eastern Germany. There, some choice by the telecommunications provider resulted in 11% of East German households to be on OPAL lines instead of DSL, which better supports high speeds. Using the German Socio-Economic Panel, they measure social capital with the frequency of going out, visiting friends and performing volunteer work. They find that Internet access has no visible impact on social capital. To the contrary, for children it seems to enhance social capital, possibly because it makes them aware of new opportunities to interact in real life. This is in stark contrast with television use, which has many times been shown to be detrimental to social capital, likely because it is a one-way communication, while the Internet can build two-way communication.

Women stay longer

It is widely documented that women have a much higher tendency to drop out of the labor force than men and that they quit jobs more often. It is obvious that fertility and marriage have a major impact here. And nobody disputes that. But apparently nobody looked into more details by differentiating genders for job market transitions.

Boris Hirsch and Claus Schnabel do it for Germany using excellent panel data that included many job and workplace characteristics along with some details about the workers. Hence, they can factor in a good chunk of heterogeneity. The interesting results is that once you control for the wage, women are less likely to quit their job for another one or non-employment. As women take jobs that pay less, a composition effect is hiding the loyalty of women to their employer.

Does faculty quality matter for PhDs?

A reason people are obsessed with department rankings is, for graduate students, faculty quality reflects the quality of their education, and for faculty, it determines the quality of the students they will attract. The presumption here is that there is a strong correlation between quality of faculty, as measured by citations or article placement, and quality of students, as measured by potential or job placement. This correlation is, however, not that close to one, I can think of several top programs whose students turn out not to be that great. The student placement ranking by Rabah Amir and Malgorzata Knauff unfortunately does not compute such a correlation.

This introduction is a little bit of a stretch to the paper by Fabian Waldinger that looks at a stark natural experiment: the massive exodus of top mathematics faculty during Nazi Germany. Some top departments, the best in the world at the time, lost over half of their faculty within a year, giving us very clear identification. Measuring the likelihood of doctoral students to publish in top journals before and after the exodus, he finds that a one standard deviation in faculty quality, as measured by citations per faculty, increases the probability of publishing the dissertation by 13%. It also has a similar impact on the probability to become full professor, and gives 6.3 more lifetime citations (for an average of 11). One conclusion that Waldinger reaches is that few top departments with top faculty should concentrate on conferring doctoral degrees.

What could be the implications for today? The United States is now the most vibrant arena for doctoral studies in most fields. But the success of US universities is possibly not sustainable, which could lead to an exodus of faculty, a watering down of top doctoral programs and thus an important reduction in the quality of graduate education. Under such circumstances, the only way to save the preeminence of the US is to close many doctoral programs and concentrate the top researchers in the remaining programs.