On World Day of Social Justice: Insights on economic inequality from IZA World of Labor

Great Gatsby CurveThe UN has proclaimed February 20 the “World Day of Social Justice” to support efforts of the international community in poverty eradication, the promotion of full employment and decent work, gender equity and access to social well-being and justice for all. Despite substantial progress in the fight against poverty across the globe, the unequal distribution of income and opportunity between different groups in society features prominently in current political debates.

IZA World of Labor provides evidence-based insights from international research into various aspects of economic inequality. Here is an overview of related articles.

If you are born poor you will always be poor?

Income inequality and social origins
Promoting intergenerational mobility may make societies both more egalitarian and more efficient. The expectation that people, whatever their social origin, can raise their standard of living is a powerful incentive to human capital accumulation and personal effort. Policies to counteract disparities in family background, such as education interventions for poor children, may foster intergenerational mobility (Lorenzo Cappellari).

Does inequality persist across generations?
A strong association between incomes across generations—with children from poor families likely to be poor as adults—is frequently considered an indicator of insufficient equality of opportunity. Studies of such “intergenerational persistence,” or lack of intergenerational mobility, are concerned with measuring the strength of the relationship between parents’ socio-economic status and that of their children as adults. However, reliable measurement requires overcoming important data and methodological difficulties (Jo Blanden).

Not all people who are poor are persistently poor
Evidence suggests that unemployment, retirement, and single parenthood are closely associated with persistent poverty and that higher education tends to protect against it. There is also evidence of a poverty trap, meaning that policy should aim to prevent people from falling into poverty because once poor, the probability of being poor in the future increases (Martin Biewen).

What can be done to counteract inequality?

Do skills matter for wage inequality?
Differences in wage inequality across countries are driven primarily by differences in the return to skills, which is determined in part by labor market institutions, but also by how well the supply of skills meets the demand. A comprehensive policy package to tackle wage inequality should include a focus on skills, reforms of labor market institutions that influence how skills are rewarded, and alignment of skill supply and demand (Stijn Broecke).

Can social security programs reduce wealth inequality?
How well social security programs reduce inequality depends on program design and implementation and labor market and population characteristics. To reduce inequality and avoid labor market disincentives, the best design appears to be a mostly proportional contributory program complemented by a well-designed non-contributory component (Alvaro Forteza).

The integration of productive inclusion programs into social assistance systems can reduce poverty
However, productive inclusion will not work for everybody, and even when it shows impacts some households—especially the poorest and most marginalized—will still need assistance. To maximize impacts, it is important to tailor productive inclusion programs to match the beneficiaries’ profiles. Furthermore, the right monetary and design incentives must be provided so that social and productive inclusion programs can effectively coordinate activities, exchange information, and refer beneficiaries (Jamele Rigolini).

Can education reduce inequality?

What role does preschool play in reducing inequality?
Good-quality preschool programs more than pay for themselves by boosting achievement and reducing inequality of achievement. That is good news, especially for countries with persistent and high levels of inequality—and a good reason to expand preschool programs in countries where enrollment is far from universal (Jane Waldfogel).

Can higher education reduce inequality in developing countries?
Projections indicate that the global labor market will face continued disequilibrium. Excess labor supply is expected from less developed regions, while excess demand is expected from developed and emerging economies. At the same time, the global economy is becoming increasingly knowledge-driven. Hence, investment in vocational and higher education is important for developing countries to remain competitive; further, expanding the skill-base of the labor force may lead to lower levels of wealth inequality (Abebe Shimeles).

Slavery, racial inequality, and education
Evidence suggests that in some countries historical slavery has influenced the racial distribution of human capital and income inequality. A regional comparison of the influence of slavery on education, racial education inequality, and income distribution shows that policies aimed at addressing inequality can account for differential effects of past slavery on current outcomes. Policies designed to remove racial education inequalities in schools can favor income equalization, though given the resilience of the effect of past slavery they are by no means an immediate solution. Nevertheless, education policy clearly has a strong influence over time (Graziella Bertocchi).

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Does modern technology slow down employment growth after recessions?

robots at workIn the last 25 to 30 years, recoveries from recessions in the US have been plagued by weak employment growth. While before 1990 employment growth during the two years following a recession was a little over five percent, it has been just under one percent since then. One possible explanation for the slower recovery of jobs is related to technological change.

A 2012 landmark paper on job polarization in the US found that middle-skilled jobs, those usually involving routine tasks that are particularly susceptible to replacement by new technologies, may be destroyed permanently during recessions. The displaced workers from these jobs are then forced into time-consuming transitions to different occupations and sectors, resulting in slow job growth during the recovery.

This phenomenon of labor market polarization (or “hollowing out” of middle-skilled jobs) has attracted widespread attention and contributed to the ongoing debate on the impact of technological change on labor markets. While much of the focus has been on the United States, Georg Graetz (Uppsala University and IZA) and Guy Michaels (London School of Economics and IZA) investigate in their recent IZA Discussion Paper whether labor markets in other countries have also been slow to pick up after recessions, and if modern technology could be to blame.

“Jobless recoveries” a US phenomenon

The authors analyze data from 71 recessions across 28 industries in 17 countries from 1970-2011 to first examine whether recoveries from recessions after 1985 produced slower employment growth than earlier recoveries. They then test if industries that are more susceptible to technological change have had particularly slow employment growth during recoveries. Finally, the researchers investigate whether routine-intensive industries have seen more replacement of middle-skill jobs during recessions and recoveries.

The results suggest that technology has not impeded job growth in recoveries outside the US. While GDP recovered more slowly after recent recessions in the countries under study, employment did not. Neither employment in industries more exposed to technological change nor middle-skilled employment experienced slower recoveries.

These findings pose a puzzle as to the nature of poor employment trends seen during recent recoveries in the US. Graetz and Michaels point to two possible explanations. The first is related to the differences in technology adoption found in previous studies. The second possible explanation appeals to US-specific policy and institutional changes: Unemployment benefit extensions, which increase workers’ reservation wages, may slow down employment growth during recoveries. Moreover, the declining role of unions may have facilitated the substitution of workers during recessions and recoveries. The authors stress, however, that further research is needed to establish the relative merits of the technology- and policy-based explanations.

CaptureRead the complete paper (IZA DP No. 10470):

See also the media coverage at Bloomberg View.

photo credit: Maksim Dubinsky via Shutterstock

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How to improve compliance with sectoral minimum wages

Research on minimum wages focuses mainly on their impact on employment. More recently some papers have looked also at prices, profits and productivity. But they disregard a potentially important issue: non-compliance.

Economists tend to assume that the minimum wage is respected by all firms, which is not the case, especially where authorities seem to turn a blind eye. There have been some attempts to estimate non-compliance with national minimum wages, especially in developing and emerging economies (see IZA World of Labor for an overview).

A new IZA Discussion Paper by Andrea Garnero (OECD, ULB and IZA) extends the research on this topic by looking at non-compliance in the case of wage floors set by collective bargaining at the sectoral level in Italy. The results show that non-compliance rates are sizeable (around 10%) and also the amount of underpayment is quite large (20%, which means e.g. a loss of 200 euros for the worker when the wage floor is 1,000 euros per month).

minimum wage violations by region

Violation of hourly sectoral minimum wages, by Italian region in 2015
Source: IZA Discussion Paper No. 10511.

“Not surprisingly, non-compliance is particularly high in the South and in micro and small firms, and it affects especially women and temporary workers. Overall, the Italian collective bargaining system seems unable to safeguard a level playing field for firms and ensure that minimum wage increases are effectively reflected into pay increases for workers at the bottom of the distribution,” says Garnero.

His paper therefore develops a series of relatively simple and almost free-of-cost policies to increase compliance beyond more effective inspections:

  • Streamline the number of collective agreements
  • Ensure that agreements are signed by representative unions and employers’ organizations
  • Make the information on negotiated wages publicly and easily available
  • Establish a helpline and/or an online form for employers and workers
  • Awareness campaigns
  • Name and shame

For a detailed description see the complete paper (IZA DP No. 10511):

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Three mechanisms to boost firm productivity

Monetary incentives are not always the most cost-effective way to make employees more productive. Three recent IZA World of Labor articles look at alternative mechanisms to improve worker productivity and boost firm performance: peer effects, employee well-being, and employee ownership.

Peer pressure and knowledge spillover

IZAWOL.314.gaShould one expect a worker’s productivity, and thus wage, to depend on the productivity of their co-workers in the same workplace, even if the workers carry out completely independent tasks and do not engage in team work? Thomas Cornelissen (University of York & IZA) argues that this may well be the case because social interaction among co-workers can boost productivity through knowledge spillover or peer pressure.

Cornelissen points at one of the downsides of the trend towards alternative workplace arrangements: Due to positive peer effects, the total productivity of the workforce is higher when workers are working together within the firm rather than from home. It would thus be beneficial for the firm to create spaces and occasions for social interaction and communication (to facilitate knowledge spillover), and to disseminate information about own and co-worker productivity (to facilitate peer pressure).

Knowledge spillovers seem to be most relevant in situations when newly trained and untrained workers interact, in collaborative team settings, or between senior and junior workers. In such instances, Cornelissen recommends that firms encourage social interaction. Peer pressure, on the other hand, can help mitigate free-rider problems in teams, but in excess it can also depress worker well-being and require firms to pay higher wages to retain workers.

Happy workers are more productive

IZAWOL.315.gaWell-being is covered in more detail by Eugenio Proto (University of Warwick & IZA), who looks at the existing evidence on the link between employee well-being and company performance. Both laboratory studies and real-world findings suggest that not only do better performing companies have happier employees, but happy employees also contribute to better company performance.

These findings have several implications for company practice, management strategies and for research. First, if happiness in a workplace carries with it a return in terms of enhanced productivity, there are enormous implications for firms’ promotion policies and for the way they structure their internal labor markets. For example, managers could be rewarded on the basis of employees’ job satisfaction, and workers could be allowed to take a more active part in decision-making, which in general raises job satisfaction.

Second, the effect of happiness on productivity raises the possibility of self-reinforcing spirals—potentially even operating at a macroeconomic level. Happiness might lead to greater productivity in an economy, and that might in turn result in greater well-being in the population.

Employee ownership increases company performance

Douglas Kruse (Rutgers University & IZA) identifies employee ownership as another mechanism that can enhance company performance by creating closer ties between employee performance and rewards. Employees are effectively “working for themselves,” and by sharing the overall economic “pie” more widely, the incentives of workers and owners can become aligned so that productivity-reducing conflict is minimized and productivity-enhancing cooperation and innovation encouraged. This is particularly so when employee ownership is combined with employee participation in decision-making and other high-performance work practices.

IZAWOL.311-chart1Not only is employee ownership linked to higher company performance on average, but it may also add to worker pay, employment stability, and company survival. While free-rider problems may occur and employees are put at higher financial risk, Kruse outlines ways to overcome these problems. Apart from benefiting companies and workers, the findings point to the potential for employee ownership to increase economic stability and reduce unemployment and inequality in the overall economy.

Read the complete articles:

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Globalization’s stabilizing effect on manufacturing jobs in Germany

Recently, there has been strong interest in the decline of manufacturing in the United States. Although the share in real output has been constant since the 1960s, the share in aggregate employment has been steadily decreasing over time. A popular explanation for this pattern is often attributed to labor-saving technological progress, but recent literature argues that rising trade with China has also contributed to the manufacturing decline, especially after 2000. That conclusion may, however, be specific for the US case, given the large and persistent trade deficit vis-à-vis China.

A new IZA Discussion Paper by Wolfgang Dauth, Sebastian Findeisen and  Jens Suedekum focuses on this topic in the context of Germany, whose economy has a traditional focus on manufacturing and runs an overall current account surplus with relatively even trade balances with China and emerging economies in Eastern Europe. The study investigates broad sectoral employment trends between 1993 and 2014, the underlying labor transitions at the micro-level that were behind broader aggregate trends, and how this micro anatomy of structural change was affected by globalization.

Rising trade with China and Eastern Europe had heterogeneous effects

At the aggregate level, the authors observe some important compositional shifts during those 21 years. Services were on a secular upward trend, while manufacturing jobs largely declined during the first decade. But parallel to this overlying expansion of services were marked changes inside manufacturing: industries with strong increases in net import-exposure from China and Eastern Europe declined much faster than export-oriented manufacturing. The number of jobs in the latter industries has been, in fact, roughly stable since 1997, while job losses in import-competing manufacturing industries continued even after the “jobs miracle” starting in 2005.

Manufacturing and Service Employment in Germany, 1993-2014

Manufacturing and Service Employment in Germany, 1993-2014

The study also documents which labor market transitions at the individual worker level are behind those trends. This analysis conveys several novel facts about the underlying micro anatomy of sectoral employment trends. In particular, it shows that the aggregate shift from manufacturing to services does not happen smoothly. The authors find little evidence that the rise of the service economy comes from incumbent manufacturing workers who directly switch jobs. The rise is, instead, entirely driven by young entrants who exhibit different sectoral entry behaviors than previous generations and by returnees coming out of non-employment who take up jobs in different industries than their previous ones.

Without expanded trade, fewer manufacturing jobs

The second part of the study analyzes the causal impact of trade on these key labor market transitions.  Dauth and his colleagues find that the long-run growth rate of manufacturing jobs would have been between 1.58 and 3.11 percentage points lower via the (re-)entry channel. In other words, as of 2014, Germany would have had between 128,000 and 259,000 fewer manufacturing jobs without the increased trade exposure from China and Eastern Europe. Because entrants and returnees would not have been pulled by the rising net export manufacturing opportunities, those jobs would, instead, have been in services (or the public/agricultural sector).

Summing up, unlike in the case of the US, rising trade with emerging low-wage countries did not speed up the decline of manufacturing in Germany. Trade, in fact, slowed it down because the rising exports to these new markets worked to stabilize industry jobs, which might have otherwise been replaced by service jobs.

Download the paper (IZA DP No. 10469):

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The economics of mental health: Better treatment would more than pay for itself

depressionMental illness accounts for half of all illness up to age 45 in rich countries, making it the most prevalent disease among working-age people. Mental illness costs billions in welfare payments and lost taxes. Sir Richard Layard (London School of Economics) shows in a new IZA World of Labor report that providing evidence-based therapies for people with a mental illness should be at the heart of public policy making. And this policy would more than pay for itself.

People with a mental illness are less likely to be working, and, if working, are more likely to be out sick or working below par. If mentally ill people worked at the same rate as the rest of the population, total employment would be more than 4% higher, boosting production and tax revenues.

Physical effects of mental illness

“Presenteeism” is another cost of mental illness—the less effective work done when a person is suffering from a mental illness. By a conservative analysis, the combined effect of non-employment, absenteeism, and presenteeism in the UK reduces national income (gross national product) by 7%—almost as much as most countries spend on education.

Mental illness also imposes costs on physical health care. People who have mental health problems use 60% more physical health care services than those who are equally ill but without mental health problems. This amounts to a massive extra cost (for example, £10 billion in England). Finally, many crimes are mental health-related and crime has a clear economic cost: ca 2% of national income.

Cutting therapy funding costs rather than saves money

Despite the considerable costs, no country spends more than 1% of national income on mental health care. For example, the UK spends just 1% of national income to reduce the expense of conditions that cost the country 7%. Progress in evidence-based psychological therapies has resulted in 50% recovery rates for people with clinical depression or chronic anxiety disorders and substantial improvements for others.

Yet, in most countries, only a tiny fraction of people receive these therapies—even though providing them involves no net cost to public funds. Layard shows that if savings on welfare benefits, lost taxes, and physical health care are included in the calculations, the treatments pay for themselves, twice over.

Layard concludes: “Psychological therapy is a remarkably good bargain. Yet health care commissioners and insurers in the UK, the US, and elsewhere regularly see psychological therapy as an easy area to cut. They need to know that every time they do this, it costs rather than saves money.”

Read the full article:

Image source: pixabay
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IZA Prize in Labor Economics conferred to Claudia Goldin at ASSA Meeting in Chicago


H. Schneider, C. Goldin, D. Hamermesh

The 15th IZA Prize in Labor Economics was formally conferred to Claudia Goldin during the traditional IZA Reception at the annual meeting of the Allied Social Science Associations in Chicago on January 6, 2017. After introductions by Hilmar Schneider (CEO of IZA) and Daniel S. Hamermesh (Chief Coordinator of the IZA Network), laudatory remarks were given by Shelly Lundberg (UC Santa Barbara; IZA Prize Committee member), Robert A. Margo (Boston University) and Price V. Fishback (University of Arizona).

Claudia Goldin is the Henry Lee Professor of Economics at Harvard University. The 2016 IZA Prize recognizes her career-long work on the economic history of women in education and the labor market. Read more about the laureate, her impressive vita, her “detective work” as an economic historian and labor economist, and her insights on the gender gap:

[more about the IZA Prize]

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