Educational choices can help explain income inequality in Germany

vocational trainingRising levels of income inequality in many developed countries have led to much political and scientific controversy. One of the empirical challenges is to identify the causes and drivers of inequality. A new study by German economists Albrecht Glitz (Universitat Pompeu Fabra and IZA) and Daniel Wissmann (LMU Munich) investigates how shifts in skill premiums – the wage difference between skilled and unskilled workers – can help explain income inequality between different skill and age groups.

Different trends in wage differentials since 1980s

The authors show for Germany that the wage differential between medium (those with vocational training and/or Abitur) and low-skilled workers (those without a post-secondary degree) decreased slightly over the 1980s and then increased by a third from 18% to 24% since the late 1980s (solid line in graph), while the high skill premium, i.e. the wage differential between those holding a college or university degree and those with vocational training, followed a U-shape pattern over the same period (Figure 1).

But not all medium-skilled workers benefited from this rise in the skill premium, which is apparently attributable to a pronounced increase in the medium skill premium of young workers (aged 30 and below).

skill premiums

According to Glitz and Wissmann, these differences in the development of wage premia may simply be due to the relative abundance of workers with a specific skill level. Analyzing long-term education trends in Germany for those born between 1950 and 1981, the authors find a pronounced trend break in the educational attainment of the West-German population: relative to previous trends, the shares of both high- and low-skilled individuals increased while the share of medium-skilled individuals declined markedly.

Fewer medium-skilled workers

For cohorts born after 1965, the share of individuals with completed vocational training decreased strongly and was as large for the 1980s cohorts as it was for the 1940s cohorts, while the share of individuals with tertiary education increased to unprecedented levels and the long-term decline in the share of low-skilled individuals came to a hold.

The authors conclude that a considerable part of recent changes in earnings inequality between different skill groups in Germany are the result of longer term educational choices of the population and hence, ultimately, driven by labor supply. With this explanation, the authors complement recent attempts focusing on demand-side explanations of rising inequality, such as technological change and the role of globalization in the vanishing of manual, routine-intensive occupations.

Download the paper (IZA DP No. 10901):

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Unpaid graduate internships: Career boost or bust?

internshipThe rising prevalence of unpaid internships as a gateway to highly competitive careers in law, politics, creative industries, media and publishing, and the sciences, has raised concerns about diminishing social mobility, and raised questions about whether and how interns benefit from the experience.

A recent IZA Discussion Paper by Angus Holford (University of Essex & IZA) uses the Destination of Leavers from Higher Education (DLHE) survey on graduates from English and Welsh universities between 2005 and 2011 to study the returns to taking an unpaid internship six months after graduating from a first degree, on labor market outcomes a further three years later. He compares interns with individuals who went straight into paid work, into further study, or something else, by pairing them each one with a ‘matched’ individual, according to their demographic characteristics and their reported motivations for taking the job or internship they are in.

The results show that, on average, former interns face a salary penalty of approximately £3500 per year compared with those who went straight into paid work, and £1500 compared with those who went into further study. Only compared with those doing ‘something else’ (including traveling or remaining unemployed) do interns gain any significant benefit on average, being 6.4 percentage points more likely to be ‘very satisfied’ with their career.

Outcomes vary by demographic group

Holford also analyzes access to and returns from unpaid internships by demographic characteristics. His findings suggest that there are both advantaged and disadvantaged groups (in terms of expected labor market outcomes after university) who are more likely to be taking an internship. Among the former group are those with parents in professional or managerial jobs, those who went to private schools or ‘elite’ universities, and those graduating with a first or upper second class degree. Among the latter group are Black and ethnic minority graduates, those with disabilities, and from areas with a higher unemployment rate.

The study also finds the negative returns to taking an internship to be significantly smaller for graduates who were privately schooled or with parents in professional occupations. This suggests a segregated market in which the social and financial capital that graduates from higher socio-economic backgrounds can access gives them an advantage in accessing the ‘good’ internships, with a relatively high labor market return.

Holford argues for improving access to and reducing the opportunity cost for students with low socio-economic status of taking relevant experience for ambitious careers during undergraduate degrees, and improving provision of information to students and early graduates about the likelihood of different outcomes from internships in key fields.

Download the paper (IZA DP No. 10845):

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GLM|LIC Call for Proposals: Growth and labor markets in low-income countries

glm-licThe IZA/DFID Programme on Growth and Labour Markets in Low-Income Countries (GLM|LIC) has opened the electronic application portal for Phase IV research proposals. Research projects can be proposed for the following research areas:

  1. Growth and Labour Market Outcomes
  2. Active Labour Market Policies, Labour Market Institutions and Labour Market Frictions
  3. Human Capital and Labour Productivity
  4. Migration and Labour Markets
  5. Labour Market Dimensions of Population Dynamics, Urbanisation, and the Environment

Proposals will be due on October 16, 2017.


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IZA continues GLM|LIC program with DFID – new website now online


Since 2011, IZA has been coordinating the “Growth and Labour Markets in Low Income Countries” program on behalf of the British Department for International Development (DFID). The objective is to fund research projects that deliver a significant new body of evidence to help shape future policies in low-income countries.

So far, 31 projects within five topic areas have been supported, generating more than 150 publications. Many of these publications have been featured in in top academic journals and major international conferences. A number of important policy recommendations have come out of the projects, described in the Policy Brief series.

To facilitate access to these findings, the relaunched GLM|LIC website has a number of new features. In addition to information about the supported projects, including working papers, policy briefs, and published articles from the projects, an Evidence Finder makes it easy to locate GLM-LIC research results by topic and country.

Meanwhile, the cooperation between DFID and IZA has been renewed until 2020. The “Call for Proposals” for innovative new research to be funded in the next phase will be posted on August 1.

glmlic launch

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Long-term unemployed through the eyes of recruiters: Less motivated, less talented and less trainable

jobsearchRecent research has shown that employers are reluctant to hire long-term unemployed: the longer job candidates’ unemployment spell, the lower is their chance of a positive reaction. In a new IZA Discussion Paper, scholars from Ghent University, KU Leuven, Vrije Universiteit Brussel, and University of Oxford have investigated why this is the case.

Unemployment as a signal of factors not shown in a CV

The research results confirm what was found in recent experiments with fictitious job applications: job candidates with long unemployment spells get fewer positive call-backs on their applications. Doctoral researcher Eva Van Belle: “Recruiters judging job candidates are confronted with very limited information. They use this information to predict other factors that drive productivity. In this respect, a main finding of our research is that recruiters perceive long-term unemployment as a signal of lower motivation. This turns out to be the most important explanation for the fact that long-term unemployed job candidates are immediately rejected.”

In addition, long-term unemployed are perceived as having lower intellectual and social skills, being less up-to-date with technological changes, and being less trainable. The research shows that these perceptions also drive the lower hiring chances of the long-term unemployed, albeit to a lesser extent than the association between unemployment and motivation.

Recruiters rely on the negative judgment of their colleagues

A final phenomenon at play is what economists call “rational herding”. IZA research fellow Stijn Baert, labor economics professor at Ghent University: “The recruiters in our research concluded that long-term unemployed candidates had often been rejected by other employers. In other words, other employers had found the candidate’s productivity to be low. As a consequence, inviting these candidates for a job interview seemed inefficient.”

Policy perspective

The study shows that long-term unemployed might benefit from including as many relevant details as possible regarding their motivation in their job applications. It seems that the focus here should be on work motivation and not on general (social) motivation as an additional analysis showed that the association between unemployment duration and hiring chances could not be compensated by revealing engagement as a volunteer.


The results are based on a state-of-the-art vignette experiment in which 219 recruiters evaluated five fictitious job candidates each. These candidates differed by gender, education level, work experience, social activities, and unemployment duration (from 1 to 36 months). Each recruiter had to evaluate different candidates. The recruiters judged and ranked these candidates in terms of likelihood of job interview invitation (and being hired). In addition, they rated the candidates on eight characteristics (including perceived motivation and intellectual and social skills). By means of an econometric model, the association between unemployment duration and chance of a job interview could be explained by these eight characteristics.

Download the paper (IZA DP No. 10876):

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Public health in utero: How external factors influence birth outcomes

By Jeanna Canapari (Yale University)

inuteroIn the study of birth outcomes, going to extremes is not always necessary. While intense events such as heat waves, deep cold or famine can impact fetal development and play a major role in the health of newborns, scientists who study birth outcomes can learn a great deal in more moderate scenarios.

To illuminate this, IZA research fellow Xi Chen, a health economist and assistant professor in the Department of Health Policy & Management at Yale University, looked to the Muslim observance of Ramadan, which requires a month of fasting from sunrise until sunset, to understand how nutritional disruptions to an expecting mother can impact fetal development. The study was published as IZA Discussion Paper No. 8494.

Studies of external factors such as fasting also can have greater influence on policy making than the study of extreme factors such as famine, Chen said. Moderate factors affect far more people: the Ramadan fast potentially impacts the health of more than one billion Muslims worldwide.

Fasting mothers, obese children

Chen’s study revealed that babies who were deprived of prenatal nutrition during Ramadan were more likely to be obese later in life. More generally, having been constrained during early life, Chen said, babies make more efficient use of the limited nutrients they receive during a time of fast, and develop stronger digestive systems. As this generation ages with access to abundant food supply (high fat, sugar diets, etc.), Chen said, the effect of this adaptation to the early environment of under-nutrition begins to show.


Xi Chen

“When they are older, and richer, and they take the same dose of nutritious food as the cohort not exposed to under-nutrition in an early stage of life, biologically their stronger digestive systems tend to produce more surplus energy as regulated in part by peptide hormones in the brain and gut, they are more likely to be susceptible to the risk of developing obesity and other chronic diseases.”

Birth outcomes can hold several clues to the adult that newborn will someday become. By examining factors such as a newborn’s birth weight, gestational size and birth defects, Chen looks to predict not only future health, but also the potential for future economic success. In another study, for instance, he looked to poor, rural China and the effect that the practice of gift giving has on birth outcomes.

“If you do not send a gift,” during community festivals and observances such as births, marriages and funerals, “you become socially isolated,” said Chen. In years with an abundance of such events, expectant parents are often forced to choose gifts over prenatal nutrition, to protect their social standing. The result, Chen said, is a negative impact on the height of children from birth to age 6 who were born during years of frequent festivals. The study was published as IZA Discussion Paper No. 10662.

Predicting future health and career

Prenatal care, said Chen, is an investment that parents make in their children. “Social scientists, like myself, often treat birth outcomes as the starting point for human capital,” he said. The conditions that expectant parents live in, and the economic decisions they make, reflect their commitment to investing in the future health of their children. This prenatal care can help determine a child’s success as he or she grows up, and ultimately enter the workforce and contribute to the economy themselves.

As telling as birth outcomes can be, Chen is part of a growing group of researchers going even further back to conception and the whole pregnancy to predict future health. Through data collected from prenatal ultrasounds, Chen is examining three measures: head circumference, femur length and abdominal circumference, all of which, he said, are indicators of long-term health, and predictors of adult chronic disease. Ultrasound data enables Chen to track each ultrasound throughout a fetus’s development, enabling his team to study trajectories of growth before birth.

“I know of only other one economist, Dr. Gabriella Conti of the University College London, who has been exploring early human health using an ultrasound data set.” Chen said. While Heckman’s data set counts information from 1,000 infants in the United Kingdom, Chen, together with Yawei Zhang from Yale’s Environmental Health Sciences Division, are working with a data set of 20,000 babies, collected from hospitals in two Chinese provinces.

Next, Chen and his team plan to use ultrasound data to explore prenatal exposure to air pollution and climate change, and how it interacts with an infant’s genes to affect their long-term development. Additionally, Chen hopes to not only continue going back in time, to fetal development, but forward as well.

“Ideally, we want to follow up on these infants all the way until they grow up and go into the labor market,” he said. “Everyone wants to know the longer-term impact. Our eventual goal is to link the two ends of life course to better understand the role of early childhood circumstances in shaping health inequality in old age.”

Download the papers:

Image source: JDOHaD
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Getting it right: Policies to fight youth unemployment in the EU

ready-for-tomorrowDespite the fact that the global financial crisis has largely come to end, youth unemployment remains high, with rates of jobless young people higher than those of adults across the entire EU. This problem has not gone unnoticed, however. Many Member States, especially those facing the highest rates of unemployment (sometimes exceeding 40%), have enacted labor reforms to provide a potential boost to employment. Nevertheless, because economic growth has remained sluggish, the reforms have had little effect, and these same countries—located mostly in Southern and Eastern Europe—still struggle to find solutions to solve the problem.

Youth unemployment rates in EU member countries (Feb. 2017)

EU youth unemployment (click to enlarge)

While Central and Northern European as well as Anglo Saxon countries also face similar challenges, these countries have weathered the storm much more strongly, and in some cases, such as in Germany, see almost nonexistent differences in unemployment between youth and adults.

In a newly released IZA Policy Paper, Francesco Pastore (Università della Campania Luigi Vanvitelli and IZA) seeks to evaluate what has led to this lack of convergence within the EU and proposes potential policy solutions to overcome it. The author primarily points to contradictory demands placed on Member States coming from the Maastricht Treaty and Lisbon Treaty as one of the key issues. And, while the recently implemented labor reforms were indeed necessary, he suggests that a shift to educational reforms is needed to fully address the problem of youth employment.

Overcoming and reforming the Maastricht Treaty’s limitations

On a basic level, one of the key drivers of unemployment is the lack of economic growth. This is specifically being seen in the Southern and Eastern European countries, which, for example, have had difficulties reaching the Europe 2020 goals. At the root of this, Pastore suggests, is the fact that the Maastricht Treaty and Lisbon Treaty, both seen as cornerstones of the EU, propose largely antagonistic recipes for growth.

While the Maastricht Treaty follows the so-called Washington consensus, a monetarist policy suggesting that financial stability is the key to growth, the Lisbon Treaty recognizes the need for infrastructure and human capital investments. As an example of the limitations of monetary policy, the author highlights the modest outcomes of the policies of quantitative easing seen in the US and the EU (too aggressive in the former, too little in the latter).

The author therefore proposes re-discussing and rewriting the Maastricht Treaty with a bottom-up approach which allows for greater financial flexibility but recognizes the insufficiency of complete financial decentralization. At the same time, public spending should constantly be evaluated and be promoted for activities that foster growth. Finally, a reinvigoration of policy that acknowledges regional differences in terms of the need for more or less EU spending would help draw in the widening gap between core and peripheral countries.

Educational curriculum should better match work requirements

While these macroeconomic adjustments are important to stimulate growth, Pastore stresses that microeconomic reforms need to be made in preparation for when growth expands again. He explains that after having focused on labor reforms for the past two decades, policy makers should now turn their attention to educational reforms. In particular, the author emphasizes the necessity of creating better links between the skills learned during education and the skills needed in the world of work.

He explains that, for the most part, the mission of education has been focused only on fostering a general education. Instead, Pastore proposes reforming the system into a more flexible dual system that provides both general education and practical work-related training. Several existing systems that better link the education system and the labor market, such as Germany’s dual system with strong apprenticeships, Japan’s Jisseki Kankei that links graduates to employers, and the job-placement services found in the Anglo Saxon countries, could all be used as potential models and adapted to fit the needs of different EU countries.

Pastore concludes that a reworking of the Maastricht Treaty, which focuses on the principles of the Lisbon Treaty—improving the level of human capital and increasing spending on research and development­­—along with increased financial and fiscal flexibility, will ultimately enhance economic growth. To do so will require more energetic decision-making at the EU level in terms of both fiscal and educational policy. Thus, solving the high youth unemployment problem in the EU will require promoting policies that better foster growth through public investments in infrastructure and human capital alongside the establishment of better links between education and the labor market.

Download the full paper:

Image: Pixabay. Chart: Statista.
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