IZA Director Zimmermann favors pushing retirement age to 70

70EU Commissioner Günther Oettinger has attacked the German government’s pension policy plans, which include the option to retire with full pension entitlements at age 63 if certain conditions are met. IZA Director Klaus F. Zimmermann, who has been a long-standing advocate of raising the retirement age to 70, supported Oettinger in the German daily DIE WELT. This is Zimmermann’s full statement:

“Increasing the retirement age to 70 years is an important European project that has to be taken seriously by the European Parliament as well. In moving away from this target, the German government is throwing a big “pensions party” to be paid for by future generations. The planned retirement policy implies that Germany gives up its leading role in shaping sustainable and harmonized European retirement regulations. The initiative by EU commissioner Oettinger to call for a universal retirement age of 70 must therefore be applauded. Even if it takes decades for this new retirement age to become effective, it would save Europe some painful adjustment processes in the labor market, particularly with regard to the war for talents. Moreover, it would be advisable to automatically adjust the retirement age to rising life expectancy.” (quoted in DIE WELT, April 21, 2014).

Read more in the German IZA Newsroom.

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A stitch in time saves nine: procrastination and academic success

cornell-university-82344_1920Every student knows how hard it can be to pull yourself together and study. From a short-run perspective, being lazy makes sense: studying is an investment in the distant future, while lying in the sun provides immediate utility. So procrastination is a natural behavior – but apparently quite detrimental.

In a new IZA discussion paper, Maria De Paolo and Vincenzo Scoppa show that procrastination and academic success are highly negatively correlated. The authors analyze how long it took Italian undergraduates to enroll in their studies after their admission. All admitted students received their letter of acceptance on the same day and had one week to fill out some forms and pay a small tuition fee.

The researchers show that each day of waiting is connected to five credit points less in the first two years of the degree. Heavy procrastinators, defined as students who needed five or more days to complete their enrollment, achieved even 13 credits less than the average student. There is also a strong negative relation between the high-school grade and the propensity to procrastinate. The authors checked that these effects are not driven by ability, motivation or family background.

Because of their performance in a placement test, some students below a certain threshold were assigned to a special remedial program. This program consists of 160 hours of extra training in math and language skills. The students with the strongest tendency to procrastinate gained most from this program. According to the authors, this training is highly recommendable as it makes these students aware that they have to work harder to overcome their educational gaps.

Read abstract or download discussion paper (PDF).

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UN interventions: Is it all about geography?

United NationsTwenty years after the Rwandan Genocide, many people discuss about the lessons to be drawn: Why have the United Nations refused to intervene militarily, although half a million people were killed? Why, in contrast, have the Yugoslavian Wars received much greater attention from the international community?

In a new IZA discussion paper Juan C. Duque, Michael Jetter and Santiago Sosa put forward a hypothetical answer to these questions: Rwanda was ignored because of its geographic location. Analyzing data from 1950-2012, the authors show that for every 1,000 kilometers of distance from the three western UN Security Council members (France, UK and USA), the probability of a military intervention by the UN decreases by four percent. So it is 42 percent more likely that the UN would intervene in a conflict taking place in Mexico or Spain than in Malaysia or Indonesia.

The researchers show that the probability of military intervention increases when the conflict is especially brutal (+14-16% when there are 1,000 or more deaths in a year) and when the country is poor and small. This has no effect if the conflict is located near one of the major oil suppliers like Saudi Arabia or Kuwait.

The authors conclude that France, the UK and the US decide whether to intervene in a war for very practical reasons. The closer a conflict to their homeland, the greater the chances of success and the lower the costs. Also, in remote places there is no danger of massive refugee waves to western countries. No such geographical bias exists for non-military operations.

Read abstract or download discussion paper.

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Knowing that you matter, matters: the luck of having a meaningful job

smileyWhat if somebody told you that your job was completely irrelevant and useless? Would you still work with the same effort? Probably not. But what if you got more money or became “employee of the month”?

In a new IZA discussion paper Michael Kosfeld, Susanne Neckermann and Xiaolan Yang analyze these questions. In a field experiment, they recruited more than 400 students at a Chinese University to help them enter a dataset into the computer. They told half of the students that their work is very important for their research project. The rest of the helpers were told that the data has already been entered, but some weird professor is not satisfied and wants the process to be repeated. So basically their work is useless.

The researchers discovered that students who thought they do something very meaningful, performed much better. They entered about 15 percent more questionnaires into the computer. Both groups responded similarly to monetary incentives: when promised one Yuan extra to the 50 Yuan fixed pay, both “high-meaning”and “low-meaning” helpers entered about eight percent more questionnaires.

In contrast, the response of the students to a special form of recognition was quite different between the two groups of students. In both groups some participants were told that the one with the most completed questionnaires would be awarded a smiley button in front of all other helpers. The students who thought their work was irrelevant showed 19 percent more effort to get this prize. In contrast, assistants who believed their work was important did not care about this award at all. The authors conclude that meaning and recognition affect workers through the same channel, so that the influence on effort and performance is substitutive, not additive.

Read abstract or download discussion paper.

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The effects of depenalizing cannabis

cannabisPolicy makers in many countries are thinking about legalizing the possession of small amounts of marihuana. For example, people in Colorado can now buy up to one ounce of cannabis in licensed coffeeshops. This is the first time that a U.S. state has legalized the sale of marihuana. Politicians and researchers are eagerly watching this policy to understand the implications of legalizing small amounts of cannabis.

In a new IZA discussion paper Jérôme Adda, Brendon McConnell and Imran Rasul contribute new evidence to the discussion of depenalizing the possession of cannabis. They investigate a policy experiment in the London Borough of Lambeth. From July 2001 to July 2002, people did not get arrested for the possession of small quantities of cannabis, while the possession was still recorded as an offense.

The authors show that the policy experiment had a large effect: there was a huge increase in cannabis demand in Lambeth. In the long run, the number of cannabis possession offenses remained nearly 70 percent higher in the borough than in the rest of London. Also the demand for hard drugs like heroin or crystal meth in Lambeth increased by 12 percent. In contrast, there were nearly 10 percent fewer non-drug related crimes like burglary, theft or criminal damage. The police arrested much more people and the clear-up rate rose significantly. The researchers explained that the police reallocated their forces from pursuing drug offenses to these types of crime and thus worked more effectively.

Since housing prices in Lambeth fell by five percent, the economists conclude that the overall effect on welfare was negative. This decrease was driven by houses in so-called “hotspots” where the drug scene is very active. But the authors also suggest that if cannabis were to be legalized citywide, drug tourism to Lambeth would disappear and housing prices would rise again.

Read abstract or download discussion paper.

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Unborn babies respond to grandparents’ death

graveyardThere is ample evidence that fetuses are negatively affected by diseases and other health issues of the mother. But little is known about babies’ reaction to psychological problems of the mother during pregnancy.

In a new IZA Discussion Paper, Sandra E. Black, Paul J. Devereux and Kjell G. Salvanes show that the death of a grandparent during gestation is associated with worse health outcomes for the fetus. The researchers focus on Norwegian mothers with at least two children and compare siblings to avoid selection problems. Women experiencing their parents’ death during pregnancy are not a random sample because poorer families have a lower life expectancy, suggesting that parents are more likely to die relatively young.

The negative health effects are small but significant: On average, newborns that recently lost one of their grandparents are one millimeter shorter and weigh 23 grams less. The differences are larger for boys than for girls. However, the authors do not find any negative long-run effects, for example on future earnings or the probability that the baby will obtain a high-school diploma later in life.

Interestingly, the negative findings are driven by grandparents’ deaths due to heart attacks. So unexpected losses seem to stress mothers much more than deaths because of cancer. Possible channels through which the babies’ health could be affected are a weakened immune system of the pregnant mother and her tendency to start smoking or drinking in order to deal with the grief.

Read abstract or download discussion paper.

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Germany’s Minimum Wage: A Costly Experiment

Klaus F. Zimmermann IZA Director

Klaus F. Zimmermann
IZA Director

The new German government coalition has announced the introduction of a national statutory minimum wage of €8.50 per hour. The wage will be implemented as of January 1, 2015, allowing interim wage agreements until December 31, 2016.

Given that the decision to introduce a minimum wage has already been made, the discussion now needs to focus on identifying the negative consequences for the German labor market. In particular, that means proposing ways to minimize those negative effects.

Although many European countries have a minimum wage, they differ substantially in terms of the wage level, the chosen mechanism of adjustment, and the exceptions for certain labor market groups.

Minimum wages can be compared internationally by relating them to median earnings. This measure is commonly referred to as the Kaitz index. For Germany, the median hourly wage for full-time employees was €17.10 in 2012.

Thus, the proposed minimum wage amounts to 50 percent of the median income in the country, placing Germany considerably above the OECD average (see chart below). These results suggest that this asymmetry will have serious consequences for the German labor market.

Minimum wages in Europe relative to median full-time earnings (2012). Source: OECD.
* based on median wage for full-time employees (€17.10/hour)
** based on median wage for all employees (€14/hour)
*** mean of available calculations (€15.26/hour)

What Will Be the Likely Outcome?

One has to be concerned about seven negative consequences in total. First, a number of simulation studies have examined the employment effects of implementing a statutory minimum wage. Studies undertaken by researchers of the IZA for Germany have shown that at least 600,000 people – among them mainly part-time employees, women, low-skilled workers and East Germans – will lose their jobs. That is 1.38 % of the country’s labor force and could drive up the German unemployment rate from the present 7.3 % to 8.7 %.

Second, significant consequences for employment can be expected particularly in areas that have contributed strongly to recent job growth, such as the service sector and part-time employment.

Third, many small businesses and employers in East Germany will be forced to make significant upward wage adjustments. This will also affect employment and it will create incentives to circumvent minimum wages, e.g., by working unpaid overtime or by shifting employment to work contracts based on formal self-employment.

Fourth, as is common in other countries, young workers, trainees, interns and long-term unemployed individuals should be exempt from the minimum wage in order to prevent them having to face an additional barrier to labor market entry.

Fifth, past research shows that (high) minimum wages encourage adolescents to drop out of training programs. Why? A minimum wage makes even simple jobs more attractive. Instead of accumulating human capital, which is increasingly important in a global economy reliant on higher qualifications, young workers may accept unstable and low-skilled jobs. This damages their future labor market prospects.

Sixth, due to large differences in minimum wage levels across EU member states and in view of the free movement of labor within the EU, it is also possible that additional workers from countries with lower minimum wages may seek work in Germany. This would have adverse effects on Germany’s overall labor market.

Finally, the political rationale behind the introduction of a statutory minimum wage is usually dominated by social fairness considerations. Given that, it is important to look at the distributional effects.

Although a minimum wage has a positive impact on the wage distribution in a country, the interaction of minimum wages with the given country’s tax and transfer system means that there is little change in disposable income. How so? Simply because higher wage income raises tax liability and that, in turn, leads to reductions in supplemental income benefits these individuals receive.
Further, and even worse, most of those who currently qualify for the minimum wage do not live in low income households. Hence, it is not at all surprising that the income distribution across households can hardly improve. Minimum wages are known to be very inefficient tools to fight inequality.

What Should Be Done?

First, if the introduction of a minimum wage is politically desired despite its potentially negative labor market effects, a cautious approach is advisable as it was taken in the United Kingdom. Starting off at a lower level than €8.50 would allow the German government to test the impact of a minimum wage on the market. Based on the results, the minimum wage could be incrementally raised or such increases might be found inadvisable.

Second, a lower minimum wage for adolescents without training, as well as for trainees and interns, is reasonable provided that skills acquisition has priority, as it should. Moreover, an exception for the long-term unemployed helps to prevent the minimum wage from becoming a permanent hiring obstacle.

And third, what is of utmost importance after any implementation is the ongoing analysis of dynamic changes in the level of employment and wages, corporate workforces, labor demand, particularly the creation of new jobs, or the quality of employment.

It would be interesting to see how the statutory minimum wage in Germany affects the wage distribution above the minimum wage threshold.

However, the German government does not plan to establish such a careful evaluation based on independent scientific research. And it attempts to impose a strict and general implementation of the minimum wage with practically no exemptions.

However, policymakers should tread carefully. Despite the political dynamics, they should use caution and proceed in a gradual fashion – lest they accept the risk that their good intentions will result in great disappointment in the end.

After all, the road to social policy improvements is plastered with examples that ended up backfiring, not just diminishing the intended positive effects from becoming a reality, but contravening them. That is a luxury – read: waste – no country can really afford any longer.

An adapted version of this article appeared in the Wall Street Journal (April 2, 2014).

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