James Heckman on Gary Becker’s unique approach to economics

Gary S. Becker †

Gary S. Becker †

Gary Becker (December 2, 1930 – May 3, 2014) has changed the economic profession like few before him. With his brilliant work on human capital and the economics of the family, but also on such issues as drug abuse and crime, he broadened both the scope and the methodology of economics.

A new IZA Discussion Paper by James Heckman analyzes what made Becker’s approach so unique and fruitful in transforming empirical economics by extending the range of problems considered by economists.

Becker’s approach was distinguished by data-driven model-building, going back and forth between empirical analysis and theoretical hypotheses. Initial mismatches between models and data led to creative insights to empirical challenges. Consistent research schemes along his long career demonstrate his ability to focus on problems over long stretches of time.

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Don’t doze off… Being tired might make you risky

tiredIt is common sense that making important decisions after a night of poor sleep might be a bad idea. Marco Castillo, David L. Dickinson and Ragan Petrie put this notion to an experimental test. In a study published in the IZA series, they exploit differences in people’s circadian cycle. Individuals differ in what is called the “diurnal preference”: Some people are early risers or “morning types” while others are most alert in the evening.

The experimenters assigned individuals from both groups to sessions early in the morning or late at night, where they were asked to place tokens on more or less risky investments. The results indicate that being tired is associated with a higher willingness to take risks.

This experimental evidence is in line with real world observations, such as the increased likelihood of being involved in traffic accidents for individuals who are “off” their circadian cycle. The findings may also have important implications for businesses in the financial sector, where long working days with little sleep are common and go hand in hand with risky decisions involving large monetary stakes.

Download the paper (PDF): Sleepiness, Choice Consistency, and Risk Preferences

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Sports and exercise boost labor market performance and earnings

fitnessMany public policy campaigns aim at encouraging people to be more physically active. Sports and exercise enhance physical and mental health, as well as soft skills like self-discipline, endurance, stress management, and team work. All of this can also boost an individual’s productivity and earnings in the labor market. An IZA World of Labor article by Michael Lechner therefore suggests including sports in active labor market programs.

Why do sports? The economist’s view

From a theoretical perspective, there are several reasons why exercising is beneficial. First, sports is (usually) enjoyable and thus yields an immediate reward. Second, there is also an investment motive. Exercise leads to better fitness and an improved physical appearance. This is no only relevant in the labor market but also, for example, in the marriage market.

Since doing sports is time-consuming, the resulting welfare effects are ambiguous: If sports and exercise crowd out other “non-productive” activities such as watching TV soaps or playing computer games, overall productivity gets enhanced. However, if people give up educational activities or even work hours to play sports, reduced earnings might outweigh positive productivity effects. And if physical training is too intense, it may hurt concentration and effectiveness on the job.

Lechner figureWhat does the literature say?

Almost all existing studies on the topic find a positive correlation between sports and labor market performance. There are, however, possible shortcomings when using surveys because people tend to overstate their activity levels, and surveys may not run long enough to establish causal links between exercising and labor market performance.

An experimental study for Sweden circumvents the problems of long-term impacts, positive selection, and measurement issues: 8,000 job applications were sent to employers, with information about different types of sports and exercise randomly added. The study showed that including a statement about being physically active increased call-back rates by two percentage points.

Using German panel data from the SOEP, researchers found that men who do sports at least once a week earn five percent more on average than men who do not. Women who were involved in sports at age 15 earn about six percent more later in life. Furthermore, a positive correlation between engaging in physical activity and moving from unemployment to employment for women with at least three years of work experience is established.

For other countries, similar results apply. The evidence for positive labor market effects of sports and exercise is strong, especially for earnings. Earnings effects range from about 4 to 17 percent.

What are the policy implications?

It is apparent that increasing the general level of physical activity is very likely to boost productivity among employees at all levels. Governments may also want to include among their active labor market policies encouragement of sports and exercise for unemployed people whose productivity is comparably low and whose participation in these activities is below optimum, in order to increase the re-employment chances for this group.

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Court ruling in the Rügemer case

In a recent court ruling, allegations that IZA engages in “lobbying” and does not inform about its private funding (thus allegedly conducting “stealth science”) were prohibited under threat of penalty. Other statements were judged as mere expressions of opinion, not statements of fact. The defendants had stated in court they would not repeat the expressed opinions in the same form.

In contrast to the prevailing (and IZA’s own) understanding of science, the defendants had claimed that in their understanding “science not bound by third-party interests or obligations” does not exist. However, science driven by vested interests entirely contradicts the ethical principles of IZA. Continue reading

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When parents divorce, children’s personality development suffers

divorceDisruptions in family structure are suspected to impede the development of children’s personality, with far-reaching consequences for school performance and labor market success. An IZA paper by Tyas Prevoo and Bas ter Weel adds to the empirical evidence by investigating the effect of parental separation, divorce and death on personality development of British children.

The authors demonstrate that increases in favorable personality traits, such as self-esteem or internal locus of control (the extent to which individuals believe they can control events affecting them), are lower for children experiencing family disruptions during adolescence. At the same time, these children are more likely to develop behavioral problems. The effects on personality development are smaller when children are older at the time of the experienced disruption.

Parental divorce has as stronger impact than separation and even death of a parent. However, the effects differ by gender: The results suggest that boys are on average more negatively affected by parental death than girls, while girls seem to suffer more from a separation or divorce of their parents.

As another recent IZA paper shows, behavioral problems caused by family disruptions can affect other children through peer effects: According to the study by Jannie H. G. Kristoffersen, Morten Visby Krægpøth, Helena Skyt Nielsen and Marianne Simonsen, boys with divorced parents have a negative influence on their classmates’ test scores.

Download both papers (PDF):

 

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New volume on gender convergence in the labor market

For most countries in recent years women’s labor force participation has risen while men’s has fallen. At the same time, fertility rates declined, marriage rates decreased, and the average husband-wife age difference shrunk slowly but steadily. The number of single mothers rose, and women’s schooling levels surpassed men’s in some countries.

rle41Along these trends, men’s and women’s wages and occupational structures have been converging. Research published in the new volume of Research in Labor Economics, edited by IZA Fellows Solomon Polachek and Konstantinos Tatsiramos together with IZA Director Klaus F. Zimmermann,  investigates whether these trends are related, and whether we indeed observe gender convergence in the labor market.

One explanation given for the gender wage gap is the division of labor in the home. According to this argument, husbands specialize in market work whereas their wives specialize more in home activities, especially when they face family constraints such as the presence of children. As a result, husbands work a greater portion of their lives, invest more in human capital, and attain higher wages.

But why are husbands the breadwinners and women the homemakers?

One of the studies contained in the current Research in Labor Economics volume proposes a new explanation. The idea is that men have a comparative advantage in the market even at the very start of their marriage because they are typically older and more educated than their wives, and thus earn more even if there was no discrimination. Data from 200 countries indicate this is the case in all but San Marino. On average husbands are over two years older than their wives, but the age difference is as large as nine years, especially in less developed countries. The demand for children exacerbates these differences. Since women have limited years of fecundity, a high demand for children strengthens men’s demand for younger less educated wives. Over time, as fertility decreased, the husband-wife age gap narrowed, division of labor lessened, and the gender wage and occupational disparities diminished.

Long parental leave may reinforce the glass ceiling

Although the wage gap between men and women has been narrowing, there still remains a substantial difference. One important question is whether government policies are effective in reducing the gap. One such policy is family leave legislation designed to subsidize parents to stay home with newborn or newly adopted children. One of the RLE articles shows that for high earners in Sweden there is a large difference between the wages earned by men and women (the so-called “glass ceiling”), which is present even before the first child is born. It increases after having children, even more so if parental leave taking is spread out. These findings suggest that the availability of very long parental leave in Sweden may be responsible for the glass ceiling because of lower levels of human capital investment among women and employers’ responses by placing relatively few women in fast-track career positions. Thus, while this policy makes holding a job easier and more family-friendly, it may not be as effective as some might think in eradicating the gender gap.

The issues explored by the other eight studies in this volume include patterns in lifetime work, gender complementarities, career progression, and the gender composition of top management.

All articles are available for free download for a limited time (until March 13, 2015)!

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Immigrants and host countries benefit from liberalized access to citizenship

PassportPoliticians, the media, and the public express concern that many immigrants fail to integrate economically. Research shows that the option to naturalize has considerable economic benefits for eligible immigrants, even in countries with a tradition of restrictive policies. An article by Christina Gathmann published in IZA World of Labor shows that the benefits of naturalization for first-generation immigrants are significant.

Citizenship results in higher wage growth, more stable employment relationships, and increased upward mobility into better-paid occupations and sectors. A better assimilation of immigrants in the labor market in turn also benefits destination countries through fiscal gains and better social cohesion. As such, liberalizing access to citizenship could be a key policy instrument toward improving the rate of economic integration of immigrants in the host country.

Germany is a case in point: In 2000, the country shortened the waiting period for immigrants to become eligible for citizenship from 15 to eight years of residence in Germany. The gains from easier access to citizenship are particularly apparent among immigrants from poorer countries and among women. In contrast to other countries like France, however, acquiring German citizenship seems to have no effect on labor market participation.

For more details read the full article:
Christina Gathmann, Naturalization and citizenship: who benefits?, IZA World of Labor 2015: 125, doi: 10.15185/izawol.125

See also the German media coverage in DIE WELT.

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