Rise in earnings inequality is the biggest difficulty in today’s US labor market

new IZA World of Labor report looking at the US labor market (2000-2016) finds a remarkable drop in the labor force participation rate; the nearly full recovery of unemployment from the depths of the Great Recession; and the continuing growth in post-inflation average earnings while earnings inequality continues to rise.

The report by IZA Network Coordinator Dan Hamermesh (Royal Holloway, University of London) looks at the development of the American labor market since before the 2001 recession. In the aggregate the US labor market is doing quite well today. Unemployment is currently below 5%, and real weekly earnings of full-time workers increased from the 2000 cyclical peak to the current period of near full employment.

IZAWOL.361.gaThe difficulties lie behind the aggregates. Teen unemployment at 15% is far higher than desirable, especially since it is coupled with the higher long-term unemployment among teenagers. It suggests that there is an increasingly large group who are beginning their work lives with long-term disappointment and with dim career prospects.

Even though labor force participation rates of people aged 55 and over have continued to rise, those of adult men aged 20−54 have dropped, continuing a trend. Since 2000 the overall participation rate has fallen by over four percentage points. Surprisingly so too has that of women aged 20−54, sharply reversing the previous trend. This decline means that employment is about six million people lower than it would have been had the participation rate not fallen. Hamermesh argues that seeing a decline in labor market participation may suggest that Americans are developing a more reasonable work−life balance.

Though post-inflation average earnings continue to rise, so does earnings inequality, with the growth in earnings most prevalent among workers in the upper half of the earnings distribution. The earnings of African-American and Hispanic workers relative to whites have not changed greatly and remain far below those of white workers.

Hamermesh sees the continuing rise in earnings inequality as one of the biggest challenges in today’s US labor market. He suggests that the solution to this problem is simple and would put the US economy more in line with those of other wealthy nations. Since the labor market continues to generate increasing earnings inequality, its effects could be offset by tax policy affecting income inequality: The government should raise tax rates on households in the upper third of the distribution of household incomes while at the same time lowering rates on households in the bottom two-thirds.

Read the complete article:

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This is the first of a series of 27 articles written by labor and macro economists from different countries who summarize the current state of the central issues in their country’s labor market: Unemployment and labor force participation, overall and by demographic group; changes in real wages and wage inequality; and other country-specific labor-market topics. Find out more on IZA World of Labor!

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Magne Mogstad receives 2017 IZA Young Labor Economist Award


Magne Mogstad

Magne Mogstad, the Gary S. Becker Professor in Economics at the University of Chicago, has been selected as the recipient of the 2017 IZA Young Labor Economist Award. IZA bestows this honor once every two years to an aspiring labor market researcher below age 45 to support and stimulate top research. The selection was made by a committee consisting of the IZA Network Coordinator and five distinguished economists: Francine Blau, Richard Blundell, George Borjas, David Card and Shelly Lundberg.

According to Daniel S. Hamermesh, Professor at Royal Holloway University of London and Editor-in-Chief of IZA World of Labor, the award is a “modest recognition of the remarkable amount that Mogstad has already achieved.” He has contributed major studies in such diverse areas as the economics of the family, human capital, econometrics of labor issues, and others. The breadth of the topics analyzed is matched by the depth of the contribution in each area.

Mogstad’s research is characterized by a strong empirical focus on large-scale administrative population data to answer a variety of public policy questions. In his most recent papers, for example, he addressed the effect of assortative mating on overall income inequality, the welfare implications of disability insurance, and the causal mechanisms behind the intergenerational transmission of wealth.

The Award, which carries a stipend of 6,000 euros, will be conferred formally during the IZA reception at the ASSA annual meeting in Philadelphia, PA, on January 6, 2018.

See also the complete list of IZA Young Labor Economist Award winners.

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How personality is affected by birth order and birth spacing

The family environment is among the most important factors in the development of a child’s personality. It is evident that parental strategies and the amount of time and resources that parents are able to put towards their children would have a strong impact. Nonetheless, there are several popular anecdotes and stereotypes about the vastly different characteristics of siblings based on which order they were born and the age gap between them.

But does it really matter if a child is the first born, a middle child, or the last? Is it also relevant for the development of the child how many years parents wait to have another baby? According to two recent IZA Discussion Papers, both factors – birth order and spacing – play a role in shaping adult personality traits.

Psychologists have long hypothesized that birth order could be related to differences in personality. First-borns are believed to be more responsible and focused on pleasing the parents, thus acting as a role-model for their younger siblings, while later-born children are thought to be more easy-going and sociable.

Personality traits related to success seem to decline with birth order

An IZA Discussion Paper by Sandra E. Black (University of Texas at Austin and IZA), Erik Grönqvist (IFAU), and Björn Öckert (IFAU) studies this relationship between birth order and personality traits among Swedish men whose personality was assessed when enlisting in the military. The researchers find evidence that the types of personality traits which are positively related to success in life decline with birth order. First-born children show higher emotional stability, greater persistence, more social outgoingness, and higher willingness to assume responsibility and take initiative.

Given the importance of such personality traits in the labor market, the authors analyze whether occupational choices display a similar pattern as well. Indeed, first-born children are almost 30 percent more likely than third-borns to be top managers, an occupation which tends to require higher non-cognitive abilities.

But what can explain such a consistent pattern of stark differences between siblings? The authors scrutinize a number of mechanisms that might be driving these results. While they eliminate biological factors as a potential culprit, the authors point to parents’ behavior as the primary influence. They find that parents invest less in children that are born later, especially in terms of how strictly they enforce rules and how much time they put into discussing and helping with school work. The researchers also note that sibling rivalry and parents’ adaptation to it play a role in shaping children’s personality.

Larger age gaps associated with negative personality traits

Similar to birth order, birth spacing, i.e., the difference in age between siblings, also affects personality traits. The IZA Discussion Paper by Bart H. H. Golsteyn (Maastricht University and IZA) and Cécile A. J. Magnée (Maastricht University) follows a large British cohort from birth until age 42, studying the effect of age gaps between siblings on personality traits of the youngest child in a two-child household.

Larger birth gaps indeed appear to be related to more disorganized behavior, more neuroticism, and more introversion. While the authors do not investigate the underlying elements responsible for these outcomes in detail, the results suggest that small birth gaps make it easier for parents to devote adequate time and resources to both children simultaneously. In addition to more attention provided by parents, siblings closer to each other may be more able to play and learn from one another.

Adverse childhood circumstances matter too

While these studies show that the order and timing of births clearly matter for personality development, the effect of events later in childhood should not be neglected. The IZA Discussion Paper by Jason M. Fletcher (University of Wisconsin-Madison and IZA) and Stefanie Schurer (University of Sydney and IZA) reveals that adverse childhood experiences are significantly and robustly associated with neuroticism, conscientiousness, and openness to experience, but not with agreeableness and extraversion.

Each of these papers reinforces the importance of the conditions and context of early childhood development in shaping an individual’s personality, which in turn affects long-term success in life.

Read the complete papers:

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Do longer working hours decrease performance?

fatigueWorking hours vary substantially, both between and within countries, due to differences in the regulation of the standard workweek and in the prevalence of part-time work.

Relatively little, however, is known about how the length of the working day affects workers’ performance. From a theoretical point of view, two contrasting effects are possible. On the one hand, if part of the working time has to be used to prepare for work before one can actually become productive (e.g. exposing goods one wants to sell, or getting back to where one left in a complex cognitive task), then short working hours are not worth the trouble and longer working hours are better for performance. On the other hand, longer working hours can result in fatigue, which is likely to cause lower performance as the number of hours worked increase.

Although scholars have started to analyze the relation between working hours and worker performance already in the early 20th century, there is still not much conclusive evidence about how exactly and how much working hours affect performance. Existing studies have either relied on historical data, e.g. from munition workers during WW1 or from the Hawthorne experiments, or on data from the health sector, in which fatigue can result in human errors with crucial consequences.

Fatigue plays an important role

In a recent IZA Discussion Paper, Marion Collewet and Jan Sauermann use data on working hours and performance of a sample of call agents from a call center located in the Netherlands. Although call agents in this call center predominantly have part-time contracts, their job is demanding due to the constant inflow of calls generating constant pressure to perform. The authors find that agents have lower performance per hour on days on which they work longer hours. If one increases the length of a shift by 1 percent, the call agent’s output, measured by the total number of calls handled, increases by only 0.9 percent. This result suggests that fatigue plays an important role. Interestingly, the quality of the service provided seems to slightly increase with hours worked.

Since these results are found for workers who are employed in part-time contracts, fatigue effects might be stronger in other service jobs with longer average working hours.

Download the paper (IZA DP No. 10722):

Read also these IZA World of Labor articles on related topics:

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The migration of talent – global inequality or global benefits?

Much of the public debate on migration centers on the skill level of migrants. While receiving countries are concerned about low-skilled labor immigration and refugee flows, emigration countries fear that high-skilled workers will increasingly leave the country. Global migration flows indeed show a significant skill bias leading to a highly unequal distribution of global talent. Two IZA Discussion Papers analyze this development and contrast the problems of individual countries with the global benefits of migration.

Contrary to public perception, the migrant share of the world population has not changed substantially since the 1960s, with roughly 3 percent currently living in a country different from their country of birth. Global migration patterns, however, have become increasingly asymmetric as high-skilled migration has become a greater force globally. The international distribution of talent thus is highly skewed, and the resources available to countries to develop and utilize their best and brightest vary substantially.

High-skilled workers four times more likely to emigrate

The migration of skilled workers across countries tilts the deck even further, as Sari Pekkala Kerr, William Kerr, Çağlar Özden and Christopher Parsons conclude in an IZA Discussion Paper. High-skilled migration has increased at a larger rate than low-skilled migration. The approximately 28 million high-skilled migrants that were residing in OECD countries in 2010 represent an increase of nearly 130 percent since 1990, while low-skilled migrants increased by only 40 percent during that time. From the average sending country, tertiary-educated people are four times more likely to emigrate than less-skilled people.

The distribution of high-skilled migration is also heavily skewed. Four Anglo-Saxon countries (US, UK, Canada and Australia) account for nearly 70 percent of high-skilled migrants to OECD countries in 2010. The United States alone has historically hosted close to half of all high-skilled migrants to the OECD and one-third of high-skilled migrants worldwide. The globalization of economic ties is also leading to a rise in shorter-term and circular migration patterns for skilled labor. For example, executives of global corporations are often required to spend part of their careers abroad.

Simulating a world without skill-biased migration

So far, most studies on the economic effects of migration have considered single countries in isolation, for example analyzing the impact of immigration on the wages of U.S. or British workers, or the impact of emigration on growth in African countries. The IZA Discussion Paper by Costanza Biavaschi, Michal Burzynski, Benjamin Elsner and Joel Machado takes a global perspective by quantifying the welfare effects of the skill bias in worldwide migration in order to determine how much the world as a whole has gained or suffered from migration flows.

To assess how the skill bias affects non-migrants across the globe, the authors build a stylized model of the world economy that allows them to simulate what the world would look like with the same number of migrants but no skill bias in migration. As shown in the figure below, the skill bias in migration makes non-migrants in OECD countries better off.


Global welfare effects of migration

In the current world, a larger number of high-skilled migrants live and work in the OECD, which leads to a higher per-capita income compared to a world in which all migrants have the average skills of their countries of origin. In the main sending countries (i.e. non-OECD countries), the average non-migrant loses from the skill bias in migration. Overall, however, the positive effect per person in the receiving countries exceeds the negative effects in the sending countries such that the global effect is positive.

Skilled migration improves the global allocation of talent

This analysis shows that, from a global perspective, skill-biased migration is a good thing. More high-skilled migration means that talent is allocated more efficiently across the globe. A higher number of productive people are working in countries where they can be most productive, which increases global welfare.

Some observers may be worried about the negative effects in the sending countries. But the effects displayed here represent a worst-case scenario. They are based on the authors’ most conservative model. But there are additional channels at work, through which sending countries might benefit from skilled out-migration. Migrants contribute to their home countries’ development through money (remittances) or technology transfers. Once the authors account for these channels, most sending countries benefit as well, and the global effect becomes even larger.

Read the complete papers:

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Mental health affects employment outcomes – and vice versa

depressionDepression, which is the focus of this year’s World Health Day, is also an important topic for labor economists as mental health and employment outcomes are inherently intertwined. People with poor mental health have lower levels of economic activity, lower earnings, and less stable employment. On the other hand, employment difficulties can undermine mental health; many who struggle to find meaningful work or who lose their jobs will experience poorer mental well-being as a result.

Mental health issues: cause or consequence of poor labor market outcomes?

A new IZA Discussion Paper by Melisa Bubonya, Deborah A. Cobb-Clark and David Ribar uses nationally representative data to estimate how transitions into and out of depressive episodes affect subsequent employment outcomes, including participation, employment and unemployment. Further, the authors address the potential for the reverse relationship to exist by estimating how changes in employment status affect the chances developing severe depressive symptoms. Their aim is to shed light on the interplay between depression and the labor market, which is particularly important because the appropriate policy responses depend on whether depressive issues are a consequence or a determinant of poor labor market outcomes.

Men’s mental health more closely tied to employment outcomes

The findings show that severe depressive symptoms lead to economic inactivity by reducing labor force participation and employment, and increasing the likelihood of unemployment. Severe depressive symptoms are also partially a consequence of economic inactivity. Interestingly, the results show larger effects for men than women, indicating that men’s mental health is more closely tied to their employment outcomes than is women’s. Further, men seem to be more responsive to the shock of a bad event — either the onset of a depressive episode or the onset of unemployment. In contrast, women appear to be more affected by prolonged depressive symptoms.

The results imply that reducing the economic costs of mental illness is a challenge that is best tackled from both sides: improving mental health by promoting economic activity, minimizing employment disruptions and shortening unemployment spells, and reducing the barriers to employment and providing positive work environments for those with mental health issues. The results also call for a gendered approach to these policies.

Download the paper (IZA DP No. 10653):

The economics of mental health

menal illnessA recent IZA World of Labor article by Richard Layard stresses that mental illness accounts for half of all illness up to age 45 in rich countries, making it the most prevalent disease among working-age people (see figure). Since mental illness costs billions in welfare payments and lost taxes, Layard argues that better treatment would more than pay for itself.

Download more IZA Discussion Papers on the topic

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IZA Journal Series merged into three high-quality journals

In 2012, IZA launched a series of five open-access online journals in cooperation with SpringerOpen to provide a high-quality, peer-reviewed outlet characterized by a fast decision-making and publication process. By now, the IZA Journals have become well-established in the scientific community. All five journals are listed in the Scopus series. The Australian ABDC index ranks the IZA Journal of Labor Economics as an A journal. Two journals are being evaluated for inclusion in the Thompson Reuters index.

izajournalsThese successes notwithstanding, it is time to look at potential improvements, both in terms of quality and in terms of costs, which have so far been covered fully by IZA. Based on valuable feedback from the members of the IZA research network, it was decided to merge journals with a similar focus and continue with three instead of five journals. All previously published and forthcoming articles will be accounted for within the newly merged journals, thus ensuring that the authors’ investments are preserved.

As of April 1, 2017, the IZA Journal of Labor Policy and the IZA Journal of European Labor Studies will be merged into the IZA Journal of Labor Policy. The new JoLP is strategically positioning itself more explicitly towards policy relevance. The other merger will affect the IZA Journal of Labor & Development and the IZA Journal of Migration, which will become the IZA Journal of Development and Migration. Its focus will be on labor and migration in the context of economic development and vice versa. The IZA Journal of Labor Economics will remain as is.

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