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:

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IZA Prize in Labor Economics conferred to Claudia Goldin at ASSA Meeting in Chicago

izaprizeassa2017chicago

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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Do employers care where you’re from?

network-889346In the last two decades, economists’ interest in social networks has increased dramatically. This has come with a parallel awareness that putting humans in their social context is not only a matter of embellishing theoretical models with human behavior but can also be a potentially powerful tool for understanding how market forces work in many economic transactions.

Social interactions and connections affect the way information spreads between individuals and the way people perceive themselves relative to their peers, ultimately shaping the way they form decisions. Thus, belonging to the “right” network, by chance or purposefully, can make a significant difference in many circumstances but especially when an unanticipated shock suddenly changes plans.

One such unpredicted event studied by Tommaso Colussi and Livio Romano in their new IZA Discussion Paper is the case of a worker whose company gets acquired and is now forced into a new employer-employee relationship. Does the worker’s social network determine whether she will retain her job in the acquired company? Will the wage offered by the new company be affected?

Employer localism favors employees from the same hometown

roofsBy relying on a rich matched employer-employee dataset from the social security records of the Italian region of Veneto, the authors investigate whether the employer of the acquiring company systematically shows preferential treatment for workers coming from the same hometown.

Because of the randomness of the potential matching of the new employer’s city of birth with the existing employees of the acquired company, the researchers are able to isolate the importance of, and ultimately the job premium placed on, this factor in the new employment relationship. They find that regardless of the worker’s observed characteristics, being from the same city of birth as the new employer increases the probability of keeping the job after the takeover by about 2.7 percentage points, which accounts for about 4% of the average probability of staying at the firm.

On the other hand, localism is not found to systematically affect the wage dynamics of those workers that retained their job after the takeover.

Managers, especially from smaller towns, benefit more than others

However, there is significant heterogeneity in the observed results depending on the characteristics of workers, firms and the network. The likelihood of retaining the job after the takeover is five times larger for managers as compared to blue and white collar workers; this effect increases with the size of the acquired firm, but decreases with the size of the community of origin (i.e., when both come from a bigger city, the effect is not as strong). Moreover, after the takeover, there is evidence of a wage premium for managers and trainees, but not for blue and white collar workers.

The paper also analyzes whether the effect of a local social network is beneficial or detrimental for the acquiring company’s performance. Colussi and Romano find, consistent with the idea that the existence of a community network in the labor market reduces the costs of the employer’s potentially “wrong” hiring decisions, that localism has a positive impact on the probability of survival of the acquiring companies.

Download the complete paper (IZA DP No.  10418):
Is There a Preferential Treatment for Locals in the Labor Market? Evidence from Takeovers

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The Empirics Strike Back Again: Abel Brodeur wins Leamer-Rosenthal Prize for his dedication to open science

Abel Brodeur

Abel Brodeur

In 2013, IZA Research Affiliate Abel Brodeur (University of Ottawa) and his co-authors published an IZA discussion paper titled “Star Wars: The Empirics Strike Back” (see also our IZA Newsroom article). Analyzing 50,000 statistical tests published in top economics journals, the authors concluded that researchers might be tempted to inflate the value of almost-rejected tests by choosing a “significant” specification. The reason is that journals favor rejection of the null hypothesis, which means that positive findings increase the chances of publication.

The IZA paper was published in the American Economic Journal: Applied Economics in January 2016 and received coverage in various media outlets, including The Economist. Abel Brodeur has now been awarded one of ten 2016 Leamer-Rosenthal Prizes for Open Social Science from the Berkeley Initiative for Transparency in the Social Sciences (BITSS), a network of researchers and institutions committed to strengthening scientific integrity in economics and related disciplines by identifying and disseminating useful tools and strategies for improving transparency, including the use of study registries, pre-analysis plans, data sharing, and replications.

Brodeur receives the prize, which includes $10,000, for his work on the above-mentioned paper and “for his clear dedication to and advocacy of open science and reproducibility,” according to BITSS. Promoting open science is also among IZA’s core objectives. We have repeatedly stressed the value of replications and launched initiatives such as the open-access IZA Journals and the IDSC data repository.

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How deporting all undocumented workers would hurt the U.S. economy

workersImmigration issues are at the top of many western countries’ political agendas. The EU is still processing all of the ramifications of the refugee crisis. Illegal immigration was also a central theme during the U.S. presidential race. Donald Trump’s promise to deport “illegal immigrants” on a large scale was highly controversial, but this pledge touched a nerve with voters skeptical about the negative consequences of illegal immigration.

Now that Donald Trump has been elected, many are seeking to examine what this promise would mean in reality. A number of people, especially in the agricultural sector, are concerned about potential negative economic consequences that would be incurred if the unauthorized workforce were excluded from the labor market. But the  virtual “invisibility,” at least in terms of official records, of these migrants and their work makes it difficult to assess their exact economic contribution without documentation across sectors.

A new IZA Discussion Paper by Ryan Edwards and Francesc Ortega of Queens College, CUNY, takes an innovative approach in order to estimate how the absence of unauthorized workers could damage the U.S. economy.

Simulation of mass deportation

The main findings are based on a simulation using an industry-level model of the U.S., which is calibrated, i.e., adjusted in parameters, to observe present conditions. The authors then estimate certain counterfactuals, situations that have not yet happened and as such cannot be observed directly. They pursue the following thought experiment: what would happen if all unauthorized workers would suddenly be removed from the U.S. labor market (ignoring the obvious obstacles and costs related to such a large-scale deportation)?

The results highlight the substantial economic contribution of unauthorized workers to U.S. GDP. Edwards and Ortega estimate this economic share at approximately 3% of private-sector GDP annually. Amounting to close to $5 trillion over a 10-year period, this is comparable to the contribution to GDP of the whole state of Massachusetts.

These aggregate estimates, however, mask large differences across industries and states. Unauthorized workers may be responsible for 8-9% of the value-added in agriculture, construction, and leisure and hospitality. Naturally, their economic contribution is larger in states where these workers account for a large share of employment. For instance, the estimates imply that the economic share of unauthorized workers in California is around 7% of private-sector GDP in the state.

Legalization would increase worker productivity

Compared to their shares in employment, the contribution of unauthorized workers to production is relatively smaller. The reason is that unauthorized workers are less skilled, on average, and appear to be less productive than natives and legal immigrants with the same observable skills. This may be a reflection of their more limited job opportunities.

But this productivity penalty can be mitigated in part through legalization. The authors estimate that legalization would significantly increase the productivity of undocumented workers, triggering further investment by employers. Legalization would therefore increase the economic contribution of the (currently) unauthorized population by about 20%, to 3.6% of private-sector GDP.

Download the paper (IZA DP No. 10366):

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“Jobs for Development”: How job creation can drive progress and what policies can support this process

jfdcoverJob creation is at the heart of development. This was the central message of the World Bank’s “World Development Report 2013: Jobs”, to which IZA had also contributed. Jobs raise living standards and lift people out of poverty, they contribute to gains in aggregate productivity, and they may even foster social cohesion.

But which jobs make the greatest contribution to development and what policies can facilitate the creation of more of these jobs? There is no universal answer – it depends on the country’s level of development, demography, natural endowments, and institutions.

A new volume, edited by IZA research fellows Martin Rama (World Bank) and Gordon Betcherman (University of Ottawa) as a sequel to the World Development Report, explores the diversity of jobs challenges and solutions through case studies of seven developing countries.

These countries, drawn from four continents, represent seven different contexts – a small island nation (St. Lucia), a resource-rich country (Papua New Guinea), agrarian (Mozambique), urbanizing (Bangladesh), and formalizing (Mexico) economies, as well as young (Tunisia) and aging (Ukraine) populations.

We wanted to know from Gordon Betcherman what readers may take away from the book.

IZA: Even if there is no one-size-fits-all solution to country-specific labor market policy challenges, are there any general lessons to be learned from these case studies?

betcherman

Gordon Betcherman

G.B.:  The cases that we study are not unalloyed success stories but they have been chosen to illustrate the different challenges that countries face in creating jobs. The book highlights this diversity, as is reflected in the subtitle. So certainly one general message that we hope comes through is that different countries have different priorities when it comes to employment and understanding these priorities is a key to developing effective jobs policies. But this focus on country context does not mean that there are not universally applicable requirements for success in creating jobs. The experiences of all of the countries included in our book show that strong fundamentals are needed.

What do you mean by “fundamentals”?

We include the sorts of things that are necessary for establishing a positive environment for employment – a favorable macroeconomic environment, an attractive investment climate, rule of law, and a productive workforce. Also sound labor institutions that support equity and social protection goals without constraining efficiency and economic growth.

Countries that cannot provide these basics are unlikely to experience sustained success in creating good jobs. However, the case studies do show that these fundamentals can look quite different in different country contexts. For example, what constitutes sound labor institutions in an “urbanizing” country like Bangladesh will undoubtedly look very different than in an “agrarian” economy like Mozambique.

What are some of the impediments to job creation in the countries studied?

Of course, where these fundamentals are not present, job creation will be impeded. But, in addition, we are particularly concerned in these cases about jobs that will have substantial development spillovers. These are what we call “good jobs for development”, a concept which was introduced in the 2013 World Development Report. What those jobs are depends on the country situation, as do the factors that may be getting in the way of creating them.

Can you give an example?

Tunisia, for example, has a large youth bulge and high youth unemployment. The price of this youth unemployment has obviously been great in both economic and social terms, and it is hard to imagine anything that would benefit Tunisia, like several other countries in the Middle East and North Africa, more than suitable jobs for these young people. At first glance, it might seem plausible to point to inadequate education or overly restrictive labor market rules as the obstacles. However, the authors conclude that the binding constraint for young people is on the demand side, specifically Tunisia’s anti-competitive formal and informal rules and practices.

What about other countries?

A very different example in the book is Mexico where, despite substantial economic progress, much of the workforce remains in the informal sector. The major challenge there is to generate formal jobs that can provide the economic and social benefits found in more developed OECD countries.

Why has there been so little progress in formalization?

Here, the case study points to two factors: the preponderance of microenterprises with low-productivity and what the authors call “social segmentation”, whereby households without access to formal jobs are constrained by low human capital and, in some cases, discrimination.

Do the case studies suggest the need for new policy approaches to the creation of more and better jobs?

On the one hand, the cases reinforce the importance of a favorable economic and business environment and good labor policies. This is familiar territory. But a prominent conclusion from the studies is that policies that can affect job creation go well beyond these. Addressing country-specific priorities often calls for policies in areas that are normally not considered as “jobs” policies.

What are some of those policy areas?

For example, in Papua New Guinea, a “resource-rich” country, the management of sovereign wealth funds may be the decisive policy area for jobs. In Mozambique, an “agrarian” economy where rural living standards need to rise, the policies that will have the greatest impact are in areas we normally consider as agricultural or rural policy: increasing farming productivity and diversifying to non-farm rural activities.  So one of our conclusions is that a much wider range of policies is relevant for a jobs strategy than is normally considered.

Apart from the policy prescriptions for developing countries, is there a need for donor countries to rethink their development policies?

Employment should be a more central and explicit element in development programs. Jobs are often seen by donors as a by-product of growth (demand-side strategies) or human capital (supply-side). Where donor programs explicitly target jobs as the development outcome, they tend to focus quite narrowly on labor policies such as regulation and active labor market programs. While these are not insignificant, our cases show that they are usually not the most important factors in determining how successful a county is in creating jobs that are good for its workers and for the society at large.

Are you seeing any progress in this regard?

One optimistic sign that development actors are more explicitly focusing on jobs is that, while employment was barely evident in the Millennium Development Goals, the new Sustainable Development Goals include a goal directly concerned with jobs.

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Read more about the book at Oxford University Press.

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