Successful year for IZA in research and policy advice

iza2015In 2015, IZA has achieved substantial progress in research, policy advice, media presence, scientific communication, and technology. In fact, the past year can be considered one of the most successful years of the institute. IZA’s work is well respected and highly reputed in the research and policy communities in Germany and globally.

IZA’s overriding aim is to find sustainable solutions for the problems in today’s labor markets and to actively shape tomorrow’s labor economics. As an economic research institute, IZA coordinates the largest worldwide network of economists focusing on the scientific analysis of national and international labor markets. Much of our success is owed to this network of IZA fellows and affiliates.

As a think tank, IZA also provides scientifically founded advice to decision makers. Academic excellence and integrity, both among local staff and network members, is a prerequisite to realizing IZA’s vision as a place of communication between academic science and political practice.

Policy advice based on independent research

At the core of IZA’s success is the systematic combination of research and evidence-based policy advice, nationally and globally, from an independent and non-partisan position. The IZA network is the platform for policy-oriented frontier research and its dissemination in labor economics.

These are some selected achievements in 2015:

Read more in a brief IZA 2015 Report (PDF).

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The effect of linguistic proximity on immigrants’ labor market performance

With the current increase of global mobility, policy has jumped to the forefront of the political agenda. Immigration can play a central role in boosting economic growth and demographic sustainability of a destination country, but it is often feared as a potential burden to the welfare system and as a strain on social cohesion.

The key to this debate requires an understanding of what makes immigrants successful. Decades of research on immigrant assimilation have isolated a few basic traits that define immigration policies around the world. Linguistic fluency stands up as a major player in immigrants’ social and economic integration.

The analysis of its impact on immigrant outcomes should be of particular interest for countries that have based their immigration policies on attracting high skilled immigrants, and for those contemplating such policies in the near future (see OECD. “Who should be admitted as a labour migrant?”, Migration Policy Debates 4, 2014)

Linguistic proximity is associated with better wages

Combining information from the Canadian Census (1991-2006) with measures of linguistic proximity and the skills required in a broad range of occupations, a new IZA Discussion Paper by Alicia Adserà and Ana Ferrer assesses whether the wages and skills required for jobs that immigrants hold are influenced by the linguistic proximity between the languages of the source and host countries.

Of particular interest is whether linguistic proximity matters more for obtaining and/or moving to jobs that require specific social or communication job-skills, rather than for jobs requiring specific analytical or strength skills. These are the key results:

  1. Linguistic proximity is generally associated with better wages. The wages of immigrants from countries whose most used language shares no linguistic connection (in the dictionary of languages) with the most used language in Canada, are 20% lower than those of similar natives. The penalty for lack of linguistic proximity to English is larger for the university-educated. Wages for this group are 25% lower than those of university educated native born, whereas the difference is only 18% among the non-university educated.
  2. Linguistic proximity significantly affects the returns associated with skills required for the jobs immigrants hold. Wage penalties are mostly linked with lower returns to social skills rather than to other skills: returns are up to 28% lower for immigrants in a job using similar levels of social skills than a native born, but only 16% (12%) lower in a job requiring similar levels of strength (analytical) skills than a native born. These differences exist even for immigrants from English-speaking countries: 6% lower wages than natives in jobs requiring similar levels of social skills, but no difference in those requiring similar levels of strength or strength skills.
  3. There is not strong evidence that linguistic proximity influences the rate at which migrants converge toward wage parity with native-born workers in the medium to long term, although it affects the initial level of wage differences. (Figure 1).
  4. Similarly, linguistic proximity is associated with the types of skills required in the jobs immigrants hold, but not with the rate at which immigrants switch to higher-status jobs over time, which remain largely flat (Figure 2).
Source: Adsera and Ferrer (2015) Notes: (1) LP=Same indicates that the most used language in the country of origin is the same as the most used language in the country of destination. LP=None indicates that the most used language in the country of origin shares no branch of the linguistic tree with the most used language in the country of destination (I.e. English and Chinese). (2) Coh indicates an arrival cohort. For instance, Coh 86-90 indicates the group of immigrants arriving in Canada between 1986 and 1990, which were observed through the Census years 1991, 1996, 2001, and 2006.

Figure 1: Immigrants’ wage assimilation by Linguistic Proximity and arrival cohort
Notes: (1) LP = Most used language in country of origin is the same as the most used language in country of destination. LP=None: The languages share no branch of the linguistic tree (i.e. English and Chinese).
(2) Coh indicates an arrival cohort. E.g. Coh 86-90 indicates the group of immigrants arriving in Canada between 1986 and 1990, which were observed through the Census years 1991, 1996, 2001, and 2006.
Source: IZA DP No. 9499

These findings generally agree with the predictions of human capital theory that linguistic proximity will be correlated with high wages and will be complementary to education. However, they show that linguistic proximity is unlikely to accelerate the rate at which assimilation (in wages or job status) happens.

Early language intervention facilitates economic integration

According to the human capital model, this could be due to lack of improvement in language skills over time – for instance, if ethnic enclaves limit economic opportunities and learning. Early intervention in language integration policies could be most beneficial for economic integration.

However, it is also possible that there are systematic barriers that limit integration, which can be (or not) related to language proficiency. This could be the case if, as noted in related research, immigrants arriving as adults may never reach the level of proficiency required to access certain types of high level jobs or there is discrimination.

Notes: (1) LP=Same indicates that the most used language in the country of origin is the same as the most used language in the country of destination. LP=None indicates that the most used language in the country of origin shares no branch of the linguistic tree with the most used language in the country of destination (I.e. English and Chinese). (2) Coh indicates an arrival cohort. For instance, Coh 86-90 indicates the group of immigrants arriving in Canada between 1986 and 1990, which were observed through the Census years 1991, 1996, 2001, and 2006.

Figure 2: Evolution of job-required skills by Linguistic Proximity and arrival cohort
Notes: see Figure 1
Source: IZA DP No. 9499

Download the complete paper (DP No. 9499):

Image Source: pixabay & IZA DP No. 9499
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Rank, sex, drugs and crime: How relative ability affects adolescents’ risky behaviors

drinkingParents, teachers and policymakers alike are concerned with adolescents engaging in risky practices, such as drug abuse, unprotected sex, or all kinds of delinquent behaviors (stealing, fighting, etc.). Adolescents are often motivated by short-term benefits while potentially not foreseeing associated detrimental effects on educational achievement, health and career outcomes. Peer pressure has long been discussed in the social sciences literature as one of the main drivers behind teenage risky behaviors, though knowledge behind specific mechanisms relating peer characteristics to individual behavior remains incomplete.

In their new discussion paper, IZA researchers Benjamin Elsner and Ingo E. Isphording explore a specific channel through which peers affects risky behaviors: a student’s ordinal rank in a school cohort.

Consider two similar students with the same ability and similar socioeconomic background. By chance, both end up in two different grades, where the first is surrounded by very well performing peers, so that he ranks among the less able students in his grade. The second student is surrounded by less able peers, so that this student is ranked among the best students in his grade. Elsner and Isphording pose the question: to what extent does this difference in the ordinal rank affect the behavior of these otherwise similar students?

There are at least two theoretical reasons why the ordinal rank may influence risky behaviors. First, a student surrounded by high-achieving peers (i.e. who has a low relative ability) might erroneously infer lower likelihoods of a successful career which would lower the expected costs of a bad health status, earlier pregnancies or incarcerations. Second, low-ranked students might think of risky behaviors as a way to gain reputation among their peers, instead of gaining status through academic achievement.

Using data from the National Longitudinal Study of Adolescent Health (AddHealth), a representative panel survey of US middle and high school students, the authors compare students who end up in different ranks because they started school in different school years. Using this within schools/across grades research design, the authors can exclude many potential confounding factors like strategic school choice and quality differences across schools. A first graphical summary of their results hints at a strong negative association between the ordinal rank and different kinds of risky behavior.

Relationship between ordinal rank and risky behaviors

Relationship between ordinal rank and risky behaviors

A thorough statistical analysis that takes into account differences in background characteristics as well as potential effects of drug abuse on cognitive ability reveals strong negative effects of the ordinal rank on smoking, alcohol abuse, and the probabilities of engaging in unprotected sex and physical fights, arguably behaviors that are associated with severe long-term costs.

These results should be of concern for parents and policymakers: Choosing the best possible school is not always optimal, because a child with a low rank in the best school may be more inclined to engage in risky behavior than she would be in the second-best school. Moreover, given that risky behaviors impose a significant cost for society, it is important to know their determinants in order to design interventions that prevent adolescents from engaging in them, e.g. through specifically targeting low-ranked students and informing them about the long-run consequences of risky behaviors.

Download the complete paper (IZA DP No. 9478):

Image source: pixabay and IZA DP No. 9478
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New trends in labor economics and policy advice: IZA/CERGE-EI conference in Prague


Jan Svejnar

To celebrate the work of 2015 IZA Prize laureate Jan Svejnar, IZA organized a joint conference with CERGE-EI on “Labor Economics and its Public Policy Impact on Economic Growth” in Prague on November 21, which attracted a distinguished audience of over 100 academics and policymakers.

During the first part, an academic session chaired by Corrado Giulietti (IZA), Nobel laureate Christopher Sims (Princeton University) presented some puzzling figures about the cyclicality of labor productivity, showing that output per worker in the wake of the recent economic crisis increased in the U.S. and Spain, but decreased in many other developed countries. He suggested that the cyclicality of labor productivity might become a central topic for macroeconomists in the years to come.

Henry S. Farber (Princeton University and IZA) demonstrated that taxi drivers in New York City respond positively to unanticipated increases in earnings opportunities, which goes against previous research showing that taxi drivers work less when the wage is unexpectedly higher.

iza_cerge-eiStepan Jurajda (CERGE-EI and IZA) documented a large wage database of McDonald’s workers around the world. Comprising data for the period 2000-2015, this database allows the comparison of how real wages of workers who supply comparable skill inputs have evolved across countries over time.

Alan B. Krueger (Princeton University and IZA) presented recent figures on the “uberization” of the U.S. labor market, showing that the size of the “offline” gig economy is much larger than the online activities of Uber et al. Analyzing the working arrangements of individuals involved in these activities is fundamental for the understanding of potential downward pressures on labor standards and for the design of proposals to extend the social compact between workers and companies in the sharing economy.

The academic session concluded with Gerard Roland (UC Berkeley) giving a condensed review about 25 years of research in the economics of transition. His presentation showed how the topics in the area evolved over the years, highlighting the important contributions made by Jan Svejnar and other academic experts in the area of transition economics.

iza_cerge-ei_2The policy panel, chaired by Jan Svejnar, was dedicated to experiences and practices in evidence-based policy advice. Representing the “demand” side, Czech Labor Minister Michaela Marksová highlighted the challenges of labor market policy making and politicians’ need for scientific advice. IZA Director Klaus F. Zimmermann presented the IZA World of Labor platform as an effective instrument for the wider dissemination of scientifically founded policy advice.

Stefano Scarpetta shared insights from the OECD while Daniel Münich introduced IDEA, an academic and policy think tank recently established within CERGE-EI, as a platform to bring research results closer to policy makers. IZA Program Director Hartmut Lehmann (University of Bologna) highlighted the importance of strengthening data collection initiatives based on his experience of leading transition research within IZA.

A more detailed report will appear in the next issue of IZA Compact.

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Courage, trust and autonomy: Werner Eichhorst outlines challenges of the new world of work

Werner Eichhorst

Werner Eichhorst

In a recent podcast by the WorkLife HUB, an online platform focusing on work-life balance topics, Werner Eichhorst speaks about the challenges and opportunities of future work. He describes what to expect from the rising importance of robots in the workplace and explains how education systems will have to adapt to the requirements of life-long learning. Eichhorst also provides a set of recommendations for CEOs who worry about their company keeping up with competition and the future of work.

Will robots take our jobs? With all the hype generated around this question it is getting harder to separate facts from the noise. Werner Eichhorst reassures us that the future is not as gloomy as it may seem. In the podcast interview, he unpicks the different elements as to what it means to be working side by side with smart machines and robots.

Key skill of the future: Adapting to change

On the one hand, there will be a lot more interaction between humans and robots, during which the smart machines will take on more and more complex tasks. But the technological advances will also lead to an increased human-to-human interaction in most jobs. And both of these will require not only new skills but also a dedication to a continuous updating of skills. Perhaps one of the most important skills for the future will be the capacity to adapt to change, including the willingness to change occupations.

This alone raises a number of issues, such as figuring out where the responsibility lies for continuously updating the skills and competences of the workforce throughout their working lives. This calls for different responses for low-skilled and high-skilled labor, with the latter requiring much more individual initiative to ensure that skills are relevant.

Government and employers must to their part to ensure employability

Eichhorst also underlines that we must differentiate between cultures. In Europe there is major responsibility for general education by the government, so there needs to be a universal public policy to not only ensure a minimum set of skills for everyone across the workforce for employability, but also to take on some of the responsibility for updating these skills throughout the working lives of employees in collaboration with employers and individuals. Examples include leave or part-time arrangements for educational purposes.

One of the biggest challenges for employers will be to ensure job security and a high level of job quality for their workforce while at the same time organizing workers in a flexible way to get the most out of their innovation capacity. This calls for a new balance of different aspects of flexibility inside the firm, but also using flexible types of employment and project-based work to a reasonable extent.

Eichhorst also recommends the creation of an “enabling working environment” that provides space for formal and informal exchanges between employees that foster innovation. In short: employers who want to be well-prepared and gain a competitive edge in the future world of work should hire the right people, break down rigid hierarchical structures, give them autonomy, and trust in them to help co-create the work organization. Some of this, of course, will take great courage to implement.

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Sexual orientation related to preferences for competition

businesspeopleThe gender wage gap is one of the most researched empirical facts in labor economics. But it is not only the biological sex that is related to wages. A small but growing empirical evidence documents how individual sexual orientation is related to significant differences in labor market success. Gay men earn less than straight men; lesbian women earn more than straight women. Still, the reasons remain largely unknown.

Thomas Buser, Lydia Geijtenbeek and Erik Plug from the University of Amsterdam try to uncover a so far under-researched mechanism behind differences in labor market success by sexual orientation: do gays and lesbians differ from straight workers in their preference for competition? Are gays less competitive than straight men and lesbians more competitive than straight women? And can this explain the gay penalty and lesbian premium?

In an experiment with members of an online survey panel, the researchers set gay, lesbian and straight panel members to work on a simple mathematical task: finding the two numbers in a grid of eight numbers that add up exactly to ten. Participants were paid according to their performance. To measure their competitiveness, the participants could choose whether they preferred to get paid a fixed amount for each grid they solved or whether to compete against another participant in a tournament, earning more if they performed better than their opponent and earning nothing if they performed worse.

Percentage of players choosing competitive mode, by sexual orientation

Percentage of players choosing competitive mode, by sexual orientation (Source: IZA DP No. 9382)

The results show that the competitive hypothesis by sexual orientation holds for men, but not for women. When given the choice of whether to compete, lesbians proved to be as competitive as straight women. By contrast, gays were much less likely to opt for the tournament than straight men, regardless of their grid solving abilities. When the experimental choices are matched to survey data on salaries, the researchers find that these differences in competitiveness can account for almost 40 percent of the gay penalty in earnings.

Download the complete paper (IZA DP No. 9382):

Image source: Pixabay
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Demanding occupations and the retirement age

With populations aging in across most developed countries, governments are under pressure to reform pension schemes to guarantee their fiscal sustainability. Raising the statutory retirement age – the age at which individuals are entitled to ‘full’ retirement benefits – is one of the most common policy responses already applied in many settings.

However, concerns arise about consequences for workers in demanding occupations. While in many jobs people are able to work much longer, more demanding occupations require workers to retire before reaching any statutory retirement age, thereby entering less favorable early retirement, unemployment, or disability schemes.

In the Dutch policy debate, it was argued that low-skilled construction workers cannot work longer since their job requires a level of physical health they are unable to longer maintain at an older age due to the strains of many years of heavy physical work. Soon several other occupational groups argued for exceptions, too.

Despite these concerns, and out of practical implementation problems, the Dutch government decided to raise the statutory retirement age without any exceptions. While the Dutch discussion is far from over, similar debates are ongoing in Belgium, the UK and potentially any other country that raises the statutory retirement age.

Which occupation is considered more demanding than others?

At the core of these debates lies the question of what qualifies as a demanding occupation. When policy makers have to decide where to draw the line, public opinion is a crucial factor. A recent IZA paper by Niels Vermeer, Mauro Mastrogiacomo and Arthur van Soest analyzes the opinion of the Dutch population on early retirement arrangements of demanding occupations. Continue reading

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