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The market for paid sick leave

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In most OECD countries, general practitioners (GPs) play several fundamentally different roles. Clearly, on the one hand, they are responsible for their patients’ health and physical well-being. On the other hand, they also play an often unforeseen, but economically important role: acting as the arbiters of sick leave. This latter capacity is of great fiscal relevance because doctors act as “gatekeepers,” deciding which types of social insurance expenditures and medical treatments are ultimately necessary for their patients.

While the GP is probably the person best placed to objectively assess the true health condition of the patient, in a market this position is ripe with skewed incentives and moral dilemmas. For example, if some patients exaggerate or even ‘invent’ health problems to justify paid absence from work, might they, as customers, choose those doctors that are more generous in giving out sick notes?

In order to find out how this particular situation affects doctors’ behavior, Knut Røed and Simen Markussen empirically analyzed Norwegian doctors’ standards when it comes to doling out sick leave and the patients’ choices of GPs. In their new IZA Discussion Paper, the experts from the Ragnar Frisch Centre for Economic Research first identified each doctor’s degree of leniency, i.e., the physician’s readiness to give out a sick note to a patient.

To do this, they designed an indicator based on the overall certification of sick pay days for each doctor’s patients, taking into account the different characteristics of patients (age, employment, etc.) and the fact that many patients often switch doctors. In a second step, the authors were then able to use this leniency indicator to examine the extent to which workers chose family doctors which were more generous in giving out sick notes.

Lenient doctors attract more patients

The researchers show that not only do patients choose the more “free handed” doctors, but doctors actually anticipate the “leniency preference” of their customers when choosing their own level of leniency. Moreover, when the local competitive environment changes—for example, when another doctor moves to town, increasing competitive pressure—GPs tend to become more lenient to attract or keep patients.

But how much does this actually account for social welfare losses? The authors propose that if all the GPs in Norway received fixed salary contracts instead of letting them run their own businesses, the level of illness-induced absence from work would decrease by roughly 3-4%. Given that the Norwegian physician market has relatively little competition, the authors expect this effect to be much larger in more competitive markets.

The study concludes that by combining the incompatible roles of business owner and health provider, GPs are faced with highly contradictory incentives. In such a situation, GPs are forced to decide between performing their “gatekeeping” function in the most ethical manner possible or furthering their financial interests by attracting and keeping more patients as customers.

The right mix of migrants to meet Germany’s needs

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“In past decades, Germany has made great strides with the integration of foreigners. Those achievements must be defended prudently and balanced with the country’s demographic challenges. Indiscriminately admitting all refugees from war, including often illiterate and unskilled youths, is bound to undermine these very impressive gains,” writes IZA’s founding director Klaus F. Zimmermann in today’s Wall Street Journal.

These are the key points he makes:

  • The increasingly heated debate over refugees inside German is causing a divide between the “welcomers” and the “door-closers”.
  • Germany needs a regular annual inflow of immigrants, including refugees, but their composition matters.
  • Therefore, an Immigration Act defining specific criteria and procedures for new arrivals is long overdue.
  • The most important driver of quick integration into a new society is a job.
  • However, the need for low to medium skilled manufacturing workers has greatly declined since the 1960s.
  • Germany must attract productive workers from all over the world, not just one war-torn region.
  • A mismanaged refugee crisis could convince many Germans to take the opposite stance, no longer wanting any more foreigners in their midst.

Read the complete article:
The Right Mix of Migrants to Meet Germany’s Needs

Gender discrimination at work: What if your boss is a woman?

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Despite the remarkable increase of female participation in education, the labor market and political life that has taken place over the past several decades, women are on average still paid less than men and are largely underrepresented in supervisory, managerial and executive positions. As research has shown, firms profit from establishing gender balance throughout their workforce for several reasons, for example, through promoting a more cooperative work environment.

Another positive effect of having women in leadership positions was highlighted in a new IZA Discussion Paper by Claudio Lucifora (Università Cattolica del Sacro Cuore and IZA) and Daria Vigani (Università Cattolica del Sacro Cuore), which investigates the association between female leadership, work organization practices and perceived gender discrimination within firms.

The female boss effect

The authors use data for 30 European countries for the period 1995-2010 and find that having a female boss is associated with lower overall gender discrimination at work. When investigating the underlying mechanisms that shape gender imbalances within firms, Lucifora and Vigani find evidence of a “women helping women” pattern, along with its associated spill-over effects, which leads to a reduction in discrimination toward women.

A better balance between work and life, a supportive work environment, and flexible working time, particularly for women in high-skilled jobs, are shown to be effective in reducing gender discrimination. There are several implications of the above findings for gender equity at work:

First, promoting a higher presence of women in leadership positions all along the occupational spectrum is an effective way of reducing gender bias and discrimination toward women in workplaces. This has a direct (causal) effect as well as an indirect (spill-over) effect on female subordinates in predominantly female jobs. While there is evidence of an adverse effect on male employees in predominantly female jobs, it is difficult to say whether this is the result of a reversal of (taste or statistical) discrimination against women or a genuine behavioral effect of women discrimination toward men.

Second, the results show that when there is a gender bias in the way work is organized (long working hours, rigid working-time schedules and low work-life balance), women are more likely to be penalized. Thus, promoting family-friendly work practices such as part-time work, flexible working time and parental leave arrangements is another effective way to better balance work and life across gender, particularly for women (and men) with caring responsibilities.

Changing work culture

Whether these changes should be implemented through company provided benefit schemes, through public subsidies for part-time work and child care facilities, or both is yet to be assessed. Conversely, any company or public policy that disproportionately rewards long and inflexible working time schedules, either through company bonuses or tax-breaks on overtime work, will make it more difficult for women to gain higher management positions.

The same is true for career concerns that are centered on high work intensity and rank-ordered tournaments, which are likely to reduce opportunities for women in organizations as well. While affirmative action and mandatory quotas for women in executive boards may reverse the general pattern in top positions, the results suggest that female leadership itself can have a welfare improving effect on gender discrimination all along the occupational hierarchy.

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Are you clever enough to tell the truth?

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 People have different propensities to tell the truth, particularly when there is an incentive to lie. According to an experiment conducted with soldiers and civilians in Israel, researchers found that it’s not the differences in religious, economic or social background that determines who is more willing to lie or tell the truth. Instead, the analysis by Yossi Tobol (Jerusalem College of Technology) and Bradley J. Ruffle (Wilfrid Laurier University) revealed a striking correlation between honesty and cognitive ability.

The truth-telling experiment was conducted with a group of 427 Israeli soldiers and repeated with 156 random passersby in an Israeli shopping mall. After a survey about individual characteristics, the participants were asked to roll a six-sided die in private and then state the rolled number. Higher reported numbers were rewarded with spare time for the soldiers and small monetary incentives for the civilians.

Common sense about rolling a fair die tells us that each side should show up with about equal frequency. Here is what the soldiers’ results look like (the civilian results are similar):

Higher numbers were disproportionately reported by both the soldiers and civilians. Interestingly, the authors found that one specific characteristic was related to differences in reporting. Soldiers who scored higher on cognitive ability in their military entrance test (kaba) were less likely to over-report by lying about their die roll.

This result is somewhat surprising in that rewards for lying in this experiment are clear and straight-forward (rewards in spare time/money). Still, however, there are costs associated with lying, for example, through later detection and/or an eroded self-image of honesty. The authors suggest that higher cognitive-ability subjects are able to think through these costs and, as a result, resist the temptation to inflate their die reports.

  • Read coverage in the Washington Post’s Wonkblog (April 14, 2016):

The importance of such internal costs of lying via an eroded self-image have also been shown in a phone call experiment conducted in Germany by Johannes Abeler (University of Oxford and IZA), Anke Becker (University of Bonn) and Armin Falk (briq and IZA), published as IZA DP No. 6919. These authors find almost no pattern of lying in their experiment despite the fact that detection was virtually impossible and thus the reputation costs were almost negligible.

Image Sources: pixabay,

How to close the disability employment gap

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Anti-discrimination legislation has been largely ineffective at improving the employment prospects of the disabled. A new report, just published by IZA World of Labor, finds that despite the introduction of a range of legislative and policy initiatives designed to eliminate discrimination and facilitate work, disability is still associated with substantial and enduring employment disadvantages.

Author of the report Melanie Jones (Cardiff University) states:

“There is no consistent evidence that anti-discrimination legislation has improved the labor market outcomes of disabled individuals.”

Key points of the report:

  • Across European countries, one in eight working-age individuals (aged 15–64) report disability as defined by a long-term health problem.
  • There is evidence of a substantial and enduring disability employment gap (average of 20 percentage point difference between disabled and non-disabled persons).
  • There is little evidence that legislation prohibiting disability discrimination has led to a narrowing of the disability employment gap.
  • Employers are crucial in supporting flexibility and adjustments to work to enable employees with a disability to retain or recommence employment.
  • Government policies and welfare systems should support reentry/entry into the workforce for people with disabilities.

Understanding the work-related well-being of disabled workers is not only important in its own right, but also because of its likely contribution to the employment and earnings gaps via the impact on the recruitment, retention and productivity of disabled individuals. It is also important to note that differences in the type, severity and chronicity of disability are fundamental to the pattern of disadvantage experienced, and are therefore also critical to the design of effective support mechanisms.

Jones advises that the importance of the employer (and effective occupational health) is recognized in supporting flexibility and adjustments to work in order to enable employees to keep their jobs, or recommence employment. The government also plays an important role in this regard, by providing incentives for employers to retain disabled workers and by designing welfare systems that support working disabled individuals rather than schemes which provide permanent support conditional on not working. The broadening of permitted employment and/or the provision of temporary financial support to facilitate work-related adjustments would provide greater incentives for disabled individuals to remain in work, or return to work, when they are able.

Can market mechanisms solve the refugee crisis?

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As the flow of asylum seekers reaching Europe’s shores is rising again with the onset of spring, the European Union is increasingly forced to address a number of challenges. Disagreements over the unequal distribution of refugees across the EU have hindered a common policy response, placing strain on existing support structures, and potentially threaten to unravel the entire international refugee protection system.

A new IZA World of Labor article outlines a new innovative way to organize the distribution of refugees efficiently while at the same time respecting their rights. The plan combines two market mechanisms: a market for tradable refugee admission quotas that allows refugees to be established wherever it is least costly, and a matching system that takes into account the preferences of both refugees and host countries.

The use of market mechanisms, such as tradable quotas, to coordinate a cost-effective international common response to different kinds of policy problems has a long-established tradition in economics. Jesús Fernández-Huertas Moraga (Universidad Carlos III de Madrid and IZA) makes use of this concept in his proposed solution to the refugee crisis facing Europe.

Debates over how to structure the distribution of refugees across the EU have usually focused around two themes: the economic cost of hosting this influx of asylum seekers and the social and humanitarian duties and responsibilities of Member States to refugees. Fernández-Huertas Moraga’s concept allows the economic component, the tradable quotas market to be combined with humanitarian “matching,” making the solution both politically and economically feasible.

Three-stage refugee acceptance system

The IZA World of Labor article proposes a fully coordinated refugee acceptance system that includes three stages. First, responsibilities should be shared among Member States by applying a distribution rule that determines how many asylum seekers each Member State should accommodate. This distribution key should reflect the countries’ overall capacities by taking into account a number factors, such as GDP, population, unemployment rate, the number of refugees resettled, and asylum applications received during the previous five years.

In the second stage, countries that wish to accommodate less asylum seekers than assigned in the first stage could trade these obligations and pay other countries to host them instead. Thirdly, a matching mechanism would combine refugee preferences with receiving countries’ preferences to ensure that refugees are not forced to relocate to an undesired destination, thus ensuring that the human rights of the refugees are protected.

While this concept seeks to solve challenges faced within the European context, this mix of accounting for both economic efficiency and human rights could also be used to address some of the main deficiencies of the international system of refugee protection.

Currently, as the above figure shows, most of the responsibility for protecting refugees falls on countries with fewer resources, typically those with close geographical proximity to conflicts. This not only threatens to politically and economically destabilize these host countries, creating broader global consequences, but the duty and also benefits of ensuring the right of asylum, a basic human right, extends to the whole world.

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China’s new two-child policy not enough to cope with aging population

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In January 2016, China formally changed its one-child policy, now allowing all couples to have two children. Fei Wang, Liqiu Zhao and Zhong Zhao systematically examine the labor market consequences of China’s family planning policies in their recent IZA Discussion Paper. Their simulation results indicate that the new two-child policy may be too little, too late to alleviate the aging problem in China.

China’s family planning policies are one of the most fundamental social policies in China. This assemblage of policies is much more complex than the simplified notion of a one-child policy. While the Chinese government initiated family planning policies in 1962, the well-known one-child policy had only been implemented since 1980.

Even after 1980, there were considerable regional and ethnic variations as well as many changes, notably the exemption of ethnic minorities and the relaxation of the strict one-child policy in rural China in the mid-1980s. As of January 1, 2016, all Chinese couples are now allowed to have two children. These policies have a far-reaching impact on many aspects of society, including the Chinese labor market.

Effects on age and gender composition of the working-age population

The dramatic drop in the total fertility rate during the 1970s has resulted in reduced numbers of people newly entering the workforce from the 1990s and beyond. Figure 1 presents factual and counterfactual population pyramids for the male and female populations in 1990 and 2010. The unfilled bars with black lines refer to the factual population pyramids. The gray bars denote the pyramids under the counterfactual regime in which no family planning policies take place, i.e., no “Later-Long-Fewer” family planning campaign and one-child policy. As can be seen, the factual pyramids show a low number of births between the mid-1970s and mid-1980s.

The working-age population (15 to 64 years) was 973.3 million in 2010, which accounted for 74.5% of the total population. The share of the working-age population peaked in 2010 and started to decline afterwards. This declining labor force growth has caused labor shortages and thus has increased wages. On the contrary, the counterfactual age structure is pyramid-shaped with a broad base of young generations, indicating that China’s working-age population would not have shrunk without family planning policies.

Figure 1: Population Pyramid 1990-2010

Another key feature of the evolution of the working-age population is the skewed sex ratio of the working-age population as people born after the enactment of the one-child policy in 1979 enter the workforce in the late 1990s. The male-biased sex ratio may lower female labor force participation as a high sex ratio increases the shadow wage for home production.

Interaction of family planning policy and internal migration

The age structure of a region is shaped not only by the processes of fertility and mortality, but is also importantly impacted by migration. With respect to the first two, the family planning policy has been implemented more rigorously in urban areas and areas with a high proportion of Han ethnicity, which would be expected to result in a more rapid aging process in these areas.

The interaction of the family planning policies and migration in China, however, has reversed the trend of regional aging rates. Regions with more stringent enforcement of the family planning policy have lower fertility rates and thus a lower supply of local native workers. Other things being equal, these regions, therefore, have a higher demand for migrant workers.

Thus, the strict enforcement of family planning policies in urban areas has accelerated rural-to-urban migration. In addition, the types of migrants that have moved to cities for work are mostly young, as can especially be seen in eastern coastal China and the major urban centers, such as Guangdong and Zhejiang province. This internal migration has, in turn however, led to a more serious aging challenge in the typically more rural and inland provinces, such as Sichuan and Anhui province.

As shown in Figure 2, the proportion of the population aged 65 and over increased by more than 2.5 percentage points in Anhui, Gansu, Guizhou, Sichuan and Chongqing over the period 2000-2010, while this number actually decreased in Beijing, Shanghai, and Tianjin and only increased by less than 0.5 percentage points in Zhejiang and Guangdong.

Figure 2: Change in Aging Rate by Province (65 years and over)

The left panel of Figure 3 presents the population pyramids for the urban hukou population (excluding migrants) for the year 2000. The urban hukou pyramid is diamond-shaped, indicating a shrinking urban hukou population beginning at the time of the one-child policy. However, when migrants are included (right panel), the pyramid for the urban residents has a wider base ,indicating that the internal migration of young laborers has shifted the aging problem from urban to rural areas.

Figure 3: Population Pyramid in Urban Area, 2010

These results highlight the greater challenge faced by rural areas and inland provinces to overcome the aging problem because rural areas and inland provinces are usually less developed, have less resources for social security, including old-age support, and have been losing their prime-age population to the urban areas and coastal provinces.

The new two-child policy

Already beginning in 2014, almost all provinces allowed a couple to have a second birth if one spouse is an only child. Since people born in the 1980s and early 1990s under the one-child policy played a major part in childbearing, there were 11 million couples who qualified for a second birth. By September 30, 2015, approximately 1.85 million couples had applied for birth certificates for a second birth, comprising a proportion of only 16.8%. This implies that the two-child policies are unlikely to increase fertility sharply, at least when one partner is an only child, which will be more common in the future.

Through simulation, Fei Wang, Liqiu Zhao and Zhong Zhao investigate if the new two-child policy will be able to alleviate the aging problem in China. The left panel of Figure 4 shows how China’s population size would evolve under the two-child policy versus under the one-child policy. This panel assumes three different effects of the two-child policy on women’s lifetime number of births compared to the previous one-child policy: an increase of 0.3, 0.5, and 0.7 children; with 0.3 being around the estimates in the literature. This panel implies that the two-child policy could, to some extent, temporarily increase the population and labor force until it begins shrinking around 2030.

The right panel of Figure 4 shows the proportion of the population aged 65+ over time under the one- and two-child policies with the same levels of fertility effects. It is clear that the two-child policy is far from pulling China out of aging.

Figure 4: Simulated Results under the One- and Two-Child Policy

No birth control and pro-natal policies

Assuming that removing the birth quota would lead to a lifetime fertility increase by 1, which is a radical estimate given the experience of some East Asian countries, Figure 5 simulates how the percentage of the elderly population and the elderly dependency rates would change over time had the birth quota been absent since 2015, compared to the one-child policy. While abolishing the birth quota would better address the aging problem than the two-child policy, it still may not be enough.

Figure 5: Simulated Percentage of Elderly Population and Dependency Rates

Elderly dependency rates

Although it is impossible to predict China’s population and labor market effects under birth encouraging policies without knowing the specific policy forms, the authors discuss the possible implications based on knowledge from pro-natal policies in other East Asian countries/regions such as Japan, Singapore, South Korea and Taiwan. While Japan and Singapore’s policies have existed for more than 20 years, and more time may be needed for evaluating the more recent policies in South Korea and Taiwan, all of these policies thus far have not shown significant effects on fertility.

If pro-natal policies fail to increase fertility rates and other measures such as opening borders to international immigrants are not implemented in China, the population would inevitably continue to age, and labor markets may encounter a shortage in the workforce if the industrial structure simultaneously fails to transform properly.

The authors therefore call on China to learn the lessons from their other neighboring countries/regions and take action as soon as possible, or it could be too late since the fertility rates have already been at low levels for such a long time.

Image source: pixabay

From a global perspective: Assessing the effects of labor market reforms

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Since the 2008/09 global recession unemployment and inequality have been on a rise. Reforms of labor markets have been one prominent feature in different countries and regions over the last years, not least in the context of the 2008/09 global recession. There has also been a continued debate in both the academia and policy circles about the effects of labor market reforms and regulation.

There are some who argue that labor market reforms and regulation have adverse effects on employment growth, increase in temporary/part-time or informal forms of employment and that it leads to higher unemployment especially among youth. However, the empirical evidence has been quite mixed and the direction remains unclear. Along with labor market reforms, a wide range of active labor market policies were also introduced in both advanced and emerging economies to get the working age people off benefits and into during the crisis. Many of these policies or programs were defined and implemented differently across countries and the extent to which they were successful also differed.

Addressing inequality has been another objective for many countries since the economic crisis. There is a renewed interest since the 2008 economic crisis on minimum wages as a useful and relevant policy tool as more and more countries experience increase in both income and wage inequality. A number of emerging and developing economies have been more active in revising the minimum wages on a regular basis. Even in advanced countries, such as Germany, the UK, and the US, minimum wages have gained importance to address income inequality.

Finally, collective bargaining is a labor market institution that has long been recognized as a key instrument for addressing inequality in general and wage inequality in particular. A number of countries across the different regions also introduced non-contributory social security schemes to provide income to the poor and to reduce inequality.

Discussing labor market reforms (from the left): Werner Eichhorst (IZA), Guy Rider (Director-General, ILO), and Moazam Mahmood (Head of ILO Research Department)

To achieve a better understanding of the effects of labor market reforms and the effectiveness of public policies, a conference was hosted jointly by the ILO and IZA in March 2016 at the ILO headquarters in Geneva (see program). Co-organized by Werner Eichhorst on behalf of IZA, the conference provided the forum for a broad debate about the design and the effects of reforms affecting labor market institutions.

From the presentations it became clear that evidence on significant positive short-run effects of flexibility-enhancing reforms, e.g. with respect to employment protection on job creation is scarce. At the same time many speakers stressed the importance of a positive macro-economic environment to realize the full positive potential of labor market reforms instead of creating more instability in the labor market.

This is particularly true for reforms expanding unemployment benefits and active labor market policies while lowering employment protection. This flexicurity approach might be desirable as it reduces the risks of persistent unemployment and provides sufficient support for job seekers (see the most recent IZA paper by Eichhorst, Marx and Wehner) – however, job finding opportunities and funding requirements depend on economic dynamism.

[Click here to watch the panel discussion video]

The twofold effect of technical progress on retirement

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Even though life expectancy is rising in most OECD countries, participation rates for older workers remain low. The fact that a non-negligible fraction of individuals exit the labor force well before retirement age has grave economic consequences, as it influences the economic dependency ratio of a country, that is, the ratio of retirees and unemployed over the employed.

Among the less noted factors that affect early retirement is technical progress. In a new research paper published in the IZA Journal of Labor Policy, Lorenzo Burlon (Bank of Italy and IZA) and Montserrat Vilalta-Bufí (University of Barcelona) reexamine the effect of technical progress on early retirement in the US. They find that technical progress affects early retirement in two opposing ways. On the one hand, it increases real wages and thus produces an incentive to postpone retirement, while on the other hand, it erodes workers’ skills, making early retirement more likely.

The researchers use US data from the Health and Retirement Study (HRS), a survey that follows about 37,000 adult individuals for 10 biennial waves between 1992 and 2010 and provides retrospective information on their job history. They merge this with individual data from US World KLEMS, a database that provides information on output, inputs and productivity at a detailed industry level. That way the authors are able to associate each individual with the technical change he or she must have faced during the period of observation. After the combination of these two datasets, Burlon and Vilalta-Bufí calculate how technical change affects the probability to retire early and compare the results to those obtained with other measures of technical change.

Probability of early retirement changes with degree of technical change

They find that the effect of technical change on the probability of early retirement changes depending on the degree of technical change. When technical change is fast, it will cause more people to retire early, because elderly workers find it difficult to adapt to the new, more technical job environment. As their skills become more and more obsolete they are more likely to retire early.

However, the authors notice that once a certain degree of technical change has been reached, the probability to retire early decreases again. They put the threshold of technical change at around 85%, above which early retirement depends negatively on technical change. They explain this with the fact that a large degree of technical change also has a large positive effect on wages. Faced with these large pecuniary incentives, workers are more likely to adapt to the new working environment, learn new skills and retire later.

Overall, the study thus reports a U-shaped relation between technical change and the probability of early retirement (see figure below). To verify their findings, the authors also performed various robustness checks and were able to exclude alternative explanatory factors.

The findings by Burlon and Vilalta-Bufí suggest that the higher the technical change, the more willing the elderly are to retrain, an insight which should be taken into account by policy makers. In the context of an aging society, the authors propose that policies should aim at delaying retirement and stimulate the participation of the elderly to the labor force.

For example, an increase in workers’ working horizon can stimulate the elderly’s labor force participation. Particularly in sectors with larger technical change, individuals are more inclined to take up training programs and delay retirement, so that training policies for the elderly become more effective.

How bad is involuntary part-time work?

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By Daniel Borowczyk-Martins (Sciences Po and IZA) and Etienne Lalé (University of Bristol and IZA)

When assessing the state of the labor market economists and policy-makers usually look at the unemployment rate. In recent years, observers have been paying increasing attention to involuntary part-time employment as an alternative and complementary measure of the amount of slack in the U.S. labor market.

The rise of involuntary part-time employment during the Great Recession was as spectacular as that of unemployment, but while unemployment has already returned to pre-crisis levels, involuntary part-time work remains stubbornly elevated several years into the recovery. Understanding the sources of the evolution of involuntary part-time employment seems key to attain a broader comprehension of labor market fluctuations, as well as their effect on workers’ welfare. In our recent IZA discussion paper we examine these two questions in detail.

Definition and comparison with unemployemt

The U.S. Bureau of Labor Statistics classifies individuals as involuntary part-time workers if they cannot find a full-time job or face slack demand conditions in their job. This definition underscores that workers in involuntary part-time employment face constraints in their desired labor supply, and establishes a useful parallel to the definition of unemployment (according to which, workers actively search for work but lack opportunities to do so).

That parallel extends to other dimensions of workers’ welfare, including income losses (and the availability of public insurance against it) and the allocation of non-market time to searching for a job or home production/leisure. Indeed, full-time workers who move to involuntary part-time experience a reduction in labor income (via a reductions in paid hours, hourly wages, or both), but, unlike those who end up unemployed, a large fraction of U.S. workers are not eligible to a public insurance mechanism to cover the associated income loss.

Cyclical dynamics

In the first part of the paper we characterize empirically the dynamic behavior of involuntary part-time employment. In a nutshell, we show that involuntary part-time employment is a remarkably transitory state and that most of workers who move in and out of that state come from or leave to full-time employment. We also document that the increase in the involuntary part-time rate observed during the Great Recession occurred by dint of a sharp increase in the probability of full-time workers to become part-time employed with their current employer.

The small duration of involuntary part-time employment spells seems to result from the dual nature of this labor market state. On the one hand, compared to unemployed workers, involuntary part-timers are much more likely to return to a voluntary form of employment in the next period. Since the pool of unemployed and involuntary part-time workers is similarly composed of workers with strong labor force attachment (male, in prime age, with low educational attainment and unmarried), this difference likely reflects labor demand factors.

The fact that transitions between involuntary part-time and full-time work occur overwhelmingly at the same employer further suggests that workers are quickly put in part-time and brought back to full-time employment while staying in the same job. On the other hand, involuntary part-time work involves a more fragile employment relationship vis-a-vis those held by voluntary part-time and full-time workers. Not only are workers in such situation more likely to quit (if given the chance), but also they are more likely to be forced out of the job into unemployment (when and if demand conditions further deteriorate).

Welfare implications

In the second part of the paper, we build on our empirical results to tackle the following question: How bad is involuntary part-time work compared to unemployment? Our tentative answer, grounded in a quantitative framework traditionally used to study the welfare costs of unemployment, is that involuntary part-time work is not as bad as unemployment from a worker’s perspective. The key aspect governing that difference is the much higher probability to return to full-time employment faced by part-time workers. In our framework unemployed workers decide on how much search effort to exert to gain access to full-time employment.

We find that, in a counterfactual world where part-time workers can only use the search technology available to the unemployed, they would need a very high level of search effort in order to mimic their actual probability to move to full-time employment. We interpret this result as a premium in access to full-time work enjoyed by part-time workers. Using our calibrated model we ascribe a welfare value to that premium of about 5% of consumption during the first quarter of a part-time work spell.

Policy views

As involuntary part-time work becomes pervasive in the U.S. labor market it is likely that related public insurance programs, such as short-time compensation schemes, will gain importance in policy debates. Our analysis focuses on the implications of involuntary part-time work at the individual level, but cannot judge its broader macroeconomic consequences. In our view, it is unclear whether public insurance targeted at involuntary part-time work would necessarily lead to gains in social welfare.

To answer that question a number of key issues need to be taken into account. First, there may be a significant degree of moral hazard regarding the number of hours worked and the voluntary/involuntary nature of a reduction in the schedules of working hours. Second, there are fundamental interactions between the risks of involuntary part-time work and unemployment, and the existence of public insurance against the latter. Future work should consider the joint design of public insurance against unemployment and involuntary part-time work taking into account the distinct dynamic behavior of the two labor market states.

In another paper , we document that fluctuations in part-time employment play a major role in movements in hours per worker in the US and UK labor markets.

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Editor’s note:
For further reading see also latest article by Andrea Garnero on IZA World of Labor:

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