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How recessions produce career criminals

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Recessions are known to create higher unemployment rates and lower levels of happiness and income. There is also growing evidence that workers who first enter the labor market during economic downturns suffer from poor job matching that impedes their career progression. But recessions have an even more disturbing effect – they contribute to initiating and forming criminal careers.

In a new IZA Discussion Paper Brian Bell, Anna Bindler and Stephen Machin show that young males who leave school in the midst of a recession are much more likely to become criminals than those who graduate in boom times. These effects are long lasting and persistent.

The researchers discover that entering the U.S. labor market at a time of recession – defined as a 5 percentage points higher than normal unemployment rate – results in a 5.5 percent increase in the probability of being incarcerated at some point over the next two decades. This effect, which is mainly driven by high-school dropouts, is similar in magnitude for the UK.

Even a decade after leaving school, there are strong and positive effects from entry unemployment on arrests, particularly for property crime. In the UK the influence on this sort of crime eventually dies out after 15 to 20 years post-school experience while it remains (and becomes even more significant) for violent crime.

The state of European integration: What labor market experts think

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Recent developments challenge the idea of free mobility in Europe. The rise in Euroskepticism, the perceived threat of welfare migration or the vote of the Swiss people to reintroduce immigration quotas indicate a degeneration of the European ideals. In light of these concerns, leading labor economists have recently joined forces in calling for an EU Charter that serves as a joint commitment to Working Without Borders.

How serious are these concerns? In a new IZA Discussion Paper, Annabelle Krause, Ulf Rinne and Klaus F. Zimmermann find that labor market experts are worried about the state of European labor market integration, too. Although the experts are generally convinced of the merits arising from free labor mobility in Europe, the survey results point at several reasons why these benefits have not yet fully materialized – and why the public has difficulties perceiving them.

For example, the majority of experts are satisfied with the European Union, but a sizable 30% are disappointed. While about two-thirds of the respondents agree that a Single European Labor Market is important for achieving larger economic welfare, the majority thinks that Europe has not yet achieved this goal. Increased labor mobility is crucial to achieving this goal. The rapid recognition of qualifications, the harmonization of social security systems, and the knowledge of several languages are named as the three most important factors to increase labor mobility in Europe. Finally, most experts share a rather pessimistic view regarding the impacts of the Great Recession: They believe that the crisis-induced economic divergence between European countries is a long-lasting phenomenon.

These are some important findings of the IZA Expert Opinion Survey 2014 on the Single European Labor Market conducted earlier this year. The online survey was disseminated among the 700 European members of IZA’s network, which is the largest network of labor economists worldwide comprising more than 1,300 experts from 50 countries.

Living with a stranger: The “Retired Husband Syndrome” in Japan

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Retirement is not just a major turning point in the life of a working man, but it often affects his entire family – and not in a good way. Many wives suffer from headaches, sleeplessness and other symptoms of anxiety or depression after their husbands have ended their careers. This phenomenon is known as the “Retired Husband Syndrome” (RHS). It is especially prevalent in societies with traditional gender roles like Japan.

The situation has been well documented anecdotally: All of a sudden, the husband stays home all day, gets all grumpy and demanding, and basically turns his wife’s daily life into a nightmare. She was used to having the day to herself, and now she is forced to put up with him 24/7. But despite wide media coverage on this topic in Japan, it has never been formally investigated whether (and to what extent) retirement itself has a direct causal effect on a severe deterioration of mental well-being.

In a new IZA Discussion Paper, Marco Bertoni and Giorgio Brunello look into this matter. Using an annual survey conducted on a representative sample of the Japanese population – with detailed information on individuals and their spouses, including retirement, divorce and self-reported measures of depression, stress and lack of sleep – the authors indeed find a strong negative effect of husbands’ retirement on wives’ mental health.

The causal effect is identified using the exogenous variation generated by a 2006 reform which mandated Japanese employers to guarantee continuous employment between mandatory retirement age (at age 60) and full pension eligibility age – effectively raising the average retirement age. The analysis of the different age cohorts shows that an additional year spent in retirement by Japanese husbands increases the probability that their wives develop RHS by 5.8 to 13.7 percentage points, depending on the underlying model.

One might think that wives are better able to cope with their husband’s retirement if they work themselves rather than stay home. However, the study shows that the opposite is the case: The retirement effects are even stronger for employed women, who are already stressed by their job and have less time to comply with the additional requests by their retired husbands. Increasing female labor force participation is therefore unlikely to stop the diffusion of RHS in Japan.

Husbands, by the way, show similar symptoms themselves. But the survey data used does not allow any conclusions whether wives are more likely to develop RHS after their husband’s mental health has deteriorated due to retirement. Nonetheless, the authors highlight the need to study retirement as a joint process affecting the couple:

“While much debate surrounding retirement in economics is centered around the financial preparedness to retire, our results suggest that attention should also be paid to preparing for retirement from a psychological point of view, so as to avoid or attenuate the consequences on the mental health and well-being of both partners.”

Do personality traits affect productivity? Evidence from the lab

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Individual differences in cognitive abilities measures such as IQ cannot fully explain the wage variation across workers, nor the intergenerational persistence of earnings and unemployment. That is probably why economists have recently focused their attention on analyzing how non-cognitive or “soft” skills such as self-control, motivation or perseverance might affect wages. Among these, personality traits have received special attention.

Psychologists were the first to study the so-called Five Factor Model of personality traits, or Big Five, as it is commonly known. According to physiologists, extraversion, neuroticism, conscientiousness, agreeableness and openness to experience can satisfactorily describe the combination of emotional, attitudinal, and behavioral characteristics unique to every individual.

While personality traits are to a large extent genetically inherited and hence can help to account for the intergenerational persistence of earnings, they are also somewhat malleable in adolescence and early adulthood and, thus, potentially more reactive to early policy interventions than cognitive skills.

Personality traits as important as cognitive skills

Studies using U.S. and European data show that the Big Five personality traits seem to be indeed important factors in the determination of wages. They account for almost the same variation in earnings than cognitive skills. Moreover, personality traits vary by gender. For instance, women are consistently more neurotic and agreeable than men, both traits that have negative returns in the labor market. Thus, personality traits could also potentially help to explain the gender wage gap.

Despite the aforementioned survey data evidence on the link between personality and labor productivity, little is still known about the actual mechanisms behind it. Moreover, observational evidence might suffer from potential confounds. For example, personality traits could affect wages and employment status through other indirect channels such as prior schooling choices, job selection, bargaining skills or evaluation by supervisors.

Laboratory experiment to eliminate confounding factors

In their latest IZA Discussion Paper, Ana Nuevo-Chiquero, Maria Cubel, Santiago Sanchez-Pages and Marian Vidal-Fernandez aim to tease out the factors behind the association between labor market outcomes and personality by means of a laboratory experiment. In this study, the authors take advantage of the controlled environment of the laboratory and the clearly defined task to reduce the risk of potential confounds.

More than 350 undergraduate students participated in their study in which they had to calculate as many five two-digit numbers sums as possible in 20 minutes. Students were rewarded for their correct answers and punished for the incorrect ones. Although not all jobs in real-life require knowing fast mental calculus, this task is mentally taxing, requires concentration and time management, all valuable qualities in the labor force.

Different effects for men and women

Consistent with survey evidence, the authors find that neuroticism decreases productivity while conscientiousness increases earnings. However, agreeableness shows only a very weak effect, suggesting that the negative relation between this trait and labor market outcomes found especially for women in previous survey studies might operate through other channels than productivity. The authors also find that extraversion and openness to experience have differential effects by gender and major of study (positive for men and science majors, but negative for women and non-science majors). Surprisingly, family background seems to play a minor role in the effects of personality.

The authors conclude that personality traits clearly affect individual productivity and that much more is to be learned and explored in the relationship between personality and economic outcomes. They also point out that a deeper understanding of the impact of personality on productivity can provide policy makers with a wider variety of instruments when designing policies aimed to improve the economic performance of disadvantaged groups and increase social mobility. This is particularly relevant for educational programs targeted to individuals after the age of 10, when cognitive skills are already mostly established but personality is still being formed.

Hiring credits stimulated employment during recession in France

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In response to soaring unemployment during the Great Recession, the French government introduced a hiring credit in December 2008. The program called zéro charges allowed firms with fewer than ten employees to hire workers at the minimum wage without paying any social security contributions. Wages up to 1.6 times the minimum wage were subject to reduced contributions.

In a new IZA Discussion Paper, Pierre Cahuc, Stéphane Carcillo and Thomas Le Barbanchon analyze the employment effects of this policy. Since the reform went into effect on the very day it was announced, the researchers set up a research design similar to a laboratory experiment: they define a treatment group consisting of firms with 6 to 9 employees, which was affected by the reform, and a control or placebo group consisting of firms with 10 to 14 employees. By comparing employment trends among treatment and control groups before and after the reform, the authors were able to identify the causal effect of the hiring credits.

The study finds that the hiring credit was very effective. It allowed the government to create jobs at zero net cost in a small amount of time. Within three months, hirings went up significantly. In the period before the reform, the treatment and control groups showed similar employment trends. In 2009, after the reform, employment decreased in the treatment group by only 0.9 percent while it dropped by 1.6 percent in the control group. Overall, the authors estimate that about 5,200 jobs were created within one year. The analysis also shows that the policy did not increase layoffs to hire new workers at lower costs.

However, the authors caution that their results were obtained in a very specific context. The program was targeted at low wages, which are very rigid in France due to binding collective agreements and a high minimum wage. Permanent hiring credits, or hiring credits not targeted at low wages, could have a much weaker employment impact. The authors also estimate that the program would have been even more effective if it had been conditional on net job creation.

Female quotas in company boards: Norwegian evidence shows no trickle-down effect

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Women still earn less than men, and are still under-represented in executive positions. In 2003, the Norwegian government passed a reform to change that, setting up a mandatory quota of 40 percent for women in the boards of publicly limited liability companies. Like in many other countries where such reforms have been implemented or are discussed, the resistance of firm owners was immense. The typical concern is that there might not be enough qualified women available to fill all the seats, which would lead to inefficiencies and declines in productivity.

In a new IZA Discussion Paper, Marianne Bertrand, Sandra E. Black, Sissel Jensen and Adriana Lleras-Muney take a closer look at the introduction of a binding female quota in executive boards and analyze the labor market effects of such a reform. First, as a direct reaction, the researchers show that many firms tried to evade the rule by changing the legal form so that they would not be affected by the reform. The remaining publicly limited liability companies were, however, compliant: the share of women in the boards indeed reached 40 percent in 2008. Second, the researchers demonstrate that women, who were newly introduced to the boards, had on average an outstanding educational and professional background. Third, they find that the quota achieved another goal as the female wage gap within executive boards decreases significantly

Despite these intended effects in the boards of affected companies, the reform had no significant spill-over effects: while there seem to be more women among the top 5 earners within a company, the effect did not trickle down as the female representation within the top 5%, 10% and 25% of earners in the firm was not affected. Moreover, the authors look at highly skilled women who have not been newly appointed to become a board member, finding neither a significant earnings increase nor a higher probability to fill a top position in the future.

Last, the researchers investigate the effect of the quota on the attitudes of young women interested in a business career. The authors show that the introduction of the quota had no effect on the enrollment of women in business programs. In addition, there seems to be no reduction in the large gender gap in starting wages induced by the reform.

Read also in IZA World of Labor:
Gender quotas on boards of directors (article by Nina Smith)

Risk and compensation in the labor market for drug smugglers

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Every year, roughly 3,000 people are arrested while working as “mules” smuggling drugs through the ports of entry along the U.S.-Mexican border in California, Arizona, New Mexico, and Texas. For every mule caught, many more get through. Despite the great public concern over cross-border drug smuggling, and the enormous expenditures devoted to stopping it, little is known about the labor market mechanisms underlying this activity.

In a new IZA Discussion Paper, David Bjerk and Caleb Mason study this underground labor market using unique data from California with detailed information on smuggling events. The authors estimate that the average compensation of a mule caught at the California ports of entry is approximately 1,600 U.S. dollars. This implies that a drug mule would have to complete about two smuggling trips per month to earn as much as an American commercial truck driver.

Compensation for drug smuggling also responds to sentencing risk: one extra year in jail when caught increases the smuggler’s pay by around 1,200 dollars. Given harsher sentences for meth and cocaine, compensation for smuggling these drugs increases sharply with the quantity smuggled until a certain load size is reached where larger quantities make no difference in sentencing. Since expected prison time is much shorter for smuggling marihuana, mules’ pay in this case increases linearly: each additional 50 kilos pay about 420 dollars extra.

The authors conclude that this underground labor market is subject to competitive market pressures with risk-sensitive, reasonably informed workers being compensated for higher risks. Their findings also suggest that border enforcement and sentencing may impact the drug market not just through restricting the amount of drugs that come through the border, but by raising the price due to higher labor costs.

Long-run effects of ADHD medication on health and crime

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The number of children diagnosed with attention deficit hyperactivity disorder (ADHD) is on its all-time high. In Germany, for example, the number of diagnosed ADHD cases rose by 42 percent between 2006 and 2011. At age 11, about 7 percent of all boys and 2 percent of all girls were treated with Methylphenidate, the most common drug, mainly known under the brand name Ritalin. Although widely used, very little is known about the long-run effects of these pharmaceuticals.

A new IZA Discussion Paper by Søren Dalsgaard, Helena Skyt Nielsen and Marianne Simonsen contributes to filling this gap. Using Danish data, the economists show that children diagnosed with ADHD who undergo treatment have better long-run health outcomes and show less criminal behavior. More precisely, treated children have fewer hospital contacts due to injuries and fewer emergency room visits, and they are less likely to be charged with a crime as teenagers.

To identify these effects, the researchers use a complex strategy. Since it is not possible to observe the development of the same child with and without treatment, the authors compare outcomes of very similar ADHD children and exploit the fact that some physicians have a much stronger preference for prescribing pharmaceuticals than others. In other words, the researchers try to find statistical twins who go to different doctors and thus are treated differently.

While the findings suggest that treatment of ADHD with Ritalin has benefits in terms of health and criminal behavior, the authors stress that this does not imply all children should be treated. In order to arrive at an overall evaluation of ADHD medication, the estimated gains should be contrasted with (a) the costs of the drugs and (b) possible side effects like insomnia or high blood pressure.

How Viagra changed the lifestyle of elderly men

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The introduction of Viagra in 1998 changed the world of men suffering from erectile dysfunction. Up until then, there were nearly no remedies available that could have helped men effectively. No wonder that within a few months after its introduction, Viagra dominated the market. Until today, Viagra has been prescribed to approximately 37 million men worldwide.

In a new IZA Discussion Paper, which is forthcoming in Economic Enquiry, Jacob LaRiviere and Hendrik Wolff analyze how the little blue pill influenced lifestyle and behavior of elderly men in the U.S. In a nutshell, the introduction of Viagra seemed to have influenced short-term rather than long-term behavior. On the one hand, Gonorrhea rates for men older than 45 increased by 15-28 percent. Apparently, the drug had an effect on short-term decisions of older men to become more open to risky sexual relationships, increasing the amount of infections with sexual transmittable diseases. On the other hand, the authors find no influence of Viagra on long-term-decisions as divorce and natality rates of the target population are not affected.

Like father, like son? Family welfare cultures in Norway

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In most Western countries children of welfare recipients are more likely to receive welfare benefits themselves. However, it is not clear if this link is causal or driven by other factors. A theory in line with the causal interpretation is that benefit receiving families create an own culture, in which it is “normal” to receive welfare. A different theory suggests that the determinants of poverty and poor health are correlated, but there is no causality.

In a new IZA Discussion Paper, Gordon B. Dahl, Andreas Ravndal Kostøl and Magne Mogstad try to get closer to answering why children of benefit recipients are more likely to be become dependent on social security themselves. The authors investigated spillover effects from parents on children of the Norwegian disability insurance (DI). After a year of sick leave, workers in Norway may apply for DI. While cases with a clear indication of disability are immediately declared eligible, cases in which the disability is ambiguous may be denied and then reconsidered by a randomly assigned judge. As some judges are much more generous than others, some applicants are more likely to receive DI than others.

The researchers exploit this feature of the application process to establish a causal link. When a parent is allowed DI, their adult child’s participation over the next five years increases by 6 percentage points. This effect grows over time, rising to 12 percentage points after ten years. Moreover, these children often report precisely the same medical disorder as their parents did. The researchers interpret their findings as supporting the benefit culture hypothesis: family beliefs and norms are altered due to benefit receipt in a way that destigmatizes being on welfare. This culture seems to be restricted to parent-child relations; close neighbors are not more likely to apply for DI.