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Did your grandpa change his name? Find out why that was a smart thing to do.

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Many immigrants arriving in America in the early 20th century started a new life, and often they started it with a new name. In fact, many Americans today have heard stories of migrant ancestors Americanizing their names. What exactly was the extent of this phenomenon? What consequences did it have on migrants’ economic success? A new IZA discussion paper answers these questions for the first time.

Costanza Biavaschi, Corrado Giulietti and Zahra Siddique have digitalized historical records that contain information on name Americanization. By digging through thousands of 1920s naturalization papers from New York City, the authors track a wide range of characteristics of migrants. Since migrants had to fill out two separate documents for the naturalization procedure, their characteristics can be observed both before and after they changed their names.

With almost a third of naturalizing immigrants abandoning their names and acquiring popular American names such as William, John or Charles, the authors find that not only was name Americanization a widespread practice, but it was also associated with substantial improvements to the migrant’s economic success. Migrants who Americanized their name earned at least 14% more than those who did not.

While acquiring a more popular American name could have influenced migrants’ success, it’s also quite possible that the choice of the new name reflected other aspects related to their experiences in the States during the 1920s, for example the acquisition of language skills. To find whether it was exclusively name Americanization that led to economic advancement, it is necessary to find factors influencing why migrants would Americanize their names that are unrelated with their earnings. The authors observe that individuals with names of certain linguistic complexity decided to Americanize their names irrespective of other reasons like socio-economic background. They measure such linguistic complexity using the amount of Scrabble points – yes, from the popular board game! – associated with each name. This allows them to isolate the pure effect of name Americanization on earnings from other spurious factors like language acquisition.

The findings of this research highlight the tradeoff that many migrant ancestors faced between maintaining one’s individual identity and being more successful in the labor market. Surely, nowadays, there are many alternative ways to make a better salary; perhaps giving up your name is something you did not think about. Until now.

Extending paid maternity leave makes no sense economically

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Paid maternity leave has become more and more popular over the past few decades as mothers have increasingly entered the workforce: the median number of weeks of paid leave to mothers in OECD countries rose from only 14 in 1980 to 42 in 2011. But what are the labor market effects of (longer) paid maternity leave? A new IZA Discussion Paper by Gordon B. Dahl, Katrine Vellesen Loken, Magne Mogstad and Kari Vea Salvanes answers this question by studying parents’ responses to a series of policy reforms in Norway, which expanded paid leave from 18 to 35 weeks without changing the length of job protection. The authors present four sets of results:

First, none of the reforms affected the length of unpaid leave. Each reform increased the amount of time spent at home by roughly the increased number of weeks allowed. Since income replacement was 100% for most women, the reforms did not affect family income.

Second, the expansions had little effect on a wide variety of outcomes, such as children’s school outcomes, parental earnings and labor market participation, fertility, marriage and divorce.

Third, the authors show that paid maternity leave has negative redistribution properties. Since unpaid leave did not respond to the reform, the extra leave benefits can be seen as a pure leisure transfer, financed by everyone and mostly taken up by middle and upper income families.

Fourth, the authors investigate the financial costs of the extensions in paid maternity leave. They find that the reforms had little impact on parents’ future tax payments and benefit receipt. As a result, the large increases in public spending on maternity leave imply a considerable increase in taxes.

Taken these four findings together, the authors conclude that the generous extensions to paid leave were costly, had no measurable effect on outcomes and exhibited poor redistribution properties. In a time of harsh budget realities, there seem few economic arguments in favor of extending paid maternity leave beyond baseline levels.

What predicts a successful life?

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How much of adult well-being is determined by childhood influences? The answer to this question is very important to policy-makers since it influences educational and family policies. In a new discussion paper, Richard Layard, Andrew E. Clark, Francesca Cornaglia and Nattavudh Powdthavee estimate how adult life-satisfaction is predicted by childhood influences. The authors differentiate between direct effects of childhood influences and indirect effects affecting adult life-satisfaction through adult circumstances.

According to the study, the most powerful childhood predictor of adult life-satisfaction is the child’s emotional health. Next comes the child’s conduct. The least powerful predictor is the child’s intellectual development. Although intellectual performance is a good predictor of the person’s educational achievement and income, it has hardly an effect on adult life-satisfaction since income itself has been found to have a very limited impact well-being. Likewise, family background (economic, social and psychological) is a quite limited predictor of most adult outcomes except educational qualifications.

Beijing’s caution on reforms makes sense – for now

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By Eswar Prasad

Cataloguing China’s economic risks has become a popular parlour game. In the past decade, a steady drumbeat of warnings has predicted imminent collapse. Rising state and local government debt, a weak financial system and multiplying inefficiencies in the economy certainly pose big risks. The reforms needed to maintain growth and improve its quality have been painfully slow.

Despite these problems, the size of China’s economy and the per capita income of its citizens have quadrupled in the past 15 years, pulling millions out of poverty. Still, the country cannot outrun its problems forever. Unbalanced growth has led to widening inequality and environmental degradation.

China’s leaders often talk of the need for broad reforms but their actions are, critics say, plodding and hypercautious. This issue is in the spotlight as expectation builds that next month’s party plenum in Beijing will yield a range of reforms. Some warn, however, that such hopes will be disappointed.

Yet, for all the criticism, certain aspects of China’s cautious approach to economic reforms, which is likely to continue, might actually prove an object lesson to other countries.

Consider the proposal to eliminate the ceiling on interest rates paid on bank deposits. The ceiling has stifled competition among lenders, resulting in households receiving minuscule real returns on their deposits for much of the past decade.

Removing the ceiling would have its dangers. Weaker, poorly regulated banks might offer higher rates to compete for deposits, make riskier loans and set themselves up for failure. An explicit deposit insurance system, rather than the implicit state guarantee that now covers all deposits, would impose market discipline.

Since such a system would take time to put in place, the government has chipped away at the ceiling by allowing the proliferation of other saving products with higher returns. This approach has its own risks but helps catalyse interest rate reforms.

Small, indirect changes, even if inefficient, elicit less opposition, pose fewer risks and make course corrections easier. A big-bang approach might harm the cause of reform in the long term by inviting stronger opposition from those keen to maintain the status quo.

Many countries have undertaken big changes when they face a crisis; reforms are harder without such pressure as they invariably involve disruption and risks. The rhetoric surrounding proposed measures then turns out to be crucial in determining their political fate. In the US, the benefits of the Affordable Care Act have been subverted by the false narrative that it would socialise healthcare and destroy jobs.

In emerging markets, the notion that reforms benefit the economic and political elite is a powerful obstacle. Foreign investment in India’s retail sector has been stymied by the narrative that it profits global corporations, destroying small retailers’ livelihoods. In reality, it would help the poor by improving food distribution channels, reducing waste and keeping costs down.

Beijing has proved effective at creating narratives that build broad support and provide a framework for communicating the logic and desirability of individual reforms.

Given its under-developed financial markets, capital account liberalisation would be premature. But this objective highlights areas where reforms would be in China’s own interest: broader and better regulated financial markets, as well as a more flexible exchange rate.

This year, Beijing announced a plan to reduce inequality. This would be a dubious policy goal if it emphasised redistributive policies. In fact, the proposals are exactly the reforms needed – financial market liberalisation, reform of state-owned enterprises and freer labour mobility. All are worthy in themselves but the narrative helped emphasise that the benefits would be widespread rather than accruing to the select few.

Narratives must be translated into action. China does not have the luxury to postpone all reforms until the conditions are ripe. Its leadership may have to take greater risks to advance much-needed steps. But critics should appreciate that Beijing’s approach might reflect its economic and political savviness rather than a lack of commitment.

This article was initally published in the Opinion section of the Financial Times.

Study abroad programs boost labor market careers

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Despite the great popularity of international educational mobility schemes like the European Erasmus scholarship program, relatively little research has been conducted to explore their benefits. A new IZA discussion paper by Giorgio Di Pietro tries to fill this gap. Using a large dataset of recent Italian graduates, the paper investigates the extent to which participation in study abroad programs during university studies impacts subsequent employment likelihood. Di Pietro accounts for the problem that certain universities or departments might have a better reputation, which increases job prospects and the likelihood of sending students abroad. Moreover, the analysis addresses the problem that students studying abroad might simply be smarter than those staying at home. The results indicate that studying abroad has a relatively large and meaningful effect on the later labor market career: graduates who studied abroad during university are about 24 percentage points more likely to be in employment 3 years after graduation relative to their non-mobile peers. This effect is mainly driven by the impact that study abroad programs have on the employment prospects of graduates from disadvantaged backgrounds.

The findings have important policy implications as the European Commission is currently planning to significantly expand the ERASMUS program over the next years. This plan, named “ERASMUS for all”, would give the possibility to study abroad to a larger number of students. Di Pietro expects a considerable proportion of future study abroad participants to come from disadvantaged backgrounds, since currently many students from disadvantaged backgrounds are left out from the list of study abroad winners as the criteria for the award of an ERASMUS scholarship (e.g. academic achievement, motivation letter) tend to favor their peers from advantaged backgrounds.

Persuading mothers to work: results from an experiment

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Many women see themselves as the better providers of care for their children, and thus refrain from delegating child care. At the same time, they may be skeptical about their chances of being successful both as mothers and in their working career. One explanation for such a view could be lacking information on the psychological and educational effects of female labor market participation on children. Consequently, informing mothers about the consequences of maternal employment could have a positive effect on female labor force participation.

A new IZA discussion papers tests this hypothesis: Vincenzo Galasso, Paola Profeta, Chiara D. Pronzato and Francesco C. Billari designed a randomized survey experiment, in which 1500 Italian women aged 20 to 40 are exposed to information on the positive consequences of formal child care on children’s future educational attainments. Surprisingly at first glance, the authors find that women on average reduce their intended labor supply. However, there are substantial differences by educational attainment in the response: highly educated women respond to better information by increasing their intended use of formal child care. In contrast, low educated women do not modify their formal child care decision and reduce their intended labor supply. The authors explain these heterogeneous responses with different monetary incentives and different preferences for maternal care between high and low educated women.

For policymakers, these mixed findings send a warning signal about the true effectiveness of often advocated public policies regarding formal child care. The authors conclude that public policies should acknowledge that child care decisions by mothers may depend on budgetary restrictions — as in the case of low wage mothers — but also on maternal identity. Thus, some (low educated) mothers may in fact choose to stay at home and take care of the children, even when family friendly institutions are available.

How to manage the quality-quantity tradeoff

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A commonly acknowledged problem in running a business is that the more that is produced, the lower the quality due to an increasing amount of errors committed. This quality-quantity tradeoff is widely thought to be worsened by incentive payments, which typically, it is said, reward quantity but overlook quality.

In a field experiment, John S. Heywood, W. Stanley Siebert and Xiangdong Wei study the relationship between incentive pay, worker monitoring, worker commitment and the quantity versus quality aspects of worker performance. Participants in the experiments had to manually input data obtained from survey questionnaires. Quantity is measured in terms of 1000’s of words input per day, and quality is measured as the number of mistakes. 60 workers were tracked for a month, and separated randomly into high monitored (50% chance of being checked per day) and low monitored (10% chance) groups. Initially the groups were paid according to a time rate. Then, halfway through the period, the system was changed to a piece rate, with high returns for quantity and at the same time a fine for mistakes. Given the different monitoring probabilities, the expected fine was larger for the highly monitored group. At the same time the workers’ motivations for doing the work were carefully surveyed with the aim of measuring worker “commitment”, e.g., whether they found the task meaningful.

The paper shows that worker monitoring, the piece rate’s high-powered incentives, and worker commitment all influence a worker’s quality-quantity performance. Hence, by choosing appropriate combinations of these variables, many different quality-quantity combinations are available to a firm. The authors show that these different combinations have different costs. For example, high monitoring requires supervisors to be paid, while high worker commitment implies costly worker selection. Nevertheless, the results imply that a firm is far from being bound by a given quality-quantity tradeoff. It can refine its worker selection and monitoring options together with the payment system to deliver a chosen (optimum) quality-quantity mix. Moreover, there is no reason to fear piece rates, provided that these are combined appropriately with worker monitoring. The paper also shows that time rates, for their part, are best combined with careful worker selection policies, and not with strict monitoring, which seems simply to demotivate in this context.

High school counselors effectively help students choose the right college major

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Choosing the right field of study at college is a very important, but also a very difficult decision. Many prospective students face a high level of uncertainty as they have little information on employment prospects and the wage structure of occupations they may work in after graduating. And they can often only guess whether their individual preferences will match the actual job characteristics. Hence, reducing uncertainty about the right field of study could result in substantial efficiency gains, leading to higher individual job satisfaction, higher overall productivity and a lower likelihood of changing the field of study or dropping out of college before graduating.

A new IZA discussion paper by Lex Borghans, Bart H.H. Golsteyn, Anders Stenberg points at an effective way to reduce this costly uncertainty. The paper provides evidence that an individual meeting with a study counselor at high school significantly improves the quality of choice of tertiary educational field. The results are strongest among students with low educated parents – a group which is likely to have the least information at the outset. Tentative analyses also indicate that counselors reduce students’ uncertainty about their own individual preferences at least to the same extent as uncertainty about objective measures such as employment prospects.

Relative bonus payment schemes do not increase performance

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Many firms run employee-of-the-month or job promotion contests. Stock brokers get additional money if they beat the index. Bonus payment schemes, where bonuses are awarded for outperforming competitors, are widely used nowadays. Yet, a potential problem of these schemes is that workers have intermediate information on their performance relative to their competitors and/or to their target. This information could neutralize the intended incentive effect. For instance, consider a salesman who can earn a bonus by attaining a monthly sales target while receiving daily or weekly sales figures. When sales – halfway through the month – are such that it remains challenging but possible to reach the target, the bonus scheme provides strong incentives. The incentive effect is much weaker, however, when intermediate sales are particularly high or low: either the salesman can hardly miss the bonus or the target is practically out of reach.

In a new IZA discussion paper, Josse Delfgaauw, Robert Dur, Arjan Non and Willem Verbeke empirically test the incentive effects of such relative performance pay schemes. The authors conducted a field experiment among 189 stores of a retail chain in the Netherlands. Employees in the randomly selected treatment stores could win a bonus by outperforming three comparable stores from the control group over the course of four weeks. Treatment stores received weekly feedback on relative performance. Control stores were kept unaware of their involvement, so that their performance was not affected by the experiment. As predicted by theory, the authors find that treatment stores that lag far behind do not respond to the incentives, while stores close to winning a bonus increased the performance. The authors conclude that on average, the introduction of the relative performance pay scheme does not lead to higher performance.

How much unemployment insurance do we need?

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By Rafel Lalive, Camille Landais and Josef Zweimüller

Rafael Lalive
University of Lausanne and IZA

The global crisis that erupted in 2008 has put millions of worker out of a job. The US, for instance, experienced an unprecedented increase in unemployment from around 4 percent to more than 10 percent during the Great Recession. Unemployment remained stubbornly even when the economy started to recover again.

Governments throughout the world have responded by making their unemployment insurance systems more generous (OECD, 2012). Some observers argue that US unemployment would have returned much faster to normal levels if the US had not expanded the duration of benefit payments from 26 to 99 weeks. Were UI extensions too generous? What is the optimal level of unemployment insurance (UI)? How much money should job seekers receive and for how long?

Camille Landais
LSE

In theory, economists have a simple answer to these questions. UI should be set optimally, i.e. such that adding a dollar to UI generosity produces as much benefit as it costs (Baily 1978). But how does one go about finding the right amount of UI in practice? Actual policy needs to be based on sound evidence. Chetty (2008) discusses a new approach to finding the optimal amount of UI. The key idea of his “sufficient statistics” approach is to combine credible evidence on the benefits and costs of more generous insurance with a plausible theoretical framework to back out the optimal level of UI.

But, what is the evidence regarding the costs and benefits of UI extensions? The costs of more generous UI are the total costs to taxpayers. The total costs have two components: direct and additional. The direct costs are those paid to job seekers who exhaust their regular benefits. Additional costs arise because more generous benefits induce job losers to stay longer on UI benefits or enter unemployment more frequently. Interestingly, a growing number of studies give us well-identified measures of the costs at the individual level. Card and Levine (2000) find that adding 13 weeks of benefit payments will prolong the duration of benefit claims by about one week in the U.S. Since their data only cover unemployment spells until benefit exhaustion, the implied impact of extended benefits on total unemployment durations (including unemployment periods after benefit exhaustion) are larger. Lalive and Zweimüller (2004) find that 13 weeks of benefits prolong unemployment duration by one week for older workers in Austria. Lalive, van Ours, and Zweimüller (2006) discuss benefit level and duration and find that raising the benefit level is less costly than prolonging benefit duration.

Josef Zweimüller University of Zurich and IZA

Economists have spent less effort in estimating these benefits. UI benefits individuals if it helps to better smooth consumption between employment and unemployment. Gruber (1997) finds that job seekers experience a drop in consumption of 6 percent compared to when they were still employed. His estimates suggest that the drop in consumption would have been almost four times larger (22 percent) without UI. This study therefore shows that UI does what it is designed to do: insure people.

However, UI generosity does not only affect individual workers’ search effort, it may also affect the competition for jobs. The idea is simple: when generous UI induces all other workers to search less intensively, it become easier for me to find a new job. This means that optimal UI needs to account for search externalities. Existing studies on the effects of extending unemployment benefits do not take these externalities into account. If these externalities are empirically relevant micro studies miss an important part of the picture.

Landais, Michaillat & Saez (2013) provide a theoretical analysis of optimal UI in the presence of search externalities. They set up a search and matching model which shows that stronger search externalities increase the socially desirable generosity of UI. An important implication of this result is that UI should be more generous during recessions when jobs are scarce and externalities are strong. Conversely, UI should be less generous during booms when jobs are plentiful and externalities are weak.

Yet are search externalities really empirically relevant? Lalive, Landais and Zweimüller (2013) provide evidence for search externalities in a quasi-experimental setting. They study a program that extended UI benefits from one to four years for certain workers in certain regions of Austria during the period 1988 to 1993. They show that this massive benefit extension led to a substantial increase in unemployment durations among eligible job seekers (Figure 1A). It also led to a substantial reduction in unemployment durations among non-eligible job seekers (Figure 1B). This evidence indicates that the effects of benefit extension programs on overall unemployment will be smaller than suggested by existing micro studies. Benefit extension programs reduce competition for jobs. Since the program induces eligible job seekers to search less hard, non-eligible job seekers face lower competition and find jobs more easily.

Figure 1: Difference in unemployment durations between eligible and ineligible counties by year of entry into unemployment

Interestingly, recent studies conclude that the US benefit extension programs of the Great Recession increased unemployment significantly but by less than half a percentage point (Rothstein 2011; Farber and Valletta 2013). This evidence suggests that the UI extensions in the US were less costly than previously thought.