Governments are increasingly concerned about the capacity of pensions systems to meet demands in the coming years. According to the OECD, one part of the policy response in many countries will be greater private provision on the part of individuals through occupational and other pension arrangements. If such a strategy is to work, it requires that individuals are well-informed about pensions. However, there are many reasons to believe that individuals may not be well-informed due to the complexity of pensions systems and degrees of myopia. A new IZA Discussion Paper by Alan Barrett, Irene Mosca and Brendan J. Whelan tests the knowledge of pensions using a representative sample of older Irish people. Looking at people who are enrolled in pension schemes, they find that two-thirds of these people do not know what amount will be paid out. Neither are most people aware of whether the payments will be in the form of lump-sums, monthly payments or both. Women are more likely not to know, as are people with lower levels of education. The findings are important for public policy. According to the authors, one obvious and direct recommendation would be to better inform certain groups. Another approach might be to extend the mandatory elements in pension systems such as contribution rates.
How to motivate workers? Money versus mission
How much harder do people work when they believe in the mission of their organization? And equally important: How much less do they work when they disagree with the mission? To answer these questions, Jeffrey P. Carpenter and Erick Gong conducted an experiment to estimate the effect of missions on worker productivity. During the 2012 US Presidential election, the authors randomly assigned individuals to work for either the Obama or Romney presidential campaign, thus creating both mission “matches” and “mismatches.” Compared to people who do not care intensely about the candidates, the authors find that Democrats or Republicans assigned to work for their preferred candidate have a 27% increase in productivity but workers assigned to work for the other candidate work 43% less. The study also shows, however, that workers who were assigned to work for their opposition could be “bought”: performance-based monetary incentives for these workers greatly mitigate the productivity gap. The results have implications for how organizations define their mission, screen workers, and provide compensation: They are good news for non-profit organizations on a shoestring budget since workers work hard given high levels of intrinsic motivation. At the same time, the responsiveness to monetary incentives may allow other, better-funded, organizations to take advantage of worker goodwill.
How job security increases insecurity
The goal of employment protection legislation is to increase workers’ job security by making it more difficult and costly for employers to fire people. A new IZA Discussion Paper by Alexander Hijzen, Leopoldo Mondauto and Stefano Scarpetta shows that such measures can, however, cause the opposite effect and reduce rather than increase worker security. The authors study a new dataset on Italian firms and workers and look at a special feature of the Italian legislation on employment protection: until June 2012 firms with more than 15 employees faced high costs and uncertainly when dismissing a worker with a permanent contract without a proper cause. In contrast, for firms with less than 15 employees such unfair dismissals were less costly. Exploiting this special rule, the authors show that firms just above the threshold of 15 employees had a 2 to 2.5 percentage points higher probability to hire temporary workers. Moreover, the authors show that the incentive to rely more on temporary workers persist well beyond the threshold. Overall, the results suggest that employment protection legislation may account for about 20% of the overall incidence of temporary work in Italy. In addition, the authors show that the greater use of temporary employment has a negative impact of firm labor productivity.
From a policy perspective, these results are important in the context of the recent reforms of employment protection in Italy as well as in a number of other countries. The study shows the problems of promoting temporary and other atypical contracts on the one hand, while leaving in place stringent regulations for permanent contracts on the other – a phenomenon observed in many, mainly European countries as well as Korea and Japan, over the past two decades. The study suggests that such developments have encouraged firms to substitute temporary for regular workers with also potentially negative effects both on the workers affected as well as productivity and overall economic performance.
Men earn more because they negotiate better
Women have been found to do worse when it comes to negotiating their salaries: first, because they renegotiate less, and, second, because they are less effective once they start to bargain. But how does this restraint translate into wage differences? A new IZA Discussion Paper by David Card, Ana Rute Cardoso and Patrick Kline answers this question by measuring the relative bargaining power of men and women in Portugal. In a second step, the authors calculate how much of the male-female wage gap can be explained by differences in bargaining strength. The paper shows that women are paid only 85 to 90% of the premiums that men earn at more profitable firms. Overall, the authors estimate that the shortfall in women’s relative bargaining power explains around 3 percentage points — or 10 to 15% — of the gender wage gap in Portugal.
High testosterone, high wages?
Does the level of testosterone, which is associated with more aggressive and competitive behavior, explain why men earn more than women? In a new IZA Discussion Paper, Anne C. Gielen, Jessica Holmes and Caitlin Knowles Myers study this question by looking at the labor market careers of twins. Biologists suggest that embryos with a male twin are exposed to higher levels of testosterone in utero than embryos with a female twin. As a consequence, individuals with a twin brother have been found to exhibit more masculine characteristics than those with a twin sister. Hence, the authors analyze the wages of more than 80,000 twins born in the Netherlands between 1959 and 1979 and compare the earnings of individuals with a male twin to the earnings of individuals with a female twin. The results suggest that the effect of testosterone differs by gender: While men with a male twin earn higher wages than men with a female twin, there is no such effect for women. In fact, the findings indicate that women with a male twin, and thus a higher exposure to testosterone, may even earn a little less than women with a twin sister.
Early retirement makes men live longer
Does early retirement affect how long people live? In a new IZA Discussion Paper, Hans Bloemen, Stefan Hochguertel and Jochem Zweerink investigate this question by estimating the impact of early retirement on the probability to die within five years. They analyze a temporary reduction of the retirement age for Dutch civil servants of certain birth cohorts. This “natural experiment” helped establish a causal relationship between time of retirement and time of death. The authors indeed find a strong effect on longevity for men. Early retirement decreases their probability to die within five years by 42.3 percent (or by 2.5 percentage points). There seems to be no such effect for women. As the study found significant effects on dying from a stroke, one plausible mechanism may work through the removal of stress‐related factors associated with demanding work.
These findings imply that pension funds also bear a higher longevity risk if workers are induced to retire early. In the Dutch case, the lives of the 2,348 early retirees were extended by an average of 56 days. This translated into roughly 7 million euros in additional retirement benefits. Another implication may be that the rising early retirement eligibility age in many countries could lead to higher mortality among men.
What is the right price of clean air?
How much are people willing to pay for clean air? Driven by this question, empirical economists have come up with a method to estimate the value of air quality. A new discussion paper by IZA Program Director Olivier Deschenes, Michael Greenstone and Joseph Shapiro suggests that former studies may have underestimated the costs of pollution and thus the value of clean air. The researchers argue that defensive investments against pollution, such as medication purchases, have to be factored in when estimating the value of clean air. Studying the introduction of an important cap-and-trade market, which dramatically reduced summertime ozone, the authors show that not only mortality rates but also pharmaceutical expenditures have decreased subsequently. Moreover, the paper shows that the improvement in air quality generates reductions in pharmaceutical purchases that are as large as the value of the observed reduction in mortality rates. This suggests that the costs of ozone might be substantially larger than previously thought.
How effective is high school mentoring?
Is it worthwhile paying special attention to high school students from disadvantaged social backgrounds? Núria Rodríguez-Planas put this question to a test by looking at the longer-term impacts of mentoring, educational services, and learning incentives on US high school graduation and post-secondary education enrollment among low-performing high school students. Her answer: “It depends.” The study, published in the American Economic Journal: Applied Economics, shows that while interventions were successful in the short term, the educational results were modest. Moreover, there were no significant effects on employment outcomes – and detrimental effects on engagement in risky behaviors in the long run.
In a complementary IZA Discussion Paper, Rodríguez-Planas unravels some of the mechanisms at play. She finds that interventions were extremely successful among youth with a high risk of drug use as they managed to curb risky behaviors: the high school graduation rate increased by 14 percent and college enrollment by 21 percent. In contrast, the program was unsuccessful among youth with a low risk of drug use as it increased their engagement in risky behaviors (especially while in high school) and had no impact on educational outcomes. The findings suggest that these negative impacts are driven by peer effects.
Lowering the legal drinking age has no detrimental impact on youth
How does the legal drinking age influence youth behavior? In a new IZA Discussion Paper, Stefan Boes and Steven Stillman answer this question by examining the impact of a reduction in the legal drinking age in New Zealand from 20 to 18. The authors analyze the effects of the policy change on alcohol use as well as related hospitalizations and traffic accidents among teenagers. The main findings of the paper are that lowering the legal drinking age has not led to an increase in alcohol consumption or binge drinking among 15-17 or 18-19 year-olds. While there is a significant relative increase in alcohol-related hospital admission rates for both age groups, the absolute number of affected teenagers is small. The study finds no evidence for an increase in alcohol-related vehicular accidents at the time of the law change for any teenagers. The authors also explain why a commonly used approach to estimate the impact of changes in the legal drinking age may give misleading results. Based on their findings, they support the argument that lowering the legal drinking age does not lead to large increases in detrimental outcomes for youth.
More and more older workers want to increase working hours
Older workers are becoming increasingly important in the European labor market. Previous research on work preferences suggests that older workers would like to reduce working hours. A new IZA Discussion Paper by David Bell and Alasdair Rutherford finds that this is not true for all them. Using data from the United Kingdom, the authors show that there are significant numbers of older workers who would prefer to increase hours. The share of these workers has been rising, particularly since the start of the recession in 2008. The analysis shows that those who want to work fewer hours are more likely to retire early, while those who want more hours delay their retirement compared to otherwise similar workers.
The findings have important implications for employment policy. They indicate that there might be opportunities within the group of older workers to better match individual working hour preferences by providing some form of exchange between those who wish to work more hours and those who prefer fewer hours. The authors argue that if the present mismatch is due to a malfunctioning of the labor market, government intervention to overcome the mismatch might be justified. Yet, for the success of such a policy, the labor market would have to be sufficiently flexible.