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IZA – Institute of Labor Economics

Do people discriminate others or favor their ownkind?

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Discrimination is omnipresent in today’s labor markets: women receive lower wages, foreigner are less likely to be hired. While the broad definition of discrimination is clear (‘the minority suffers compared to the majority’), there is no evidence on whether the differences arise because people really discriminate against others or because they favor their own kind.

This distinction can, however, affect wage gaps and other important labor market outcomes. A new IZA Discussion Paper by Jan Feld, Nicolas Salamanca, and Daniel S. Hamermesh investigates this question by conducting a field experiment at Maastricht University in The Netherlands. In the experiment, the authors have some exam
papers written without student names on the front page, others with. Graders were randomly assigned to students’ exams that did or did not contain the students’ names.

The paper shows that graders substantially favor students of their own nationality but do not discriminate against people of a different nationality. While there is neither favoritism nor discrimination by gender, the authors do show that more experienced graders and those who are worse teachers favor people like themselves the most. Thus, the methodology and results of the experiment suggest that favoritism and discrimination are not opposite sides of the same coin, but rather distinct concepts.

In the experiment, unequal treatment of students is caused by favoritism rather than discrimination. If this finding carries over to the labor and other markets, it might have an important policy implication: moral suasion stressing to members of the majority group that minority-group members are not “bad” might, for instance, be ineffective.

People react less to tax changes if tax rules are complex

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How does a tax system’s complexity affect people’s reaction to tax changes? A new IZA Discussion Paper by Johannes Abeler and Simon Jäger answers this question by conducting a laboratory experiment. Participants are either faced with a simple or a highly complex tax system. Despite the differences in complexity, the work incentives of the two systems are identical. The authors then introduce the same sequence of tax changes in both groups. The experiment shows that people facing the complex tax system adjust their work effort less in response to a new tax compared to participants in the simple system. Many participants in the complex treatment even ignore the new tax rule entirely and do not change their behavior at all. The results suggest that the effect of tax increases in complex tax systems, which are common in many countries, might not lead to the strongly adverse effects critics of high tax rates expect.

How preschool helps to fight inequality

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The widening wage gap between college educated and non-college educated workers in the US and around the world has raised the question of how education policy can effectively mitigate this trend is highly topical. A new IZA discussion paper by Nobel Prize Laureate James J. Heckman and Lakshmi K. Raut gives a clear answer: intervene early and send children to preschool. The authors show that attending preschool has long-term positive effects on school performance and labor market success — in particular for economically disadvantaged children. The paper finds that preschool strongly boosts cognitive and socialization skills, which themselves have positive effects on the level of schooling and the labor market earnings of individuals. Given these findings, the authors demonstrate the beneficial effects of a policy that could reduce the wage inequality between high and low-skilled workers in the long tun. Publicly providing preschool to economically disadvantaged children would (a) increases the probability of children with poor parents not to end up poor themselves, (b) increases the probability of children of non-college educated parents to attend college, (c) increases the college completion rate of the children of non-college educated parents, (d) reduces earnings inequality, and (e) would yield a net gain for society by increasing long-run per capita earnings even after taking into account the costs of such a reform.

The problems of being too skilled for your job

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What if you are too skilled for your job? Previous research has shown that over-skilled workers receive lower wages. A current study by IZA Fellows, Kostas Mavromaras, Stéphane Mahuteau and Peter Sloane, together with Zhang Wei shows that over-skilling can even be a threat to growth potential of the economy. Economic growth is affected if workers remain in too easy jobs for too long and if wage penalties persist even after the over-skilled workers have changed to a more suitable job. Using Australian data, the authors find that between 15 and 30% of employees report themselves as over-skilled. The paper further shows that the nature and the consequences of over-skilling crucially depends on the level of education of workers. On the one hand, high-skilled graduates are less likely to remain in a too simple job for a long time. On the other hand, they suffer the biggest reduction in pay if the actually work in a job for which they are overqualified. In contrast, those workers with vocational qualifications below degree level are more likely to be over-skilled and remain in such jobs for a much longer time. Yet, they do not suffer any wage penalties for being over-skilled. The authors conclude that policy needs to consider both extent and persistence of skill mismatch as well as the size and persistence of the resulting wage effects if the problem is to be targeted efficiently.

Firms can rely on workers referred by current employees

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Hiring job applicants who were referred by current employees is a common and empirically well-supported practice, but there is relatively little scientific evidence about exactly why this works. A new IZA discussion paper by Stephen Burks, Bo Cowgill, Mitchell Hoffman and Michael Housman shows that referred workers perform better and that this is primarily because referrals allow firms to select workers better-suited for particular jobs.

The authors use large survey and operational data sets on workers from nine firms in three industries (call centers, high-tech software, and long distance trucking) to investigate the performance of referred workers. In the data referred applicants are very similar to non-referred ones on most measures of individual characteristics and on general productivity. However, they are more valuable to employers because they are substantially less likely to quit, and also because they are measurably better on such as the number of patents or preventable truck accidents. The researchers develop several tests of why referred workers are better in these ways, and conclude that most of the effects result from referred applicants being a better match for the specific jobs for which they are referred. This is in contrast to referred workers being generally more skilled, or to having better experiences on the job, such as receiving coaching from those who referred them. [Read more…] about Firms can rely on workers referred by current employees

Ora et non labora? A test of the impact of religion on female labor supply

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Religious norms on family formation and the respective roles of husband and wife are likely to influence labor market outcomes – in particular female labor supply behavior. A new IZA discussion paper by Francesco Pastore and Simona Tenaglia examines the influence of religion on women’s decision to enter the labor market by using data on 47 European countries and find a strong negative association between the share of individuals belonging to the catholic religion in the population of European countries and that of active women in the labor market. Moreover, the authors show that women belonging to the Orthodox and Muslim denomination present a higher risk of non-employment than agnostics, while being Protestant increases the probability for a woman to be employed. Intuitively, the authors show that these religious effects are mainly driven by groups that live their religious beliefs more intensively.

Basic entrepreneurship helps women out of poverty – new evidence from Bangladesh

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The world’s poorest people lack capital and skills and work in occupations that others shun. Using a large-scale and long-term randomized control trial in Bangladesh, a new IZA discussion paper by Oriana Bandiera, Robin Burgess, Narayan Das, Selim Gulesci, Imran Rasul and Munshi Sulaiman
demonstrates that sizable transfers of assets and skills enable the poorest women to shift out of agricultural labor and into running small businesses. This shift, which persists and strengthens after
assistance is withdrawn, leads to a 38% increase in earnings. Inculcating basic entrepreneurship, where severely disadvantaged women take on occupations which were the preserve of non-poor women, is shown to be a powerful means of transforming the economic lives of the poor.

Seek and ye shall find: how search requirements affect job finding rates of older workers

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Older workers often have difficulties to find a new job after becoming unemployment. While this problem is often attributed to low job availability, new evidence from the Netherlands suggests that older workers should by no means be discouraged as job search effort of older workers has a positive impact on job finding rates. In a new IZA discussion paper, Patrick Hullegie and Jan van Ours study how a specific rule in the Dutch of unemployment insurance affected the job finding rates of elderly unemployed workers. In the Netherlands unemployment insurance recipients were for a long time exempt from the requirement to actively search for a job when they reached the age of 57.5. The authors find evidence that the job finding rate of unemployed workers who were getting close to the age of 57.5 is reduced in anticipation of the removal of the search requirement. In addition the study shows a large negative effect on job finding rates of the actual removal of the search requirement. Apparently, even for persons with seemingly poor job prospects search requirements have a positive effect on finding rates. Read the complete discussion paper.

Workers bear most of the corporate tax burden

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Do higher corporate taxes reduce wages? While this question has heavily been discussed in economics since the 1960s, compelling empirical evidence is still scarce. In a new IZA discussion paper, Clemens Fuest, Andreas Peichl and Sebastian Siegloch exploit the specific institutional setting of the German local business tax — the most important German profit tax — to provide new answers to this old question. The authors use annual changes in the local business tax rates set by 11,441 German municipalities to show that a one euro increase in a firm’s annual tax liabilities yields a decrease of the annual wage bill of 50 to 75 cents. This means that raising one euro of corporate tax revenue reduces local wages by up to three quarters of the revenue raised. The authors only find a negative effect on wages if firms are under a collective bargaining agreement. If workers are not represented by a trade union, the local business tax has no effect on the wage. The reason for this finding: workers which are represented by a trade union receive higher wages and have more to lose if corporate taxes increase. Consequently, high and medium-skilled workers experience relatively higher wage losses than low-skilled workers if corporate tax rates increase.

In the public and political debates, arguments in favor of (higher) corporate taxes are often based on redistributive motives: allegedly rich firm owners are supposed to contribute to financing public goods and social safety nets by paying their fair share of taxes. Opponents of high corporate taxes often claim that eventually the tax burden is (fully) shifted to labor, being immobile in an international context. The findings by Fuest, Peichl and Siegloch shed new light on this debate and show that the shifting of the corporate tax burden is more complex. First, if workers receive relatively high wages — e.g. through collective bargaining agreements –, they are likely to suffer from higher corporate taxes through wage decreases. If wages are low, employees do not have much to lose. Second, the analysis suggests that local corporate taxation might offer a possibility to prevent firm owners from shifting large(r) shares of the tax burden to workers. If labor is regionally mobile, competitive wages are determined within the regional or even the national labor market and should hardly respond to the tax changes in a small jurisdiction.

Will There Be Blood? – Economic incentives increase blood donations without negative consequences

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Institutions such as the World Health Organization and national blood agencies have for 40 years promoted policy guidelines that oppose the use of economic incentives to attract blood donors. In an article that appeared in the May 24, 2013, issue of Science, Nicola Lacetera (University of Toronto) and IZA Fellows Mario Macis (Johns Hopkins University) and Robert Slonim (University of Sydney) argue that such opposition should be reconsidered.

The authors state that the current guidelines are based in part on outdated evidence mainly from uncontrolled studies using non-random samples, and surveys and artificial scenarios using hypothetical questions. These studies typically have suggested that economic incentives can decrease intrinsic motivations to donate and may also attract blood donations with greater risks such as viruses and infectious diseases.

However, a large body of field-based evidence from large, representative samples on actual donations has recently emerged, and the results clearly refute the previous findings: economic rewards have a positive effect on donations, without negative consequences on the safety of the blood.

Lacetera, Macis and Slonim cite the work of other researchers, as well as their own extensive work in this area, one initially appearing as an IZA DP No. 4567, which examined incentives for actual blood donors in the United States, Argentina, Switzerland and Italy. Of the 19 incentive items examined by the field-based studies, 18 had a positive effect and only one (a free cholesterol test) had no effect.

The authors note that there are many differences between the earlier approaches and the new evidence, including that in the field studies donors do not feel scrutinized by the researcher and thus might be less concerned about their image and more excited about the rewards. Moreover, the past research often focused on getting paid cash to donate, whereas offering “gifts” such as t-shirts may be seen as a token of appreciation which can reinforce rather than undermine donors’ intrinsic motivation. Also, the rewards are typically provided for presenting at the blood drives, not for donating blood, which should reduce the risk that an ineligible donor might misrepresent health or other information.

The voluntary supply of blood is typically low, in wealthy countries and especially in the developing world, which raises the question of how best to address blood shortages when they occur. The Science article demonstrates that even small economic rewards can be a powerful tool to address shortages [read summary | obtain full text].