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IZA – Institute of Labor Economics

Extended unemployment insurance did not affect U.S. unemployment rate

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Unemployment insurance (UI) benefits typically are available for 26 weeks in the United States. In response to the Great Recession of 2007-2009, UI benefit availability was extended to the historically unprecedented level of 99 weeks. Some observers and analysts have argued that this policy measure was counterproductive and was in fact a major contributing factor to the severe, sustained dislocation in the U.S. labor market. In a new IZA discussion paper, Henry Farber and Robert Valletta find that such concerns have little basis in the facts. The effects of extended UI on the overall unemployment rate and labor market efficiency were quite limited.

Farber and Valletta apply direct statistical tests to data on unemployed individuals and find that extended UI accounts for less than half a percentage point of the 5.5 percentage-point increase in the unemployment rate. Moreover, these effects occurred primarily through prolonged labor force attachment rather than reduced job finding, suggesting that extended UI benefits do not substantially disrupt the hiring process. Using a common basis for comparison, the authors also find that the impact of extended UI on the behavior of job seekers was quite similar between the recent episode of extended benefits and an earlier episode associated with the milder recession of 2001. Despite their limited impact on overall unemployment, the results for both episodes indicate that extended UI can account for a substantial fraction of the recessionary increase in long-term unemployment, a nuance that is commonly overlooked in public debate over extended UI.

Immigrant integration: Linguistic distance impedes literacy

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Language acquisition of immigrants is crucially affected by the dissimilarity between the immigrant’s mother tongue and the language of the destination country, according to a new IZA discussion paper by Ingo E. Isphording. The study relies on a combination of linguistic information on the differences between languages with rich data on literacy skills in OECD countries.

The research demonstrates that the role of the linguistic background outweighs the importance of socioeconomic factors like age, education, or exposure to the destination country language. Migrants with a very distant mother tongue (e.g. a Turk in the Netherlands) face distinctive hurdles in acquiring literacy skills in the destination country language. This disadvantage of a distant mother tongue in the language acquisition intensifies with the age at migration.

According to the author, the diversity in language background is a factor not to be ignored in understanding the integration process of immigrants into the host country societies. Language skills are an important prerequisite for this integration and have significant impacts on the success of immigrants in the labor market. Thus, hurdles by distant language background are likely to be translated into economic disadvantages.

Microinsurance in developing countries can help prevent child labor

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Child labor is a common consequence of economic shocks in developing countries. A new IZA discussion paper by Andreas Landmann and Markus Frölich shows how reducing the vulnerability to such shocks can affect child labor and schooling. The authors exploit the extension of a health and accident insurance scheme by a Pakistani microfinance institution (MFI): on the hand the program was extended to include supplementary household members such as adult children of the client or other household members; on the other hand clients were assisted with claim procedures. Importantly, the extension of the insurance scheme was set up as a randomized controlled trial, which allows clean identification of the effects of the extension. The paper finds lower incidence of child labor and lower child labor earnings caused by the innovation. Separating the two parts of the innovation package, the effects of claim assistance are mostly insignificant, while increased insurance coverage strongly decreases child labor incidence, hours worked and days missed at school. The authors show that the positive outcomes are largely due to an ex-ante feeling of protection as opposed to a shock-mitigation effect.

Older workers use longer unemployment benefit duration to retire earlier

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Extending the duration of unemployment insurance (UI) bene fits is one of the most important policy instruments to ease economic hardships of job losers – this is especially true for older workers who might be less likely to find a new job. Yet, a prolonged duration of unemployment benefits could also provide wrong incentives as older workers might exploit too generous rules as the first step into early retirement. A new IZA discussion paper by Lukas Inderbitzin, Stefan Staubli and Josef Zweimüller studies this trade-off by analyzing the impact of extended UI benefi ts on employment and retirement behavior of older workers in Austria.

The authors find the extended duration of unemployment benefits increases the probability of early retirement: a job loser aged 50-54 is 17 percentage points more likely to withdraw from the labor market when he is eligible for the longer benefit entitlement period. The paper finds that the Austrian program also affected the pathways into early retirement: the 17 percentage point increase in early retirement is associated with a 12.6 percentage point increase in a subsequent disability insurance take-up. From a welfare perspective, the authors conclude that Austrian unemployment insurance rules for older workers were too generous and the regional extended benefit program was a suboptimal policy.

Blacks are still less happy than whites in the United States

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In the United States the well-being of blacks is still below the well-being of whites. This has been shown by a new IZA Discussion paper by Betsey Stevenson and Justin Wolfers. Yet, compared to the early 1970s the study reveals that the racial gap in well-being has shrunk: two-fifths of the gap has closed and these relative gains have occurred despite little progress in closing other racial gaps such as those in income, employment, and education. The authors suggest that large declines in prejudicial attitudes towards blacks could be explained with improvements in the subjective well‐being of blacks. However there remains prejudice today and, along with it, a racial gap in well‐being, some of which may have its explanation in the unfinished parts of the civil‐rights era agenda. As much of the current racial gap in well-being can be explained by differences in the objective conditions of the lives of black and white Americans, the authors argue that making further progress will likely require progress in closing racial gaps in objective circumstances.

Search and mating: the effect of the Internet on marriage rates

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Internet facilitates searching tremendously. This should not only be true when you shop online for books or software, but also when you are look for a partner. A new IZA discussion paper by Andriana Bellou examines the effects of Internet diffusion in the United States since the 1990s on marriage rates. By now, dating platforms are the second most popular venue of meeting a partner, especially among young people. Among couples that met in 1994-1998, 3.9% report having met online for the first time. Interestingly, this number has risen to 11% and 20% for couples that met between 1999-2003 and 2004-2006 respectively. Beyond these mere correlations, the author uses the geographic variation in the adoption of broadband Internet to show that there is a causal relationship between Internet diffusion and marriage rates. The estimates suggest that the increase in broadband access has contributed to higher marriage rates by roughly 13%-30% relative to what they might have been in the absence of this technology. Moreover, the results suggest that Internet has repelled other traditional meeting venues, such as through family and friends. Last, the author provides some suggestive evidence that Internet availability even reduces the probability of getting separated or divorced.

Pay later to increase honesty – evidence from a field experiment with soldiers

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People tend to be more honest if they are not rewarded immediately but rather in the distant future. This is the result of a new IZA Discussion Paper by Bradley Ruffle and Yossi Tobol, who show in a field experiment with Israeli soldiers that honesty increases when temporally distancing the decision task from the payment of the reward. Each of 427 soldiers rolled a six-sided die in private and reported the outcome to the unit’s cadet coordinator. For every point reported, the soldier received an additional half-hour early release from the army base on Thursday afternoon. Soldiers who participated on Sunday (the first work day of the week) are significantly more honest than those who participated later in the week. The simple and likely explanation: as the week goes by, the weekend nears and becomes more relevant.

The finding could have quite interesting implications for everyday life: For example, insurance fraud whereby the customer overstates the value of claims or falsely reports missing or damaged items might be diminished by delaying reimbursement. Also, instead of immediately paying company managers and employees based on their self-reported tasks, remuneration should be delayed to some (possibly unannounced) future date to promote honesty. On a different level, parents often condition rewards to their children on good behavior or the completion of their chores or homework. The optimal time to ask your eight-year-old son whether he behaved well at school is not as you tear off the wrapper from his promised candy, but well beforehand.

According to the authors, there is, however, a flip side to this argument: if you want to hear reliable, honest intentions regarding a costly outcome, the question should be posed as close as possible to the outcome. Ask a person about his intention to begin exercising, dieting or saving not weeks ahead, but rather the day before the intended start date.

Do family-friendly policies hamper women’s careers?

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Over the past 20 years, female labor participation in the U.S. has decreased remarkably relative to other Western countries: In 1990, the US had the sixth highest female labor participation rate among 22 OECD countries. By 2010, its rank had fallen to 17th. A recent IZA discussion paper by IZA Prize winner Francine D. Blau and Lawrence M. Kahn finds that the expansion of “family-friendly” policies including parental leave and part-time work entitlements in other OECD countries explains 28-29% of the increase in women’s labor force participation in these countries relative to the US.

However, the authors find that these family-friendly policies might come at a cost as they encourage part-time work and make women more likely to end up in lower level positions. In the U.S., women are more likely than in other countries to work as managers or professionals. Thus, the analysis suggests that there may be a tradeoff between family-friendly policies and women’s advancement at work. On the one hand, such policies likely facilitate the labor force entry of less career-oriented women (or of women who are at a stage in the life cycle when they would prefer to reduce labor market commitments). On the other hand, entitlements to long, paid parental leaves and part-time work may encourage women who would have otherwise had a stronger labor force commitment to take part-time jobs or lower-level positions. Moreover, on the employer side, such policies may lead employers to engage in statistical discrimination against women for jobs leading to higher-level positions: if employers cannot tell whether a female job candidate will downgrade to a part-time job later in the career, she might not be considered for a high-level position in the first place.

Older people are less productive: Evidence from professional chess players

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Do people become less productive when they grow old? According to a new IZA Discussion Paper by Marco Bertoni, Giorgio Brunello and Lorenzo Rocco the answer is Yes. The authors analyze data on professional chess players — individuals doing a brain-intensive and purely individual activity — and find that the relationship between age and productivity follows an inverted U: productivity at chess increases by close to 20 percent from age 15 to its peak at age 42, and smoothly declines by 11 percent until age 60. This indicates that better skills and longer experience cannot completely offset the decline in numerical and reasoning abilities.

The finding is at odds with other evidence by Jan C. van Ours, which suggests that mental productivity of economists does not decline with age until the age of 60. Marco Bertoni, Giorgio Brunello and Lorenzo Rocco present the following argument that can reconcile the contradictory findings: less talented professionals are more likely to quit their job in early ages of the career. Therefore, older professionals are more able than the average professional across all ages. If one takes this selection mechanism into account, productivity declines with age — at least for chess players. If this finding also holds for other brain-intensive professions, it could have important macroeconomic implications given the ageing population in many developed countries.

The Guardian reports on IZA study: No ‘welfare migration’ within EU

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According to a comprehensive study of 19 European countries over a period from 1993 to 2008, national differences in unemployment benefits have no impact on migration flows within the European Union. IZA researchers Corrado Giulietti, Martin Guzi, Martin Kahanec and Klaus F. Zimmermann find that — contrary to widespread prejudice — benefit generosity overall does not influence the individual decision to migrate. For non-EU immigrants only a small, statistically insignificant effect was found. “It is a popular myth that scores of immigrants come to take advantage of the welfare state,” said IZA Director Klaus F. Zimmermann. “While such cases exist, they are rather due to ill-designed immigration policies than to generous public benefits.”

Read the full article in The Guardian or download IZA Discussion Paper No. 6075.