On the (Labor) Market
How Important Is Human Capital? A Quantitative Theory Assessment of World Income Inequality
Andrés Erosa, Tatyana Koreshkova & Diego Restuccia
Review of Economic Studies, forthcoming
Abstract:
We build a model of heterogeneous individuals - who make investments in schooling quantity and quality - to quantify the importance of differences in human capital versus TFP in explaining the variation in per-capita income across countries. The production of human capital requires expenditures and time inputs; the relative importance of these inputs determines the predictions of the theory for inequality both within and across countries. We discipline our quantitative assessment with a calibration firmly grounded on U.S. micro evidence. Since in our calibrated model economy human capital production requires a significant amount of expenditures, TFP changes affect disproportionately the benefits and costs of human capital accumulation. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: To explain a 20-fold difference in the output per worker the model requires a 5-fold difference in the TFP of the tradable sector, versus an 18-fold difference if human capital is fixed across countries.
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Human Capital and on the Job Training: The Educational Consequences of Under Investment by Firms
Gilad Aharonovitz
Washington State University Working Paper, January 2010
Abstract:
A common assumption in literature dealing with the lifecycle profile of human capital is that individuals decide every period on the investment in their human capital, i.e., schooling and training. However, in many cases training is a decision made by the employer rather than the employee. This study constructs a lifecycle profile of human capital assuming that individuals decide on investment in schooling, but employers decide on investment in training in latter periods. A shorter time horizon for employers leads to underinvestment in training, which leads to underinvestment in schooling. Policy implications and other contributions of this model are discussed.
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Economic Growth and Labor Standards: Evidence from a Dynamic Panel Data Model
Michaël Bonnal
Review of Development Economics, February 2010, Pages 20-33
Abstract:
The relations between economic growth and international labor standards are explored in a panel of 121 countries from 1974 to 2004. A large literature has empirically tested the neoclassical and endogenous growth models using cross-sectional or panel regressions. Here, the growth model is augmented with labor standards. A dynamic panel data model is used to account for the endogeneity of the determinants of economic growth and labor standards. Two measures of labor standards are used: The rate of work injuries and the rate of strikes and lockouts. The estimation results show that higher levels of labor standards are associated with higher rates of economic growth.
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Viral Acharya, Ramin Baghai & Krishnamurthy Subramanian
NYU Working Paper, January 2009
Abstract:
We provide empirical evidence that strong dismissal laws appear to have a positive effect on the innovative pursuits of firms and their employees. Stringent labor laws provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify the effect of dismissal laws by exploiting the time-series variation generated by staggered country-level law changes. Using fixed effect panel regressions and difference-in-difference tests, we find that innovation is fostered by stringent laws governing dismissal of employees. In addition, stringent dismissal laws disproportionately influence innovation in the more innovation-intensive sectors of the economy. Finally, we complement our cross-country results with firm-level tests within the United States that exploit a dis-continuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act.
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The Impact of Foreign Outsourcing on Wage Inequality in US Manufacturing: New Evidence
Nobuaki Yamashita
Economics Letters, forthcoming
Abstract:
Re-examining the impact of foreign outsourcing on wage inequality in US manufacturing with a new methodology shows that increased parts and components imports from developing countries tended to increase wage inequality but imports from developed countries had no such effect.
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Policies to Create and Destroy Human Capital in Europe
James Heckman & Bas Jacobs
University of Chicago Working Paper, January 2010
Abstract:
Trends in skill bias and greater turbulence in modern labor markets put wages and employment prospects of unskilled workers under pressure. Weak incentives to utilize and maintain skills over the life-cycle become manifest with the ageing of the population. Reinvention of human capital policies is required to avoid increasing welfare state dependency among the unskilled and to reduce inefficiencies in human capital formation. Policy makers should acknowledge strong dynamic complementarities in skill formation. Investments in the human capital of children should expand relative to investment in older workers. There is no trade-off between equity and efficiency at early ages of human development but there is a substantial trade-off at later ages. Later remediation of skill deficits acquired in early years is often ineffective. Active labor market and training policies should therefore be reformulated. Skill formation is impaired when the returns to skill formation are low due to low skill use and insufficient skill maintenance later on in life. High marginal tax rates and generous benefit systems reduce labor force participation rates and hours worked and thereby lower the utilization rate of human capital. Tax-benefit systems should be reconsidered as they increasingly redistribute resources from outsiders to insiders in labor markets which is both distortionary and inequitable. Early retirement and pension schemes should be made actuarially fairer as they entail strong incentives to retire early and human capital is thus written off too quickly.
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Do Enterprise Zones Create Jobs? Evidence from California's Enterprise Zone Program
David Neumark & Jed Kolko
Journal of Urban Economics, forthcoming
Abstract:
We use new establishment-level data and geographic mapping methods to improve upon evaluations of the effectiveness of state enterprise zones, focusing on California's program. Because zone boundaries do not follow census tracts or zip codes, we created digitized maps of original zone boundaries and later expansions. We combine these maps with geocoded observations on most businesses located in California. The evidence indicates that enterprise zones do not increase employment. We also find no shift of employment toward the lower-wage workers targeted by enterprise zone incentives. We conclude that the program is ineffective in achieving its primary goals.
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Gregory Hooks, Clayton Mosher, Shaun Genter, Thomas Rotolo & Linda Lobao
Social Science Quarterly, March 2010, Pages 228-244
Objectives: It is widely believed that prison construction offers significant economic benefits to local areas. We review the popular and scholarly literature and provide a quantitative analysis of claims.
Methods: We analyze data on all existing and new prisons in the United States since 1960 to assess the impact of these prisons on the pace of public, private, and total employment growth in U.S. counties from 1976 to 2004.
Results: Our results suggest that enhanced human capital is associated with employment gains and cast doubt on the assertion that prisons provide economic benefits to local areas. We provide evidence that prison construction impedes economic growth in rural counties, especially in counties that lag behind in educational attainment.
Conclusions: Based on empirical results, this research casts further doubt on claims that prisons offer a viable economic development option for struggling rural communities. Possible explanations for the failure of prisons to help local areas are explored, including existing corrections officers moving to fill openings, adverse local impacts of prison labor, and paucity of local multipliers when a prison opens.
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Modeling College Major Choices Using Elicited Measures of Expectations and Counterfactuals
Joseph Hotz, Peter Arcidiacono & Songman Kang
Duke University Working Paper, January 2010
Abstract:
The choice of a college major plays a critical role in determining the future earnings of college graduates. Students make their college major decisions in part due to the future earnings streams associated with the different majors. We survey students about what their expected earnings would be both in the major they have chosen and in counterfactual majors. We also elicit students' subjective assessments of their abilities in chosen and counterfactual majors. We estimate a model of college major choice that incorporates these subjective expectations and assessments. We show that both expected earnings and students' abilities in the different majors are important determinants of student's choice of a college major. We also show that students' forecast errors with respect to expected earnings in different majors is potentially important, with our estimates suggesting that 7.5% of students would switch majors if they made no forecast errors.
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The Causes and Consequences of Sectoral Reallocation: Evidence from the Early 21st Century
Andrew Figura & William Wascher
Business Economics, January 2010, Pages 49-68
Abstract:
A number of industries underwent large and permanent reductions in employment growth at the beginning of this decade. We investigate the sources of these permanent changes in employment growth and what the consequences were for the U.S. economy. In particular, we find that relative declines in demand rather than technological innovations were the key drivers of the elevated levels of job destruction and permanent layoffs in the affected industries. In addition, most workers that were displaced in downsizing industries relocated to other sectors. While this process of reallocation led to large increases in productivity (and a reduction in labor's share of aggregate income) in industries shedding workers, it also resulted in prolonged periods of unemployment for many displaced workers, along with sizable reductions in earnings that were consistent with substantial losses in their specific human capital. Putting these pieces together, we estimate the costs to those adversely affected by these events to have been 1/2 percent to 1 percent of aggregate income per year.
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Movie Production Incentives: Blockbuster Support for Lackluster Policy
William Luther
George Mason University Working Paper, January 2010
Abstract:
In the last decade, state governments have "gone Hollywood," or tried to, by enacting dozens of movie production incentives (MPIs), including tax credits for film production. Hollywood might be expected to wield influence in the California state legislature, but it is more surprising to see movie and TV executives throwing their weight around in Louisiana, Massachusetts, Michigan, New Mexico, and South Carolina. All these states and most others have enacted MPIs. Those who were quickest and most generous have landed productions. Other states are left empty-handed despite having offered embarrassingly generous tax abatements to attract filmmakers. Based on fanciful estimates of economic activity and tax revenue, states are investing in movie production projects with small returns and taking unnecessary risks with taxpayer dollars. In return, they attract mostly temporary jobs that are often transplanted from other states. States claim to boost job training with MPIs, but these tax incentives often encourage individuals to gain skills that are only employable as long as politicians enact ever larger subsidies for the film industry. Furthermore, the competition among states transfers a large portion of potential gains to the movie industry, not to local businesses or state coffers. It is unlikely that movie production incentives generate wealth in the long run. Most fail even in the short run. Yet they remain popular. Florida Governor Charlie Crist (R), Michigan Governor Jennifer Granholm (D), New Mexico Governor Bill Richardson (D), Oregon Governor Ted Kulongoski (D), Ohio Governor Ted Strickland (D), and Texas Governor Rick Perry (R) in particular have strongly pushed for MPIs to encourage film production in their states. In California, a state that avoided offering credits until very recently, Governor Arnold Schwarzenegger hopes that they will lure back productions now moving to other states. In the rare case when the executive branch rejects the use of MPIs, as Indiana Governor Mitch Daniels (R) did in 2008, or strongly questions them as Iowa Governor Chet Culver (D) and Rhode Island Governor Don Carcieri (R) have done recently, their concerns are overridden with resounding support from the state legislature and incentive beneficiaries. Politicians are not alone. While the occasional letter to the editor warns otherwise, most citizens view state-funded film production in a positive light, a win-win for everyone. This report describes the various incentives that states have enacted, explains their undeserved popularity, and makes an argument for their immediate discontinuance. Key Findings: Forty-four states now offer significant movie production incentives (MPIs), up from five states in 2002, and twenty-eight states offer film tax credits; In the face of state budget pressures and preposterously generous incentives in Louisiana and Michigan, states may curtail or even terminate their MPI programs. Kansas and Iowa have suspended theirs, Kansas for two years to save revenue and Iowa briefly to investigate corruption; MPIs have often escaped routine oversight about benefits, costs and activities; Spurious research is common in campaigns for film tax credits, often featuring dramatic job creation claims. A recent study concluded that Pennsylvania's film tax credit produces net benefits of $4.5 million by assuming that any business interacting with the film industry would not exist but for the credit. MPIs create mostly temporary positions with limited options for upward mobility; The MPI experience demonstrates that a politically connected industry can grow if the state greatly reduces its taxes, but states should have a tax system that operates as a welcome mat to all industries, not just those politicians have picked.
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Why Japanese Workers Remain in the Labor Force So Long: Lessons for the United States?
John Williamson & Masa Higo
Journal of Cross-Cultural Gerontology, December 2009, Pages 321-337
Abstract:
As part of the search for ways to increase labor force participation rates among older workers in the United States, it makes sense to take a close look at evidence from Japan, one of the few industrial countries with a substantially higher labor force participation rate among older workers, particularly men, than the United States. Based mainly on prior studies and original interview data, we first discuss five potential factors which help explain why Japanese workers remain in the labor force as long as they do: (1) perceived economic necessity; (2) the large fraction of workers who are self-employed; (3) a culture that puts a high value on remaining in the labor force throughout the life course; (4) the long healthy life expectancy; and (5) the government's role in facilitating the labor force participation of older workers. We suggest that the Japanese national cultural value on remaining economically productive well into old age clearly underlies the development of the government's legislative initiatives aiming to extend the working lives of older workers. We then outline three policy suggestions for those seeking to increase labor force participation rates among older U.S. workers: (1) increase the financial incentive to workers who remain in the labor force; (2) improve public programs designed to foster efforts by older workers to become self-employed; and (3) increase the extent of government efforts to link older workers to prospective employers.