Reservation Wages and the Wage Flexibility Puzzle

February 29, 2016
By: Felix Koenig ; Alan Manning ; Barbara Petrongolo
Wages are only mildly cyclical, implying that shocks to labour demand have a larger short-run impact on unemployment rather than wages, at odds with the quantitative predictions of the canonical search model – even if wages are only occasionally renegotiated. We argue that one source of the wage flexibility puzzles is plausibly the model for the determination of reservation wages, and consider an alternative reservation wage model based on reference dependence in job search. This extension generates less cyclical reservation wages than the canonical model, as long as reference points are less cyclical than forward-looking components of reservation wages such as the arrival rate of job offers. We provide evidence that reservation wages significantly respond to backward-looking reference points, as proxied by rents earned in previous jobs. In a model calibration we show that backward-looking reference dependence markedly reduces the predicted cyclicality of both wages and reservation wages and can reconcile theoretical predictions of the canonical model with the observed cyclicality of wages and reservation wages
Keywords: job search, reservation wages, wage cyclicality, reference dependence
JEL: J63 J64 E24

The contribution of the minimum wage to US wage inequality over three decades: a reassessment

February 29, 2016
By: David H. Autor ; Alan Manning ; Christopher L. Smith
We reassess the effect of minimum wages on US earnings inequality using additional decades of data and an IV strategy that addresses potential biases in prior work. We find that the minimum wage reduces inequality in the lower tail of the wage distribution, though by substantially less than previous estimates, suggesting that rising lower-tail inequality after 1980 primarily reflects underlying wage structure changes rather than an unmasking of latent inequality. These wage effects extend to percentiles where the minimum is nominally non‐binding, implying spillovers. We are unable to reject that these spillovers are due to reporting artifacts, however.

Top Incomes and Human Well-Being Around the World

February 29, 2016
By: Richard V. Burkhauser ; Jan-Emmanuel De Neve ; Nattavudh Powdthavee
The share of income held by the top 1 percent in many countries around the world has been rising persistently over the last 30 years. But we continue to know little about how the rising top income shares affect human well-being. This study combines the latest data to examine the relationship between top income share and different dimensions of subjective well-being. We find top income shares to be significantly correlated with lower life evaluation and higher levels of negative emotional well-being, but not positive emotional well-being. The results are robust to household income, individual’s socio-economic status, and macroeconomic environment controls.
Keywords: Top income, life evaluation, well-being, income inequality, World Top Income database, Gallup World Poll
JEL: D63 I3

Genuine Saving and Conspicuous Consumption

February 18, 2016
By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics, Umeå University,) ; Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
Much evidence suggests that people are concerned with their relative consumption, i.e., their own consumption relative to that of others. Yet, conspicuous consumption and the corresponding social costs have so far been ignored in savings-based indicators of sustainable development. The present paper examines the implications of relative consumption concerns for measures of sustainable development by deriving analogues to genuine saving when people are concerned with their relative consumption. Unless the positional externalities have been fully internalized, an indicator of such externalities must be added to genuine saving to arrive at the proper measure of intertemporal welfare change. A numerical example based on U.S. and Swedish data suggests that conventional measures of genuine saving (which do not reflect conspicuous consumption) are likely to largely overestimate this welfare change. We also show how relative consumption concerns affect the way public investment ought to be reflected in genuine saving.
Keywords: Welfare change; investment; saving; relative consumption
JEL: D03 D60 D62 E21 H21 I31 Q56

Paradox Lost?

February 18, 2016
By: Easterlin, Richard A. (University of Southern California)
Or Paradox Regained? The answer is Paradox Regained. New data confirm that for countries worldwide long-term trends in happiness and real GDP per capita are not significantly positively related. The principal reason that Paradox critics reach a different conclusion, aside from problems of data comparability, is that they do not focus on identifying long-term trends in happiness. For some countries their estimated growth rates of happiness and GDP are not trend rates, but those observed in cyclical expansion or contraction. Mixing these short-term with long-term growth rates shifts a happiness-GDP regression from a horizontal to positive slope.
Keywords: Easterlin Paradox, economic growth, income, happiness, life satisfaction, subjective well-being, transition countries, less developed nations, developed countries, long-term, short-term, trends, fluctuations
JEL: I31 D60 O10 O5

Personality Traits and the Evaluation of Start-Up Subsidies

February 18, 2016
By: Caliendo, Marco (University of Potsdam) ; Künn, Steffen (Maastricht University) ; Weißenberger, Martin (University of Potsdam)
Many countries support business start-ups to spur economic growth and reduce unemployment with different programmes. Evaluation studies of such programmes commonly rely on the conditional independence assumption (CIA), allowing a causal interpretation of the results only if all relevant variables affecting participation and success are accounted for. While the entrepreneurship literature has emphasised the important role of personality traits as predictors for start-up decisions and business success, these variables were neglected in evaluation studies so far due to data limitations. In this paper, we evaluate a new start-up subsidy for unemployed individuals in Germany using propensity score matching under the CIA. Having access to rich administrative-survey data allows us to incorporate usually unobserved personality measures in the evaluation and investigate their impact on the estimated effects. We find strong positive effects on labour market reintegration and earned income for the new programme. Most importantly, results including and excluding individuals’ personalities do not differ significantly, implying that concerns about potential overestimation of programme effects in absence of personality measures might be less justified if the set of other control variables is rich enough.
Keywords: start-up subsidies, evaluation, self-employment, personality, treatment effects
JEL: C14 L26 H43 J68

Not Working at Work: Loafing, Unemployment and Labor Productivity

February 18, 2016
By: Burda, Michael Christopher ; Genadek, Katie ; Hamermesh, Daniel
Using the American Time Use Survey (ATUS) 2003-12, we estimate time spent by workers in non-work while on the job. Non-work time is substantial and co-varies positively with the local unemployment rate. While the fraction of workers who spend some time in non-work varies pro-cyclically, the average time spent by workers in non-work conditional on any positive non-work varies countercyclically. These results are consistent with a model in which heterogeneous workers are paid efficiency wages to refrain from loafing on the job. That model also predicts relationships of the incidence and conditional amounts of non-work with wage rates and unemployment benefits that are observed in links of the ATUS to data characterizing states unemployment insurance schemes.
JEL: J22 E24 J30