Assessing policies to equalize opportunity using an equilibrium model of educational and occupational choices

The inter-generational correlation of education in the U.S. is tremendous. For instance, in PSID data from 1990, young males with college-educated parents had a 70% chance of attending college. But those with high school drop-out parents had only a 15% chance. In this paper, we analyze the impact of college attendance bonus schemes designed to increase college attendance rates (and PV of lifetime income) of youth from disadvantaged backgrounds. Of course, policies that increase the supply of skilled labor may reduce the college wage premium (see Heckman et al. [Heckman, James, Lochner, Lance and Taber, Christopher, Explaining rising wage inequality: explorations with a dynamic equilibrium model of labor earnings with heterogeneous agents, Review of Economic Dynamics, 1 (1998a), 1–58; Heckman, James, Lochner, Lance and Taber, Christopher, General-equilibrium treatment effects: a study of tuition policy, American Economic Review, 88:2 (1998b), 381–386]). This may have the unintended consequence of wiping out most of the gains to the targeted groups. The strength of such equilibrium effects on wages depends on the substitutability between different types of labor. Thus, it is important to evaluate education subsidies within an equilibrium framework that allows for flexible patterns of substitution across factor inputs. This is exactly what we do here, using an overlapping generations equilibrium model of the U.S. labor market fit to PSID data from 1968 to 1996. The model allows for imperfect substitution among types of labor differentiated by education, gender, age and ten (1-digit level) occupations — a much finer differentiation than has been considered in prior work.We find that very large college attendance bonuses are necessary to equate college attendance rates between youth whose parents had only high school degrees or were high school dropouts and youth whose parents attended at least some college. The size of these bonuses far exceeds any reasonable measure of college costs; suggesting the “costs” the bonuses overcome are primarily psychic or effort costs. For example, youth from disadvantaged backgrounds may be poorly prepared for college. This suggests that bonuses targeted at college age youth are probably a very inefficient way to reduce inequality. Earlier intervention is likely called for.     

Occupational self-selection in a labor market with moral hazard

This paper studies the determinants and implications of self-selection when firms imperfectly observe worker effort. The effects of the resulting moral hazard problem on the self-selection mechanism are analyzed in a model in which workers simultaneously choose an employment sector and an effort level. The implications of the model reveal that in the presence of moral hazard, workers’ effort decisions become an additional mechanism determining the pattern of selection into sectors. Workers’ sector-specific endowments impact sectoral allocation through their effect on workers’ comparative advantage as well as their effect on workers’ shirking propensity. The model is then used in an empirical application that analyzes workers’ self-selection into white collar and blue collar occupations. The estimation results, based on data from the National Longitudinal Survey of Youth, suggest that workers’ occupational self-selection leads to higher wages and lower dismissal rates in both occupations, compared to an economy in which workers are randomly assigned to each occupation. The difference in dismissal rates between the two occupations is driven by the higher expected productivity in the white collar sector. The positive effects of occupational sorting diminish as the labor market becomes increasingly characterized by moral hazard. Results also suggest that human capital investments in skills that are most relevant to blue collar jobs may generate higher wages and lower dismissal rates in both white collar and blue collar occupations.     

Is Racial Exclusion Gendered? The Role of Residential Segregation in the Employment Status of Black Women and Men in the US

This paper explores one angle of the race/gender/class intersection by examining the effect of residential segregation on black women and men's employment status in the US. Do the exclusionary mechanisms embedded in racially-based residential segregation affect black women and men's economic outcomes similarly, or are their employment outcomes differentiated by their different gender statuses? This paper lays out a theoretical framework for understanding the role residential segregation may play in shaping black men and women's labor market outcomes, outlining key mechanisms that link residential segregation to labor market inequality, highlighting the ways in which many of these mechanisms are gendered as well as racialized. This paper also offers an analytic design to test the hypotheses developed in this exploration.     

Financial intermediation with credit constrained agents

This paper studies the effects of financial intermediation on aggregate levels and the distribution of resources in an economy with credit-constrained heterogeneous agents and occupational choice. Whether an agent becomes an entrepreneur depends on a realized entrepreneurial ability and accumulated assets needed to finance a business project with uncertain returns. I compare a steady state of an economy with financial intermediation to an economy in which entrepreneurs must finance their projects only from their savings. The simulated economy with financial intermediation matches well the US data on the distribution of occupations and resources. The steady state welfare and efficiency gains from financial intermediation are large.     

Are computers driving real wages down?

The annual growth in mean employee compensation plummeted from 2.6% in 1947–73 to 0.4% in 1973–2003. Using both time-series regression and pooled, cross-section, time-series regression analysis for 44 industries over the period 1953–2000, we find that earnings growth is positively related to overall productivity growth, capital investment excluding computers, and the unionization rate. We find also that computerization has a significant negative effect on earnings growth, but no evidence that the growth of skills or educational attainment has any statistically significant effect on earnings growth. The dominant factors explaining the slowdown in wage growth are decline in the unionization rate, slowdown in both TFP growth and overall capital investment, and acceleration in computer investment.     

Domestic R&D and offshoring: does offshoring reduce knowledge production?

An important question in industrialized countries is whether offshoring activities reduce the probability of performing own research and development (R&D) or whether the R&D intensity falls in firms that already have R&D activities. This question is addressed using a unique data set that combines survey and register data. No evidence is found for a lower probability of own R&D after offshoring takes place compared to before. Moreover, offshoring does not lead to lower R&D intensity in general. However, firms that offshore R&D activity have larger R&D intensity after offshoring has taken place, which suggests that R&D performed at home is complementary to foreign R&D.     

The labour market effects of offshoring of small and medium-sized firms: micro-level evidence for Germany

Small and medium-sized enterprises (SMEs) are the economic powerhouse of many OECD countries (perhaps most prominently so in Germany). Yet, the labour market dynamics caused by the internationalization of their production activities are largely unexplored. We use survey-based micro-level data for Germany to explore the employment effects of offshoring of SMEs, relying on propensity score matching and difference-in-difference analysis. We find evidence for a downsizing effect in the immediate aftermath of offshoring whereas, initially, job creation is not spurred. In the medium run, we find evidence for a slowing down of employment dynamics of offshoring firms (that tend to belong to the better performing SMEs in Germany) relative to non-offshoring firms. Even though our results do not point to a net employment loss in the medium run, our evidence suggests that offshoring may lead to less jobs being created. This conclusion cannot be confirmed for large companies.