Tuesday, September 30, 2014

A backward-bending job search intensity supply curve for modeling the labor market

Unemployed on a job search at Watford labor exchange. Russavia
We expect the unemployment rate to increase in a recession and the opposite when the economy improves. Yet, during an expansion, some non-employed persons do not seem to be looking for a job, or are slack about doing so. It would be insightful to understand the search efforts or intensity of search the unemployed employ faced with improving economic conditions. As with employment, search efforts are complements to labor market conditions. At expansions, we expect an increase in search efforts and vice versa in recessions. But to what degree? Wealth and risk aversion also influence search efforts. In a model of job search intensity in relation to labor market conditions, the evidence is undeniable that labor market conditions, risk aversion, wealth and job search methods does influence job search intensity.

In classical economics, there is a backward-bending labor supply curve that models choices made between working and leisure time. According to the curve, at low wage rates, increased wages lead people to work more and at higher wage rates, people work less, substituting leisure for work. Because job search and job-finding rates are related to macroeconomic conditions, many researchers have desired to understand if an association exists. In standard search models, workers’ search intensity is procyclical but recent models seem to debate otherwise, asserting that workers’ search intensity should be acyclical. Let’s assume our job search intensity is based on increased expected income and an accompanying increase in expected consumption. If a rational person thinks that looking for and getting a job will increase his income and hence, his consumption, he’d tend to be more energetic in finding one. Let’s also make an allowance for the procyclical and acyclical arguments and assume that labor market conditions (meaning macroeconomic conditions) can either have a positive impact on the job search effort or none at all. According to Jeremy Schwartz of Loyola University, Maryland, USA, what we’ll have as a result is a backward-bending job search intensity supply curve.
Job search intensity curve as depicted in the study by Jeremy Schwartz
As you can see from the graph, there are two parts to the graph, the lower half and the upper half. At the lower half, the procyclical debate prevails - as labor market conditions improve, we’d expect an increase in job search intensity and in the upper half, a countercyclical argument comes into play – as labor market conditions improve, workers tend to substitute leisure for work and are hesitant to put much effort in looking for a job. The shift in the curve favors the acyclical debate that labor market conditions and job search intensity have no association or relation.
  • Labor market conditions have a positive relation to job search intensity.

  • This is similar to the classical substitution effect. As labor market conditions improve, job search effort is expected to have a greater impact on expected income and the opportunity cost of not searching increases, therefore workers substitute away from leisure towards job searching. This is the bottom half in the figure above. Labor market conditions and job search intensity are complements in the job search process. Job search intensity is procyclical. This is the condition that dominates in most cases when the economy improves. The labor force participation rate (LFPR), the ratio of the labor force to the civilian population, is procyclical. When counting the average number of job search methods employed by the unemployed in looking for a job, this measure was also found to be procyclical.

  • Labor market conditions have a negative relation to job search intensity.

  • This is similar to the classical income effect. As the economy improves and the probability of finding a a job increases, workers’ bargaining power increases and firms are forced to increase wages. This increase in expected income and expected consumption decreases the search effort as workers focus more on leisure activities. This relation is also found to favor the wealthy. In this situation, labor market conditions and job search intensity are substitutes. This countercyclical behavior though is found of minor importance when compared to the job search procyclical behavior.

  • Labor Market conditions and the job search intensity appear to show no evident relation.

  • When you look at the graph, the shift in the curve from S1 to S2 represents a shift in workers’ risk attitudes from risk seeking to risk aversion. At any given labor market condition, greater risk aversion results in higher levels of job search effort. Also, less wealthy risk averse individuals have greater job search efforts than their more wealthy counterparts.

This model of the labor market is quite interesting because it attempts explaining all cases of job search behavior which will greatly improve policies like unemployment insurance and other policies that reduce the unemployment rate and/or increase social welfare.

Finally, Schwartz’s study on the procyclical nature of job search methods found that sending out resumes and looking at advertisements have the lowest opportunity cost on effecting an exit from unemployment while contacting placement centers, unions and schools have the lowest impact.

You can find and download the full study online: The Job Search Intensity Supply Curve: How Labor Market Conditions Affect Job Search Effort.

Saturday, September 20, 2014

My interest is not your interest or how "defenders of the public" commit suicide

Imagine a university community harassed by cultism. The students’ union (SU) decides to take up the challenge, supported by the Vice-Chancellor (VC) and the Governing Council. The mandate of the SU was to make sure the campus environment is conducive to learning and provide freedom from fear of the unknown. The SU sets up several curfews, school breaks, library and extra-curricula restrictions. Because the cost of knowledge and information on how cultism operates and SU activities is very high for the studentship, these restrictions become a burden, dragging both curricula and extra-curricula activities. The SU gains in political power, in secrecy, and crushes any supposed opposition. Eventually, the SU loses sight of its target and becomes a threat of its own, but because of its privileged status, it does everything possible to ensure the status quo. Cultism is never defeated; it thrives in a benign form. The studentship suffers.

The message of chapter 3 of the book,How to import modern Western Institutions Suppresses Economic Growth?, entitled “MODERN ROBBERS: SPECIAL INTEREST GROUPS AND BRAKING THE ECONOMIC GROWTH”, is clear – an over-regulated and over-protected society makes corruption profitable for both businesses and the government while initiatives for fighting corruption can only make the situation in such a climate worsen.

Advocacy groups or special interest groups are set up for many purposes, but because they have no power of their own, they use the state apparatus to care for the needy, protect the vulnerable, defend the weak, the sick and the “unwise”. On the other hand, how far can a society support these aspirations? Because the average citizen is incapable of defending himself, assuming rational ignorance, these groups have thrived with the support of the government. They could go far. Regulatory and state interference, growth of state apparatus, increase in extra-budgetary spending and state insurance programs along with reasonable protective measures that bar entry into the market and weaken property rights are some of the burdens these groups can impose on emerging markets.

Using Russia as a case study, Konstantin Yanovsky, Cherney D, and Shadrin A, state that as a result of information asymmetry and likelihood of manipulation of the state, far from defending the weak and consumers’ interests, special interest groups have succeeded in dragging the economic growth of underdeveloped countries, and even developed ones.

Due to the “coupling of property and authority”, intensification of entrepreneurs with special relationship with the government have resulted in an exaggeration of the role played by the authorities in decision making concerning investment; over-the-board redistribution of property; a slow-down of economic growth due to parasitism; the rich and privileged class turning out to be the “weak”, especially bankers and state-owned enterprises; failure of the courts and authorities to enforce legislation, entrenching corruption as a result; inordinate accumulation of property by private persons and etcetera.

Some of the solutions proffered by the authors are the following:
  • Transparency
  • Government activities should be made transparent to the citizenry. The model it proposes is that of the Library of Congress (LOC) which website provides access to accurate, timely, and complete legislative information for Members of Congress, legislative agencies, and the public.

  • Involve civil society in discussions and decision making
  • The chapter made reference to the Regulations.gov website as an example where citizens can comment on proposed regulations and related documents published by the U.S. Federal government.

  • Just and equitable legal system
  • Crime and its punishment should be made commensurate.

  • License Institutions and self-regulating Institutions
  • Institutions that serve as lobby groups should choose to self-regulate, making it easier and cheaper to combating corruption.

  • Enforce Antitrust
  • Work towards anti-monopoly, therefore reducing monopoly and the loss of society’s welfare that comes with it.

  • Reduce over-protection of rights and privileged sectors of the society
  • General approaches to property protection and, correspondingly, penalties for rights violations should be universal.

Notwithstanding the poor quality of translation from the Russian, you can download that chapter of the book, chapter 3, and spend about some hours acquainting yourself with the perils of over-protection, over-regulation and how special-interest groups, though good intentioned at the start, might eventually commit suicide by losing focus.

Thursday, September 18, 2014

Quite likely humans show equivalent attitudes to risk

Is there a common “risk preference” that is independent of country, culture, profession or aspirations of making a loss or gain? Are survey questions better in accessing global risk and uncertainty attitudes than incentivized measures? What professions are more risk averse, risk seeking or are correlated with high uncertainty?

What is risk and uncertainty? Risk is when the outcome of an event has known probabilities but the process of receiving the outcome causes some anxiety or concern. Possibility of risk leads rational persons to make investment. When the probability of the outcome is unknown or ambiguous, then uncertainty arises. Uncertainty bred the Insurance market.

In a first of its kind study, Vieider, Ferdinand M. and six other researchers in a working paper entitled: Common Components of Risk and Uncertainty Attitudes across Contexts and Domains: Evidence from 30 Countries, sought for answers to the above questions. Using incentivized measures and survey questions, they looked for a correlation between risks and uncertainties in contexts like finance, sports, driving etc and evaluated these contexts against the possibilities of gains and losses.

The study compared binary lotteries or prospects against survey questions and sought for correlations between both techniques in contexts such as sports, driving, finance, health, occupational, social and general risks, evaluating both the gains and losses domains. It also elicited responses from 2939 subjects from 30 different countries based on gender, study major and other macroeconomic factors like GDP per capita and the gini coefficient, a measure of inequality in a country.

A typical lottery task was:
In the present experiment, you will be asked to choose repeatedly between a fixed amount of money and a lottery. The lottery will always give you a chance to win one of two amounts of money. Figure 1 shows a typical choice task. You are asked repeatedly to choose between playing the lottery and obtaining a sure amount of money. For each row, you are asked to indicate whether you would prefer to play the lottery or to obtain the sure amount of money by ticking the preferred option.
A sample risk survey question runs thus:
How do you see yourself? Are you generally a person who is fully willing to take risks or do you try to avoid taking risks? Please tick a box on the scale below, where 0 means “risk averse” and 10 means “fully prepared to take risks”:

A brief of the results obtained from the study.

  1. Does a correlation or association exist between the two different techniques above i.e the incentivized lottery and the survey question?

  2. A correlation does exist that cuts across individuals and countries when considering risk and uncertainty attitudes, but the strength of this association is somewhat variable and could be affected by cultural factors within countries.

  3. When it comes to risk premium, does a relation exist, in absolute values?

  4. Risk premium, in this case, is defined as the expected value of a prospect or lottery minus the sure amount of money. Most persons in Western countries (except the UK) were considered to be risk averse while people in developing countries were found to be typically risk seeking. Countries considered very risk seeking were Nigeria and Nicaragua and to a lesser degree, Ethiopia, Vietnam and Peru. It was found that individuals who are willing to take risks are less willing to take an insurance policy.

  5. Does a relation exist between risky gains and risky losses?

  6. It was decided that persons who are willing to take risks when there is a possibility of gains are highly likely to take risks when there are possibilities of losses. There seems to exist an underlying component of risk attitudes.

  7. What do biology, study majors and macroeconomics reveal?

  8. An association was found between gender and risk preferences, with women generally more risk averse than men. As to age, weak and inconsistent effects were discovered.

    Where it concerns study majors, persons who study the Arts are generally risk seeking but seem to be risk averse when it comes to financial risks. Mathematics and natural science majors tended to be less or equivalent risk takers compared to economists while students of the Humanities and Social Sciences tend to be reluctant to accept risks.

    In the field of sports, persons from rich countries are more willing to take risks. People from countries with low GDP per capita compared to the United States tend to be more willing to accept uncertainty. In general, when it concerns uncertainty attitudes, there is a clear relation between most contexts (or risk areas) and domains (areas of gains or losses).

You can download and read the full study at the research papers in economics site.

Conclusion: The possibility exists that across contexts and domains, a global “risk preference” does exist.

Thursday, September 4, 2014

If small firms cannot grow in isolation, how extended should be its social network?

Can a small firm plot its own growth in isolation, relying solely on its efficiency and technology? Competition rewards the least cost producer, increasing its market share and profits, but when a small firm neglects the benefits of peer group social interactions, both within and across the industry, it could be working to its peril.

Gibrat’s law might state that firm size growth is a random process, yet the jury is out and other considerations could supplant chance in creating a path for the growth of small firms.

These considerations deal with both the characteristics of the firm and that of its environment.

In contrast, in a recent study based on manufacturing firms in a developing economy, Tunisia, the author, Amara Mohammed, concludes that Gibrat’s law does not hold; that is, small firms do not grow faster than larger firms because they are small. On the other hand, young firms were found to grow faster than older ones and for that growth to be sustained, they need a more closed network.

This blog piece was inspired by the paper published by Amara Mohammed in the Economics Bulletin, Volume 34, Issue 1, titled: Gibrat’s Law and peer group effect: the case of Tunisian small manufacturing companies.