Abstract
Abstract Labor market policies succeed or fail at least in part depending on how well they reflect or account for behavioral responses. Insights from behavioral economics, which allow for realistic deviations from standard economic assumptions about behavior, have consequences for the design and functioning of labor market policies. We review key implications of behavioral economics related to procrastination, difficulties in dealing with complexity, and potentially biased labor market expectations for the design of selected labor market policies including unemployment compensation, employment services and job search assistance, and job training.
Highlights
Background and motivation The GreatRecession of 2007 to 2009 and its aftermath have been a trying period for American workers
We briefly review selected topics in labor market policy through the lens of behavioral economics
Behavioral economics suggests new directions for experiments with alternative incentive schemes in unemployment insurance and related programs that recognize the role of self-control in returning to work
Summary
Implement some form of wage loss insurance Individuals return to work when they get a job offer paying above their reservation wage. The combined effect might be to lead individuals to be irrationally reluctant to accept job offers below their preseparation wage, to be unwilling to relocate to areas with greater labor market opportunities, and to search mainly for jobs like their previous one or to pass up reasonable opportunities while waiting for their old job (or one just like it) to return This phenomenon has been called “retrospective wait unemployment” and is important for longtenured workers displaced from high-wage sectors in decline such as autos and steel (Summers 1986; Balls et al 1991). The effects of biased wage expectations or reference dependence with respect to those expectations call into question the likely efficacy of partial wage insurance at speeding up returns to work for displaced workers These behavioral concerns are consistent with the limited impacts on reemployment rates and job search efforts found in a Canadian demonstration project testing partial-replacement wage insurance for displaced workers (Bloom et al 2001). The benefits of such a redesign in mitigating the effects of biased wage expectations and loss aversion must be weighed against the possible costs it might impose on targeting and allocative efficiency
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