Labor Market Inefficiency Research Articles

Bureaucracy and labor market inefficiency: A contest model

The theory of bureaucracy describes the internal rent-seeking incentives in government agencies. A consequence is that a government agency competing with other agencies for budgetary funding will value rent-seeking ability rather than individual productiveness when choosing who to hire. With private-sector firms valuing personal productiveness, I look at labor-market incentives when job seekers facing employment options can choose effort at becoming productive and effort at becoming better rent seekers. A nested lottery contest with the two types of effort is used to show that, under reasonable conditions, prospective employees invest in the latter type of effort more than in the former. The productiveness of labor is therefore diminished in the private sector when a government agency is hiring in the same labor market.

Moneyball in offensive versus defensive actions in football

ABSTRACT Market inefficiencies, known as Moneyball effect, have been recently documented in different sports and their scope largely remains an empirical question. This article focuses on football, where fans and club managers seem to value forwards more than defenders. Apparently, football rules imply equally important roles for goals scored and goals conceded in a team win. Economic theory in this case suggests that marginal returns on offensive and defensive efforts should be equal. This prediction can be potentially violated, resulting in labour market inefficiency. To test this hypothesis, we use two separate data sets at team-game and player-season levels (1224 and 772 observations, respectively) from two seasons (2017/18–2018/19) of the German Bundesliga. We compare the relative contribution of the offensive and defensive actions to a team win with the same relative contribution to players’ market value and show that defensive actions are relatively underestimated by the market compared to the offensive.

Skill-biased technical change and labor market inefficiency

The economic literature has so far produced limited (country-level) evidence on the magnitude of skill-biased technical change (SBTC), and has not yet investigated the extent to which, coupled with labor market imperfections, SBTC is associated with inefficient use of labor. We present a novel approach to estimate SBTC allowing for the presence of labor market inefficiency. Using data taken from the World Input-Output Database across 38 countries and 30 sectors, we provide the first country-sector evidence of SBTC during the 1995–2005 period and quantify the extent of economic inefficiency arising from labor market imperfections. On average, we find that the productivity of skilled workers grows by approximately 11.5% more than that of unskilled workers, mostly driven by SBTC (13.7%), rather than factor accumulation (−2.1%). Economic inefficiency decreases by 10.5% on average, and labor market rigidities are more binding in sectors that are more exposed to technological change. Substantial heterogeneity is also observed.

Refugee inflows, surplus farm labor, and crop marketization in rural Africa

This paper sheds light on the structure of factor and output market frictions to investigate long-term effects of refugee inflows on host farmers. Combining a canonical agricultural household model, the natural experimental setting of mass refugee inflows into Tanzania in the early 1990s, and longitudinal panel data from the host economy, I show that refugee inflows cause market-specific gains and losses. Refugee inflows tighten the off-farm labor market participation constraint, implying an increase in surplus farm labor and labor market inefficiency. On the other hand, I observe a positive impact on the transition from subsistence to crop marketization. This transition is revealed to be primarily due to a reduction in fixed transaction costs around refugee camps, not due to an increase in consumption demand by refugees. While the overall impact on agricultural labor productivity is negative, the “surplus farm labor effect” and the “crop marketization effect” act in opposite directions.

Why Do Firms Fail to Engage Diversity? A Behavioral Strategy Perspective

The persistent failure of organizations to engage diversity—to employ a diverse workforce and fully realize its potential—is puzzling, as it creates labor-market inefficiencies and untapped opportunities. Addressing this puzzle from a behavioral strategy as arbitrage perspective, this paper argues that attractive opportunities tend to be protected by strong behavioral and social limits to arbitrage. I outline four limits—cognizing, searching, reconfiguring, and legitimizing (CSRL)—that deter firms from sensing, seizing, integrating, and justifying valuable diversity. The case of Moneyball is used to illustrate how these CSRL limits prevented mispriced human resources from being arbitraged away sooner, with implications for engaging cognitive diversity that go beyond sports. This perspective describes why behavioral failures as arbitrage opportunities can persist and prescribes strategists, as contrarian theorists, a framework for formulating relevant behavioral and social problems to solve in order to search for and exploit these untapped opportunities.

Optimal trade policy, equilibrium unemployment, and labor market inefficiency

AbstractUnder which circumstances is using trade policies to prevent job losses welfare improving? To answer this question, I incorporate a frictional labor market into the Heckscher–Ohlin model. The results suggest that (a) a country that has an inefficient level of unemployment may experience welfare losses from free trade; (b) having search‐generated unemployment is not sufficient to justify a use of trade policy, because free trade is still optimal when the labor market is constrained‐efficient; and (c) a small country that has an inefficient level of unemployment can use trade policy to improve its welfare.

CAREER DECISION AND READINESS IN UNDERGRADUATE STUDENTS OF LAO PDR

Background and Purpose: In Lao PDR, young people have been striving to earn higher degrees, especially in economics or business administration, in the hope of having more opportunities to be employed in the public sector. Meanwhile, they also assume a high risk of unemployment, since the government intends to limit the number of approved civil servants. As labor demand is smaller than labor supply, there will be labor surplus and, even worse, the labor market is moving away from its equilibrium. This raises the questions of why young people aspire to work in the government and how they react to this phenomenon. Methodology: This research study involved a field survey which collected data from final year undergraduate students studying in the faculties of economics and business administration using a crosssectional questionnaire. The survey was conducted from June to August 2018. A descriptive analysis was employed to identify determinants of education and career decisions together with level of career readiness. Findings: The research findings from a sample of 571 undergraduate students, majoring in economics and business administration at four public universities in 2018, revealed that the most influential factors affecting career preference are job security and prestige. As competition among government applicants increases, they seem not to be well-prepared in terms of employability skills. Contributions: These research findings will be useful for the improvement of national policies relating to education and labor market development that aim to alleviate labor market inefficiency. Keywords: career decision, readiness, employability skill, undergraduate, Lao PDR Cite as: Onphanhdala, P., Philavong, V., & Sengkhamkhoutlavong, B. (2020). Career decision and readiness in undergraduate students of Lao PDR. Journal of Nusantara Studies, 5(1), 1-26. http://dx.doi.org/10.24200/jonus.vol5iss1pp1-26

Business Cycles in Post-Conflict Serbia: The Cycle Is the Trend

As a hypothesis, “the cycle is the trend” means that business cycles are driven primarily by permanent productivity shocks that generate stochastic trends. This study estimates stochastic growth models for Serbia during the 2002Q2–2017Q2 and 2007Q1–2017Q2 periods, thereby accepting the hypothesis. Major findings are as follows. Migration outflows from Serbia to Germany negatively influenced permanent productivity shocks. Permanent productivity shocks were negatively correlated with remittances, which is also suggestive of the negative effect of migration outflows on permanent productivity shocks under the assumption that workers migrate to send money home. Labor market inefficiency pushes workers out of Serbia.

Permanent productivity shocks, migration and the labour wedge: business cycles in South Africa

ABSTRACTThe findings of this study are as follows. First, permanent productivity shocks play a dominant role in South African business cycles. Second, the migration outflow has a negative effect on permanent productivity shocks. Third, a labour wedge that represents labour market inefficiency is significant in South Africa. Fourth, the labour wedge has a positive effect on the migration outflow. These findings are consistent with the hypothesis that labour market inefficiency in South Africa pushes workers out of the country and permanently influences the country’s labour effectiveness, thereby driving South African business cycles.

Civil War, Migration and the Effect on Business Cycles: The Case of Sri Lanka

We estimated a stochastic growth model for Sri Lanka over the 1962–2015 period and found that permanent productivity shocks constituted the largest proportion of the variance in output growth. We computed correlation coefficients between permanent productivity shocks and some variables and found a negative correlation between the shocks and the growth in migration outflows. The findings are consistent with the negative effect of civil war on economic growth from an exodus of skilled workers. We further investigated the factors that drive migration from Sri Lanka to a major migration destination, namely Australia, for educated and skilled Sri Lankans. We regressed the growth rate of the Sri Lankan-born population in Australia on a civil war dummy variable, per worker Australian gross domestic product (GDP), adjusted for the restrictiveness of Australian immigration policy and an estimated labour wedge that represents labour market inefficiency in Sri Lanka. We found that Sri Lankan immigrants in Australia increased with per worker GDP in Australia, civil war and labour market inefficiency in Sri Lanka. The finding suggests that excessive protection of insiders in the Sri Lankan labour market should be abolished to mitigate migration outflows that have continued since the end of the civil war.

A note on “Jobs, Jobs, Jobs: A “New” Perspective on Protectionism” of Costinot (2009)

In this paper, I re-investigate Costinot (2009) in a more general parameter space. The key insight of this paper is that the reason a small open economy uses trade protections is not because of the existence of search frictions in the labor markets, but the real motivation is from labor market inefficiency. I show that the restricted parameter space considered in Costinot (2009) generates an equilibrium with inefficiently high unemployment compared to the constrained-efficient level of unemployment, and thus trade protections can improve welfare. In the more general parameter space considered in this paper, despite the existence of search frictions in a labor market, free trade can be optimal if the labor market is efficient. In addition, unemployment can be inefficiently low and import subsidies are preferable. The result holds true for standard matching functions.

Substitution, entrapment, and inefficiency? Cohort inequalities in a two-tier labour market

Abstract In this article, we provide a longitudinal account of institutionally originated, cohort inequalities in a two-tier labour market, taking Italy as an exemplary case of partial and targeted deregulation. We examine the incidence and career consequences of temporary employment relying on panel data, across reforms implemented in the 1990s and early 2000s. A substitution effect is found for the initial stages of workers’ careers: while the youngest cohorts of school-leavers increasingly enter the flexible labour market, access to stable positions is hampered. Previous experiences in the flexible segment of the labour force also increase the risk of entrapment in temporary jobs. This lock-in dynamic is more visible for post-reforms cohorts and might have increased labour market inefficiency. Indeed, the entrapment risk has risen disproportionately for those individuals whose (un)observed characteristics could instead predict a faster exit from the flexible labour market, possibly towards stable positions. Our findings cast doubts on the transitory nature of temporary work in Italy and on the efficiency of partial and targeted reforms.

Optimal Trade Policy, Equilibrium Unemployment and Labor Market Inefficiency

Why do politicians advocate trade protections to save domestic jobs when neoclassical trade models suggest that small open economies should implement free trade? The novel insight of this paper is that trade protections can be rationalized as a second-best policy that improves the domestic welfare when the equilibrium unemployment is different from the constrain-efficient unemployment. To understand the puzzle, we incorporate a Diamond-Mortensen-Pissarides frictional labor market into the standard Heckscher-Ohlin model of international trade. The model offers various findings. First, when the relative price of the labor (capital)-intensive good increases, equilibrium unemployment decreases (increases). Second, the labor market in a competitive equilibrium is constrained-efficient when the Hosios condition is satisfied. Third, a capital-abundant country with inefficiently high unemployment may experience welfare losses from trade. Conditional on having the same observed trade share, a labor-abundant country with inefficiently high unemployment have an extra welfare gain from international trade that is not present in traditional models without equilibrium unemployment. Finally, when the la- bor market in a small open economy generates inefficiently high equilibrium unemployment, the optimal trade policy is to raise the domestic price of its labor-intensive goods (an import tariff in a capital-abundant country and an export subsidy in a labor-abundant country). Free trade is optimal only when a labor market is initially efficient. The model predictions are sup- ported by patterns of tariffs in WTO member countries.

A Note on 'Jobs, Jobs, Jobs: A 'New' Perspective on Protectionism' of Costinot (2009)

In this paper, I re-investigate Costinot (2009) in a more general parameter space. The key insight of this paper is that the reason a small open economy uses trade protections is not because of the existence of search frictions in the labor markets, but the real motivation is from labor market inefficiency. I show that the restricted parameter space considered in Costinot (2009) generates an equilibrium with inefficiently high unemployment compared to the constrained-efficient level of unemployment, and thus trade protections can improve welfare. In the more general parameter space considered in this paper, despite the existence of search frictions in a labor market, free trade can be optimal if the labor market is efficient. In addition, unemployment can be inefficiently low and an import subsidy is preferable. The result holds true for a large class of commonly used matching functions.

Measuring Occupational Mismatch: Overeducation and Overskill in Europe\u2014Evidence from PIAAC

Occupational mismatch has been a hot topic in the economics literature in recent decades; however, no consensus has been reached on how to conceptualise and measure this phenomenon. We explore the unique opportunity offered by the PIAAC survey to measure occupational mismatch at the individual level based on both education- (overeducation) and skill-based (overskilling) variables by using both objective and subjective measures. For this purpose, we use data on 17 European countries and compute up to 20 different indicators of occupational mismatch. We find that the conceptualisation and measurement of occupational mismatch are indeed important and that education and skill mismatch do not measure the same phenomenon. In fact, only a small percentage of mismatched individuals are mismatched with respect to both education and skill, whereas the majority are mismatched with respect to either education or skill only. At the country level, we find a negative correlation between the incidence of education and skill mismatch, which has important implications for policies aiming to address this labour market inefficiency.

Renting vs buying a home: A matter of wealth accumulation or of geographic stability?

I study the housing tenure decision in the context of a spatial life cycle model with uninsurable individual income risk, plausibly calibrated to match key features of the US housing market. I find that the relatively low ownership rate of young households is mainly explained by their high geographic mobility. Downpayment constraints have minor quantitative implications on ownership rates, except for old households. I also find that idiosyncratic earnings uncertainty has a significant impact on homeownership rates. Based on these results, I argue that the long term increase in ownership rates observed over the period 1993–2009 was not necessarily due to mortgage market innovations and the relaxation of downpayment requirements, as is often argued. Instead, it was simply an implication of US demographic evolution, most notably the decline in interstate migration and, less importantly, population ageing. The model predicts that an increase in the income risk (i.e. higher income inequality) has a positive impact on geographical mobility of young households, which means that young homeowners are less affected by the labour market inefficiency associated with homeownership.

Flexible inflation targeting and labor market inefficiencies

Do congestion externalities offer a reason to depart from complete price stability as the only goal of monetary policy in a New Keynesian model featuring search frictions, and under what conditions is the welfare cost of labor-market distortions sizable? This paper tries to answer these questions by deriving a linear quadratic framework for optimal monetary policy analysis – ala Benigno and Woodford (2005) – that is consistent with a Pareto inefficient labor market allocation, where the Hosios (1990) condition is not satisfied, and as a consequence, the flexible-price steady state of the model is distorted. The results indicate that maximization of expected utility of the representative household is equivalent to minimizing a quadratic loss function that consists of inflation, and two appropriately defined gaps involving unemployment and labor market tightness; and that search externalities give rise to an endogenous cost-push term in the New Keynesian Phillips Curve. Hence, full stabilization of both inflation and the welfare relevant unemployment gap is not feasible and deviation from complete price stability is welfare improving (because it allows to contain inefficient unemployment fluctuations). The inflation-unemployment trade-off and the welfare cost of search externalities are shown to be quantitatively sizable in response to shocks when steady state distortions are large and thereby the cost-push term is more volatile over the business cycle. Finally, a monetary policy rule that responds to unemployment growth rate is presented to be more efficient than a rule responding to unemployment gap.

Sector-Based Analysis of the Education–Occupation Mismatch in the Turkish Labor Market

AbstractThe aim of this study was to investigate the existence of sectorial undereducation and overeducation problems in the Turkish labor market. In order to cope with this issue, the 2009 Household Labor Force Survey (TurkStat), which covers 145,934 individuals within 27 sectors, was utilized. An objective measure of education-occupation mismatch based on the mean level of schooling was used as the main tool in the analysis. The results revealed two important points. Firstly, high levels of undereducation and overeducation problems in the sectoral job groups were found. Secondly, the results showed that these problems are not specific to a few sectors, but they are widespread among many sectoral job groups, which has created serious problems for the Turkish economy. Moreover, we employed Oaxaca decomposition to investigate the effects of overeducation and undereducation on wage outcomes, and the findings indicate that education-occupation mismatches in the Turkish labor market are also reflected on such outcomes. Finally, the Turkish labor market penalizes workers who acquire less education than the adequate level to perform their jobs, whereas it rewards the workers who obtain more education than the adequate level, but not to a considerable extent.Keywords: Overeducation * Undereducation * Sector-based education-occupation mismatch * Human capital * Turkish labor marketIn economics, there is a consensus that education is an essential ingredient of economic growth and personal welfare. The growth literature (i.e., Barro, 1989, 1999; Lucas, 1988; Mankiw, Romer, & Weil, 1992) theoretically and empirically shows that education, ensuring human capital accumulation, positively and significantly affects long-term economic growth.1 In a similar vein, the human capital literature, following the seminal paper of Becker (1964), argues that education increases personal income, as it constitutes the main determinant of workers' productivity, and the workers are paid according to their marginal products. Consistent with this argument, the majority of the existing empirical studies show that the return of education is significantly positive. For example, measures of the return of education in the Turkish labor market indicate a high return for each year of schooling (Bakis, 2012; Dayioglu & Kasnakoglu, 1997; Oksuzler, 2008; Ozcan, Ozcan, & Ucdogruk, 2003; Tansel, 1994).2An implicit assumption in these literatures is that workers' human capital is efficiently utilized in the labor market and, relatedly, workers earn wages equal to their marginal products. However, another strand of literature, following the seminal papers of Freeman (1976) and Duncan and Hoffman (1981), questions this implicit relationship and draws attention to potential labor market inefficiencies in matching occupations and workers according to the required and actual skill levels. This mismatch in the labor market potentially leads to some workers being placed in occupations that require less human capital than the worker has acquired. Such a worker who has acquired more education and has more human capital than his/her job requires is said to be overeducated, whereas a person with less education than what his/her job requires is classified as undereducated. An implication of this overeducation and undereducation problem is that overeducated (undereducated) workers are likely to earn less (more) income compared to similarly educated ones whose education levels actually match their jobs.In this paper, we examine the prevalence of overeducation and undereducation in Turkey since there are there are substantial inefficiencies in the Turkish labor market that may lead to education- occupation mismatches. According to results of Turkish Household Labor Force Surveys, more than half of the workers found jobs on their own rather than through employment agencies, which indicates possible inefficiencies in job searching and matching. …

Fertility and rural labor market inefficiencies: Evidence from India

Informational frictions are an important source of inefficiency in rural labor markets. I examine the role of family size in mitigating costs that arise due to these frictions. I show that an increase in family size decreases the demand for hired labor in tasks for which worker output and effort are difficult to observe (monitoring intensive tasks). In contrast, in tasks for which worker output is easily observed, I find no relationship between family size and hired labor use. I provide evidence that supervision costs drive the preference for family labor in monitoring intensive tasks. As a consequence, larger families spend less time in supervision. I develop a theoretical framework, that illustrates the empirical challenge of identifying the link between family size and labor demand: factors that determine labor demand on the farm also determine family size. To address this endogeneity problem, I use exogenous variation in fertility induced by both a family planning policy in India, which provides cash incentives for sterilization take up, and income shocks. I show that while neither incentive payments nor income shocks by themselves are valid instruments for completed fertility, their interaction is a valid instrument. I infer that population control policies must take into account market inefficiencies that make larger families profitable.

Estimating Worker Information Gaps From A Stochastic Wage Frontier: A Study Of Canadian Labour Markets

In the presence of imperfect information in labour markets, optimal job search entails accepting a wage offer if it exceeds a workers reservation wage. However, this generally means that a worker with a given skill, will not earn the maximum wage on offer, and the gap between the maximum wager and the wage earned could be viewed as an indicator of labour market inefficiency arising from worker information gaps. The inefficiency arises because information is costly, so workers do not search long enough to discover the maximum wage, which would otherwise be sought and earned if information were costless. The aim of this paper is to empirically investigate the extent of labour market inefficiency within and across a number of population strata in Canada. These strata include individuals grouped according to various socio-economic and demographic characteristics such as gender, geographical location, education, and immigration status. The econometric model adopted is the stochastic frontier function used initially extensively in studies of production and cost efficiency of firms, and subsequently employed in studies of worker information gaps. The data we use are drawn from the 2001 Census of Canada.