More rooftop-ready results on reservation wages

by on August 24, 2011 at 6:16 am in Data Source, Economics, Uncategorized | Permalink

These are from Alan Krueger and Andreas Muller (pdf):

This paper presents findings from a survey of 6,025 unemployed workers who were interviewed every week for up to 24 weeks in the fall of 2009 and spring of 2010. Our main findings are: (1) the amount of time devoted to job search declines sharply over the spell of unemployment; (2) the self-reported reservation wage predicts whether a job offer is accepted or rejected; (3) the reservation wage is remarkably stable over the course of unemployment for most workers, with the notable exception of workers who are over age 50 and those who had nontrivial savings at the start of the study; (4) many workers who seek full-time work will accept a part-time job that offers a wage below their reservation wage; and (5) the amount of time devoted to job search and the reservation wage help predict early exits from Unemployment Insurance (UI).

Here is a popular summary of some of the results, including the recommended Figure 4.1 (p. 47 in the paper):

… today’s job seekers seem more picky. According to an analysis of surveys of 6,000 job seekers, the minimum wages that the unemployed are willing to accept are very close to their previous salary and drop little over time, says Mr. Mueller. That could help explain in part why they have so much trouble finding work, he says.

I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers.

This paper has many other excellent points and results, see for instance pp.27-29.

For the pointer I thank the excellent Andrew Sweeney.

Gunnar Tveiten August 24, 2011 at 6:39 am

It’s sorta boring to hear you go on and on and on about the problem with workers not being sufficiently willing to take a job at a sufficiently low pay-level, despite real wages having fallen for decades, despite USA getting wealthier and wealthier.

If a country gets richer and richer, yet pays workers less and less. Is the problem really -only- with the workers ? That’s what one would believe reading your posts.

Is the main reason for varying unemployment -really- that people in some cultures are better at applying for jobs, or better at accepting very low salaries ? Really ?

John Thacker August 24, 2011 at 7:07 am

It may be “sorta boring” to hear results you don’t like, but it is an interesting paper.

It’s also “sorta boring” for conservatives and libertarians to keep hearing people go on and on about climate change. Not liking proposed solutions makes them want to deny underlying facts– which is analogous to what you’re doing.

If a country gets richer and richer, yet pays workers less and less. Is the problem really -only- with the workers ? That’s what one would believe reading your posts.

There may be some horrible underlying factors with an economy (perhaps a Great Stagnation) causing a country to pay workers less. There may or may not be ways to deal with that. However, individual workers changing their behavior from previous recessions and being less likely to accept anything less than that perfect job does not help the problem, and makes it worse. This is particularly true to the extent that you believe that there was an unsustainable bubble, and that certain jobs aren’t coming back. (Compared to the extent that you believe it’s merely cyclical.)

Ricardo August 24, 2011 at 8:21 am

What evidence is there that individuals are changing their behavior from previous recessions? In the early years of the Great Depression, nominal wages stayed pretty flat and it was a key part of Keynes’ argument that a fall in nominal wages — even if you could convince workers to accept it — would hurt rather than help a recovery. I’m less familiar with more recent recessions so I would be interested in any evidence you can bring of workers’ being willing to work for less in a recession but all this has a distinct deja vu feel to it.

Podunk August 24, 2011 at 8:54 am

I’m not sure any difference needs to exist between current and previous workers in order to get the effects we’re seeing. It’s quite likely that all unemployed workers have the same behavior, and it only leads to large and long-term unemployment when NGDP drops. As Sumner would probably point out, in the two extreme cases we know of, the Great Depression and the Great Recession, we’ve seen exceptionally slow recovery in NGDP. The result is normal worker behavior leading abnormally bad results.

mulp August 24, 2011 at 3:35 pm

I think the changes are very significant.

In the 60s and 70s, people would go from a higher paying job to a new lower paying job rather often in the expectation their wage and benefits would grow rapidly far above the old wage. I remember kids who went to work at the Fisher Body plant during high school summer break who could make the equivalent of probably $60,000 today in the first year out of college, with increased wages and benefits over time, thanks to the UAW.

Yet, some of those who did those jobs in the summer would go to college, get a degree, and then, rather than staying even as a supervisor, would leave Fisher Body’s golden handcuffs for a job paying the equivalent of $40,000, but then would get 10-20% pay bumps for five years as they completed various corporate training programs, got experienced, and were moved around to give them more experience. Corporations had explicit dual career path plans they presented to college hires or recruits from other firms, so this wasn’t just management that got the promotions, but engineering and sales and support and technical services and manufacturing jobs all had promotion potential.

I don’t see or hear of any corporation that has a plan for bringing in employees that offers flexible opportunity to advance on the job and get higher wages. Instead, you are either qualified for a job, or not, and once in the job, that is the only job you will have at the company, unless you happen to be selected for another job opening over an outside better qualified new hire.

If you were making $100K a year, taking a $60K job means you will be making closer to $60K in five years than $100K, and thus, not working at all for two years to get the $100K job is more rewarding: $300K for five years plus $60K wage vs $100K wage.

NAME REDACTED August 24, 2011 at 5:20 pm

This is another way of saying that the equilibrium real interest rate has fallen to near zero.

Andrew Edwards August 24, 2011 at 7:42 am

This is actually an interesting point – worth thinking about what is true in the economy that wages have risen for the top 1% while this happened.

foosion August 24, 2011 at 7:07 am

Don’t forget that there are about 4-5 job seekers for every job opening. This has to part of any explanation as to why people have difficulty finding work.

John Thacker August 24, 2011 at 7:14 am

Yes. But this result makes it more likely that a higher number of job seekers per job opening will persist. A higher reservation cost of labor also encourages companies to have fewer openings, as well as encourages them to hire none of the candidates. If you believe that the problem is AS/AD related, then hiring someone initially would put that person to work generating supply and consuming more, causing a multiplier effect that would lead to more job openings for others.

Also, isn’t it particularly striking that people seem to be less likely to accept something less than the perfect job when there is more competition than in previous recessions?

TheophileEscargot August 24, 2011 at 7:21 am

Quite recently you reposted this comment about how wage stickiness largely comes from the employer side
http://marginalrevolution.com/marginalrevolution/2011/08/from-the-comments-on-nominal-wage-stickiness.html

Lots of the comments pointed this out in the original post too.
http://marginalrevolution.com/marginalrevolution/2011/08/scott-sumner-on-sticky-wages-for-the-unemployed.html

If wage demands drop very little, it could still be that the stickiness comes from the employer side, and the job-seekers are just rational, informed and self-interested: the normal assumptions of economics.

What I find interesting is why you’re so sure that stickiness must come from the job-seeker side. I wonder if it’s the just-world cognitive bias at work. Maybe it’s emotionally comforting to believe that the recession’s unemployed are just choosing a lifestyle of leisure.

It’s strange how these normal assumptions of economics are held with iron rigidity sometimes, and dropped with indecent haste at other times, depending on what you want to be true.

Aris August 24, 2011 at 7:29 am

Just wondering, is key finding (2) a tautology?

Rahul August 24, 2011 at 8:14 am

(2) seems bizarre to me too. “People accept the job if it pays more than what they want.”

Slocum August 24, 2011 at 8:22 am

But people aren’t always good at predicting what they will actually do when finally confronted with a choice. People often, for example, become involved in relationships with partners that don’t have what they think are all their ‘must have’ characteristics.

Simon August 24, 2011 at 7:33 am

Isn’t this just the ghost of Thorstein Veblen? Everyone wants thier ticket to the Leisure Class, and no one wants to be told to get back in line. This paper is sooo 1899!

Benny Lava August 24, 2011 at 8:30 am

No, not really. There is no conspicuous consumption here. Re-read Veblen and you will see your error.

Simon August 24, 2011 at 10:15 am

How do you explain why reservation wages remain constant. Seems like pride. People not wanting to downsize, take the pay cut , sell the SUV, etc…”The basis on which good repute in any highly organized industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name, are leisure and a conspicuous consumption of goods” T.V.

Benny Lava August 24, 2011 at 10:55 am

No job means no consumption of goods.

I’d explain wage reservation the way that Ricardo a few posts down did: “Once you start a full-time job, it becomes difficult to look for a better job while part-time work does not carry this difficulty.”

Simon August 24, 2011 at 2:52 pm

….is there an implicit point made whereby high savers and those over 50 have more dynamic wage reservations? The sage amongst us…? Im betting most people go into debt before serious lifestyle/status downgrades happen. I wonder if wage reservations are pinned to mortgages. Once you face the prospect of moving to a lower class neighborhood, other options start looking good. Maybe that’s obvious.

Also, most successful people I know say its easier to find a job when you already have one. Ironically. Anecdotly, id say its true.

Daniel Putman August 24, 2011 at 10:54 am

“The tabu on labour has further consequences in the industrial differentiation of class. As the population increases in density and the predatory group grows into a settled industrial community, the constituted authorities and the customs governing ownership gain in scope and consistency. It then becomes presently impracticable to accumulate wealth from simple seizure, and in logical consistancy, aquisition by industry is equally impossible for high minded and impecunious men. The alternative open to them is beggary or privation. Wherever the canon of conspicuous leisure has a chance undisturbed to work out it’s tendency, there will therefore emerge a secondary, and in a sense spurious, leisure class -abjectly poor and living a precarious life full of want and discomfort, but morally unable to stoop to gainful employment.”

It’s definitely at least a little bit Veblen.

Andrew Edwards August 24, 2011 at 7:49 am

I think that the behavior described is quite rational. Wages once you have taken the job are sticky. Why sell (or set your price) at the bottom of the market? Why not hold your labor until its value rises due to economic recovery, and then lock in at that higher wage rate?

Yes this is destructive when everyone does it, but it’s pretty reasonable at a single individual level, until the savings run out. You could even do an NPV calculation if you had some sense of the spread between wages today and wages in a full-employment boom.

Anecdotally, I have heard of fast food workers making up to 2x typical wages in areas with supply-constrained labor markets (Northern Alberta oil sands, for example). This is potentially quite a payoff for waiting even in the low-MP segment.

This implies that modern recessions cause very high degrees of human misery.

Slocum August 24, 2011 at 8:24 am

Why sell (or set your price) at the bottom of the market? Why not hold your labor until its value rises due to economic recovery, and then lock in at that higher wage rate?

Why? Because nothing prevents you from reselling your wage to a higher bidder at a later date after the economy improves — which will be easier to do if you had a history of work (rather than unemployment) during the downturn.

tenthring August 24, 2011 at 8:47 am

Changing jobs is a lot of work and risky. Employers also tend to use your current wage as a baseline for any offers. An HR department may have a set rule such as current wage +10% for maximum offers.

Rahul August 24, 2011 at 8:56 am

Is inflating previous wages an option? Does HR ask the previous employer what they paid. Would the previous employer disclose that?

Cliff August 24, 2011 at 9:12 am

They will ask, but only a fool discloses their existing salary. It’s not relevant.

Andrew Edwards August 24, 2011 at 10:30 am

It is if it is higher than the one you would otherwise be offered.

It is not foolish, in a negotiation, to try to anchor your opponent on a high number. This is why high initial wages have a way of reproducing themselves and the single best indicator of salary at 40 is salary at your first job after graduation.

This creates an asymmetry – if you took a low wage job as a first job, then you are weaker in your negotiation for a second job even if you don’t mention your wage, simply because you don’t have a high wage to mention.

Cliff August 24, 2011 at 10:45 am

Are there studies to that effect? Obviously there is a huge problem with saying that a high first salary is the CAUSE of high later salaries. Isn’t it more likely the person is just smart and successful?

Many times employers are competing amongst each other for an employee. Prevailing salaries for the position are generally the predominant factor. I just don’t buy some low-salary lock-in effect beyond the underlying fact that a low first salary indicates a poor candidate.

Finch August 24, 2011 at 11:14 am

> Are there studies to that effect?

There are, see: http://mba.yale.edu/faculty/pdf/kahn_longtermlabor.pdf

The distinction between individuals studied is when they graduated. It’s difficult to believe that graduates in bad economic times are systematically worse.

Cliff August 25, 2011 at 12:16 am

Well of course you are going to be worse off is it takes you a long time to get a job or you get a poor job that does not train you for your chosen career. The question is whether you are better off to take a job at a lower wage or hold out for years for a better job.

Andrew Edwards August 24, 2011 at 10:27 am

tenthring is right – you need to include search costs for that new job, plus non-monetary utility costs in the form of stress (changing jobs has huge psychic cost, there is data on this), plus the job-seeker’s self awareness that as a human being they have psychological biases which will lead them to over-value the “bird in the hand” over the “two in the bush”.

It is not realistic to model the labor market as a continuous live auction resulting in a single static equilibrium where a smooth demand curve intersects a smooth supply curve. Not even close.

AndrewL August 24, 2011 at 7:59 am

Perhaps workers cannot take a lower wage. Perhaps the unemployed worker is underwater on their mortgage and they could not keep their house on a lower wage, so they must find something comparable to their current wage just to keep their heads above water. Maybe they could not stand the shame of having to uproot their family to move to a lower income area to take a lower income job. And hey, the government is giving out 99 weeks of unemployment, maybe they can ride it out for two years.

Rahul August 24, 2011 at 8:22 am

If they couldn’t keep their house on a lower wage how can they on a zero wage (= unemployed). I’m assuming that the “lower wage” is still higher than the government handout………

AndrewL August 24, 2011 at 8:41 am

The opportunity cost maybe too high to accept a lower wage job. The government can’t help you if you are helping yourself, you could be giving up valuable government benefits by taking a job. If the lower wage job is comparable to government benefits (unemployment, food stamps etc) why work? If the lower wage job or the government benefits are not enough to live on, then why take the more difficult route?

I think most unemployed were previously working at the minimum required to sustain their lives, It’s either their previous wage level or they sink. That would explain the wage stickiness. Below that wage, they are doomed and the jump to the next tier is quite large.

Finch August 24, 2011 at 9:31 am

There are expenses that come with work, such as car, clothing, and daycare. Whether that’s enough to make a difference will depend on details.

Ricardo August 24, 2011 at 8:14 am

“the minimum wages that the unemployed are willing to accept are very close to their previous salary and drop little over time”

Keynes for the win.

However, without having read the paper, it seems rational that people would take a part-time but not a full-time job for less than their reservation wage. Once you start a full-time job, it becomes difficult to look for a better job while part-time work does not carry this difficulty.

Benny Lava August 24, 2011 at 8:33 am

Bingo. Try taking a random day off for an interview with less than a week notice at a job you were so desperate to take that you had a 50% wage cut. You’ll get fired. This is something the academics don’t understand because their labor market is so different.

Rahul August 24, 2011 at 8:37 am

Sick days? Not that much of a red flag.

Benny Lava August 24, 2011 at 10:56 am

Low paying jobs usually don’t have sick days or don’t start accruing them until after a year. Furthermore, taking a sick day for a job interview that may not pan out is a high risk high reward proposition. After all, new employees are the first to be fired. Have you done much of this yourself, if you don’t mind me asking?

Rahul August 24, 2011 at 8:18 am

(3) the reservation wage is remarkably stable over the course of unemployment for most workers, with the notable exception of workers who are over age 50 and those who had nontrivial savings at the start of the study;

What’s with the “non-trivial” savers? I am trying to think why their reservation wage would be less stable? Do they retire to Florida after a few months of unemployment shooting their reservation wage to infinity?

Jonathan August 24, 2011 at 8:40 am

Maybe they save a lot because they’re risk averse. They therefore take any job rather than face the risk of not getting a job later.

mulp August 24, 2011 at 4:17 pm

Is $10,000 in the bank a risk adverse person? The criteria in the study was $10,000 in the bank…

…a small amount to me who had a couple of periods of unemployment leading to near desperation before the age of 30, and always prepared for it to happen again even as I expected to retire at the age of 70 from my employer in 3 then 2 decades – at just under two decades to retiring at 70, my fear was suddenly realized. I had something like a $50K in cash in the bank, with more resources available.

If you are earning $50K, $10K in the bank is barely six months annual stable income if you get the maximum UI benefit of $584 a week – some work expenses go down, commuting, taxes, but others go up – the cost of COBRA.

Rich Berger August 24, 2011 at 8:41 am

I just downloaded the paper for reading on my home tonight, so I haven’t read it yet. My first reaction regarding the non-trivial savers is that when you have a cushion you can accept a lower paying job until something better comes along, or until you can work your way up. BTW, I have almost always found a new job while employed, so the idea that you can’t interview while working is BS.

Slocum August 24, 2011 at 8:45 am

I’d assume it’s because ‘non-trivial’ savers are already accustomed to living below their former incomes (which is where the savings came from), so a lower new income would not be hard to manage (especially because they have the cushion of savings). I’d suspect, too, that these are also likely to be people who are cautious in management of their personal finances and who, therefore, might be experience more distress at the prospect of drawing down savings during unemployment.

mulp August 24, 2011 at 4:20 pm

Given $10K in savings is not that much, it might mean the worker saw the writing on the wall and was waiting for the hammer to fall, and working on connections,etc.

But the key word you use is “management” which requires anticipating risk and then planning to mitigate the risk.

Cliff August 25, 2011 at 12:17 am

$10k is the minimum. Most probably had quite a bit more.

sam August 24, 2011 at 8:30 am

What a nice way to throw some blame on people without jobs: In essence saying something in the line of “part of the reason why you’re unemployed is because you people aren’t willing to clean toilets for a living even though you have a degree, in say, economics from a so-so university!”

Cliff August 24, 2011 at 9:15 am

Did you read the paper? I don’t think that’s what it says.

Benny Lava August 24, 2011 at 8:35 am

Tyler finally admits he is a freshwater economist and all unemployment is voluntary.

Cliff August 24, 2011 at 9:16 am

Did you get that from the study?

TallDave August 24, 2011 at 10:06 am

We’re certainly learning a lot from this study!

Benny Lava August 24, 2011 at 11:00 am

I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers.

Cliff August 25, 2011 at 12:18 am

Doesn’t sound like all unemployment is voluntary to me.

botogol August 24, 2011 at 8:36 am

its not just about discounted cash flows and opportunity cost
- taking a lower paid job than you had before signals you have accepted a loss in status
- but staying at home waiting for the right job signals that you have not lost status

Ricardo August 24, 2011 at 11:12 am

I’d guess psychological loss aversion is partly at work here. The same thing crops up in the housing market: people are extremely reluctant to accept a price on their house that is less than what they paid for it, even when the housing market is known by everyone to be severely depressed. Accepting a lower price or a lower wage seems to be surrendering to the idea that things really aren’t going to get better any time soon. And if they do, you will feel foolish and possibly lose status in the eyes of your significant other.

Rahul August 24, 2011 at 1:17 pm

With respect to houses isn’t that the sunk cost fallacy? Or maybe an Endowment Effect?

mpowell August 24, 2011 at 5:08 pm

The difference is that whether you buy or sell your house will have no impact on the market. It is quite logical to believe that taking a lower paying job will make it substantially more difficult to get a higher paying one in the future. Many studies indicate that this is true. So it is rational for people to hold out for better jobs. Perhaps the extent that they take it is irrational due to the loss aversion you are talking about, but this is a pretty damn hard thing for any given individual to accurately figure.

tenthring August 24, 2011 at 8:49 am

Also consider recent grads. My anecdotal experience is that grads who take low status work after graduation are lumped in with the “losers”. “Winners” would hold out until a job worthy of them came along. That’s the way employers think.

Cliff August 24, 2011 at 9:17 am

For how long? Will they still favor someone who has been without a job for 2 years?

AnotherTom August 24, 2011 at 10:31 am

If the data on lifetime wage-earnings of college graduates relative to the job market when they graduated is to be believed, forever.

Cliff August 24, 2011 at 10:46 am

If you are only looking at the year they graduated, that does not seem relevant to the question of whether holding out is helpful?

AnotherTom August 24, 2011 at 3:39 pm

If recent grads are less likely to be hired for “winner” jobs and more likely to take the best job they can due to a need for income, thus branding themselves as “losers,” then holding out as long as possible is the highest-upside strategy.

I should add this explanation is consonant with, and probably influenced by, Hanson-style signaling and Garrett Jones’s idea of ZMP workers creating organizational capital. To the extent objective measures of performance influence hiring and promotions, different behaviors may make more sense.

Cliff August 25, 2011 at 12:19 am

There has to be some limit. Is it better to hold out for 10 years? 20? Your entire life?

BeenThere August 24, 2011 at 8:57 am

I suspect that neither the author nor most commenters have been on long-term unemployment. I was laid off (after working 27 years) in the fall of ’09, and diligently looked for work for nearly 10 months before finding something. If you are unable to relocate, prospects for employment in a field in which you are qualified are somewhat constrained. If you attempt to interview for a position at a wage much lower that what you previously made, it makes you highly suspect in the eyes of the prospective employer. In short, they won’t consider you because you’re over-qualified and will jump ship as soon as things pick up. Wage stickiness is certainly bolstered by the employer, who generally has relatively narrow salary bands for a given class of employee. Furthermore, the amount of effort devoted to job search necessarily declines somewhat over time, as you’ve already exhausted the pool of potential employers in your field(s). Like in any other endeavor, the longer you do it, your productivity increases, and you accomplish more (contacts, interviews) with less effort.

Cliff August 24, 2011 at 9:18 am

But this study is saying that people get offers at lower salaries and turn them down.

Ricardo August 24, 2011 at 10:58 am

That appears to only apply to full-time offers. I haven’t read the paper carefully enough to see the relationship between offers and reservations wages yet but it seems a reasonable interpretation is that a full-time job effectively takes you out of the job market. First, you hardly have time to look for a job and schedule interviews when you are working 40-50 hours a week and, second, you can hurt your reputation by leaving a full-time job soon after starting. If you work at Starbucks and quit after 3 months, probably nobody’s going to hold it against you but if you take a full-time job in your industry and leave after 3 months, that shows bad faith and lack of seriousness to some employers. They will wonder if they are the next stepping stone on the applicant’s job-hopping saga.

Morgan Warstler August 24, 2011 at 9:24 am

There is only one key take-away.

Since this is how people are, public policy on aid (minimum wage, food stamps, UI, etc.) should be reconstructed to unstick sticky wages.

We can’t force people to work, but we have a moral obligation to try.

Andrew' August 24, 2011 at 10:53 am

Or just stop ‘forcing’ them not to work. The current system seems to reinforce keeping your reservation wage at your previous wage.

Rahul August 24, 2011 at 3:33 pm

How? What could you (reasonably) change in the system?

RZ0 August 24, 2011 at 9:48 am

Interesting, but not unexpected result. As unemployment grows longer, the unemployed spend less time looking because they are discouraged.
One thing to keep in mind – whether an individual worker accepts or rejects an offer doesn’t affect the overall unemployment rate. If one worker rejects an offer, an offer is extended to a second worker. Eventually, the offer is filled.
From the paper:
“One issue of concern is that the response rate was low. Only 10 percent of sampled individuals who were contacted participated in the entry wave of the survey, and respondents in the entry survey only participated in about 40 percent of the weekly follow-up surveys.”
In other words, the response rate was 4% of the sample. The authors use the underlying database to normalize results, but there’s still a pretty strong chance that the 96% who didn’t complete the surveys are different from the 4% who did.
Finally, I’m not sure there’s evidence in the paper that “today’s job seekers seem more picky.” The paper doesn’t introduce any prior studies to which its results can be compared. Today’s job seekers may be more picky, less picky or about the same.

Dan Weber August 24, 2011 at 10:14 am

It’s not just discouragement. After about a month of unemployment, the job seeker becomes very efficient at it. They don’t need to keep working on their resume. They don’t need to read every single want ad. They don’t need to call every place with a supposed job opening.

TallDave August 24, 2011 at 10:05 am

So, wages are sticky on the employee side as well. Interesting.

I would argue this is another wealth effect — wage demands are much more elastic when people are hungry.

dirk August 24, 2011 at 5:50 pm

Agree. Will there be an asymptotic drop in reservation wages as wealth -> 0? Or will there be a lot more people living in the streets in a few years if the economy doesn’t improve? It’d be interesting to see the relationship between reservation wages and current savings.

mw August 24, 2011 at 10:10 am

bizarre how intricate arguments become without ever answering “where are the job openings?”

Bill August 24, 2011 at 10:13 am

Several observations:

1. If I were a smart employer, I would hire persons I wanted as full time employees as part time employees, as a person to who takes a part time employment has a lower reservation price for part time work. Then I would offer the person a full time position later at the part time price.

2. I think Krueger should do some follow-up work on persons who reluctantly accepted a wage rate below the reservation wage and see if there is a difference in job turnover–do persons who do not wait to match at their reservation wage leave early for another job when the economy turns around.

3. While the study measured duration of UI benefits and measured the amount of personal savings, it did not measure whether there was a two income household and the level of the other persons income.

4. The study treats all unemployed workers the same. Construction unemployment is different than retail unemployment. Construction workers may have a sense of seasonality or an irrational belief that this is an ordinary recession. College educated engineers may have both a different reservation price and a different search market or time horizon. Some labor is not fungible.

Bill August 24, 2011 at 11:19 am

Another thing I would like to see from this study would be how many of the unemployed go back to the same employer: sometimes UI is used by employers to reduce workforce quickly, with the employees knowing that they can come back when the business turns around, much in the same way UI is used in seasonal industries.

I think what is sometimes missing from these studies is studying the other side of the market: from the employers perspective. Is UI used by employers to adjust costs quickly–so that in effect, it is a benefit to them as well, particularly if other employers are picking up their costs through UI insurance pools.

Finch August 24, 2011 at 11:40 am

These are good questions.

Regarding #3, this is something I’ve observed, albeit with a small (and biased) sample size. If you live in a big city, the punitive tax treatment of a second income in the household, the cost of daycare, and the regular expenses of work can drive the break-even point of a second job in the family up around $100k. So one needs to get a pretty good offer to make working worthwhile.

That said, I’m not sure how this scales down to low incomes. It seems to me like taxes are the big driver in this decision.

Finch August 24, 2011 at 11:52 am

I’m not sure that scaling comment made sense, now that I think about it.

Rich Berger August 24, 2011 at 12:24 pm

All excellent points that illustrate the difficulty of seeing the microeconomic causal factors at work when you deal with broad macroeconomic data.

Bill August 24, 2011 at 11:29 am

Another point that people may be missing in this paper is that NJ permits you to continue to receive UI while working part time.

Another point that people often miss regarding UI and labor matching is this as well: if you accept a job that doesn’t match you or you really hate, and then you quit, you do not get UI again. So, this places a premium on obtaining the right match for the risk averse person who is unsure about the employer or the job, much less the wage. It may be better to search harder and get a better match.

mulp August 24, 2011 at 4:47 pm

All States allow part-time work while getting UI; NJ is more generous than most as you get to keep 20% of the earnings while NH limits it to $25 a week. I believe part-time work while getting UI is required, but without specifying the terms. Working part-time extends the period of benefit, also a requirement of Federal law, I believe, but not exactly how. It could be Federal law promotes part-time work extensively in 1950s terms – a Federal requirement to let a worker keep $5 of earnings each week in 1950 was a lot more money than $5 a week amounts to in Georgia today. In 1950, $5 was about a day of work at minimum wage, but $5 today in Georgia is 40 minutes of work.

Andrew' August 24, 2011 at 1:52 pm

Seems like most of the criticisms can be summed up by…”More cowbell!”

Beth August 24, 2011 at 4:51 pm

I’d like to see single-wage-earners broken out of dual-wage-earner families.

That paper does seem to provide decent evidence that unemployment doesn’t contribute to reserve wage expectations. It also seems to suggest that people are relatively good at judging their own marketability, as those with higher reserve wages exited unemployment more quickly than those with lower reserve wages. I see nothing in those statistics to suggest that long-term unemployment is the result of failed job seeking; rather I see it as a lack of available jobs at a positive marginal wage.

mulp August 24, 2011 at 4:57 pm

The paper explains the incentive to work that is present in NJ and to some degree in all State unemployment benefit systems:

“In New Jersey, UI recipients are allowed to work on part time jobs while receiving benefits. Earnings from part time jobs are deducted from the benefit amount, with an earnings disregard of $5 or 20% of the weekly benefit, whichever is greater. This implies that UI recipients who work part time can keep weekly earnings of up to 20% of the weekly benefit amount; any earnings in excess of that is deducted from the weekly benefit. Thus, those who earn more than 120% of their weekly benefit no longer qualify for UI benefits. A worker who works part time during a period of unemployment may draw benefits for a longer period than the maximum duration for an otherwise comparable beneficiary who does not work at all. The reason is that the state specifies a maximum dollar amount that can be received for a given UI claim (the maximum benefit amount), and those who work part time can receive benefits for a longer period of time because their weekly benefit amount is reduced.”

These features are often cited as improvements to the system that could be implemented to get people back to work.

I believe these incentives to work even part-time are an old feature of the Federal UI system. I’m also guessing the Federal law specified the worker could keep the first day of wages at minimum wage, specified in dollars: $5 a day. That $5 has not been increased with inflation, so now you get to keep the first 40 minutes per week of effort per week by taking a (part-time) job.

Not increasing the $5 was likely penny wise, pound foolish, because the saving when a day of labor went from $5 to $6 were small, but by now the incentive for part-time work while unemployed is very low, so the costs to the UI system a rather large.

mulp August 24, 2011 at 5:25 pm

This from page 29:

“On the one hand, workers do not search more or lower their reservation wage in periods when their UI benefits have lapsed or been exhausted, suggesting that EUC did not provide a serious disincentive to finding a job.”

In other words, UI benefits are unlikely to keep people from taking a job they want and need; what is the difference between someone who never got UI and someone who no longer gets UI? Other than the person with UI benefits exhausted is probably poorer.

“On the other hand, we find that average search time was lower for workers as a whole after the maximum duration of benefits was extended from 79 to 99 weeks, although this finding is sensitive to the functional form of the unemployment duration variable, the particular measure of job search, and possibly confounded by other temporal factors, such as seasonality.”

In other words, the time required to check out the available jobs in a really bad job market with few job offers is lower than when more jobs are offered, and the degree of badness is the UE rate which is reflected in the length of benefits: 26, 79, 99.

If one studied the time it takes to read a book per week and found that if the time declined each week, and found the time required for all readers was lower the shorter the book, would teachers be seeking ways to get students to spend a lot more time reading the 5 page book at week 99? “You will spend five hours reading that 5 page book just to prove you are really reading hard.”

dirk August 24, 2011 at 5:42 pm

Pay grade correlates highly with other desirable aspects of a job: office vs. cubicle, more respect, more autonomy, etc. It may be the non-pecuniary aspects of a lower paying job the Americans have such a hard time reverting to.

Anand August 24, 2011 at 5:57 pm

It’s interesting that people accept part-time work at a lower wage but not full-time. I wonder how much of this has to with anchoring, not just in their heads, but in the heads of prospective employers. I’m looking for a new job myself (I am currently employed) and it’s striking how often “What’s your current salary?” and other classification type questions (job title, number of direct reports, etc) are asked before anything related to my technical qualifications. Maybe the stickiness of your salary isn’t purely stubborn unwillingness to compromise. It may also be (rational?) recognition of the fact that the lower salary will stick to you too. Part-time work allows you to use you last salary and title without being completely misleading.

Al August 25, 2011 at 3:02 am

Is it possible that, with no prior experience with getting laid off in a bad economy, these unemployed workers are approaching their job search with their boom-time mindset, ie to get a promotion?

dirk August 25, 2011 at 3:39 pm

Given one’s age, field, previous salary and current length of unemployment, what is the optimal amount one should reduce their reservation wage by? Nobody seems to have much wisdom on this.

Greg Colvin August 26, 2011 at 3:33 am

Maybe I misunderstand Tyler, but if not, I’d say he hasn’t a clue. I’m currently holding out on $870 a month in disability, living in a 40 year-old trailer in the middle of nowhere with my best friend. It sucks. But I have Medicare, and medical needs, so I don’t dare take a job without medical benefits. And my savings disappeared to divorce and illness, so I need to save a lot more before I can retire. As a Ph.D. with decades of engineering experience I’ve set my reservation salary at $100,000. No point in taking much less, as it would only make it more difficult to look for work, and by lowering my eventual salary would cost me savings in the long run. It would also jeopardize my disability and Medicare, and take away from working on plan B, which is to start a business with technology I’m researching now.

And it’s true, I spend very little time looking for work. There are very few companies working in my specialties, and I’ve already applied. And having applied, I get automated emails about new listings. What tells me that these are really hard times is that in the past I would usually get jobs without even looking, and if I let the word get out that I was looking it never took more than two months to get a job. Now I have to actually look, and am finding very little.

I may sound unique, being high-tech and over-educated, but the same sorts of choices apply to anyone with hard-earned knowledge and skills: it’s best if possible to advance in your trade rather than slip backwards or sideways. “Some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers” has nothing to do with it at all.

gamesliga September 6, 2011 at 12:25 pm

gamesliga bahis yap. gamesliga bahis sitesi. gamesliga bahis sitesi.a

Comments on this entry are closed.

Previous post:

Next post: