I Z A COMPACT Considering the Future of Labor

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IZA Prize 2007 Awarded to Richard B. Freeman EMPLOYMENT AND DEVELOPMENT German President Lauds the Achievements IZA/WORLD BANK CONFERENCE The 2nd IZA/World Bank Conference of the Prize-Winner and IZA in Bonn, Germany, provided a forum for both policymakers and research- In recognition of his innovative and seminal studies important implications for labor market re- ers to discuss initiatives for employ- on various labor market issues, the 2007 IZA Prize forms in Germany. Preceding the award cer- ment creation in the developing in Labor Economics was awarded to the U.S. econ- emony, a scientific conference honoring the world. page 4 omist Richard B. Freeman on November 5. The prize-winner was held with world-renowned award ceremony was marked by a speech of Ger- researchers, including the 2003 winner of the RISK, RECIPROCITY AND TRUST: RECENT man Federal President Horst Köhler emphasizing IZA Prize, Orley Ashenfelter (Princeton Univer- FINDINGS IN BEHAVIORAL ECONONOMICS the scientific merits of Richard B. Freeman as well sity). as the impact of IZA as an independent research The IZA research focus on behavioral institution that combines cutting-edge economic Good work of unions improves and personnel economics provides research with scientifically founded policy advice. employee retention findings with important implications for the working world. page 7 The IZA Prize carries a cash award of 50,000 For more than three decades, Richard B. euros and is considered the most important Freeman has been among the internationally GROWING WAGE INEQUALITY IN GERMANY: science award in the area of labor economics most active and influential labor economists. AN ARGUMENT FOR MINIMUM WAGES? worldwide. With Richard B. Freeman (Harvard His research, which has greatly enriched the University and London School of Economics) scientific debate, has also had a strong im- A recent IZA Discussion Paper revisits as this year’s laureate, the prize goes to an ex- pact on policy debates around the globe. the German wage structure and draws ceptional scholar whose contributions have Among the institutions he has advised on comparisons with the United States. had “a massive influence on the profession” economic policy issues are the World Bank, page 9 according to the award statement by the IZA the International Labour Organization (ILO) Prize Committee. Nobel laureates George A. and the European Union. In addition, Free- THE LABOR MARKET SUCCESS OF Akerlof (University of California, Berkeley) man directs the Program on Labor Studies at TURKISH IMMIGRANTS and Joseph E. Stiglitz (Columbia University, the National Bureau of Economic Research New York) are among the committee mem- (NBER). An analysis of integration policies bers. The prize recognizes Freeman’s ground- shows that Turkish immigrants breaking work on the sustainability of the “By awarding the IZA Prize in Labor achieve better labor market outcomes welfare state and the role of trade unions in Economics to Richard B. Freeman, IZA hon- in Germany than in the Netherlands. the labor market. His highly innovative stud- ors an outstanding economist, a pioneer page 11 ies address policy-relevant issues that have and a lateral thinker. Without his impor- TAKING STOCK OF LABOR MARKET POLICY REFORMS IN GERMANY At an IZA conference in Bonn, experts on evaluation research discussed the success and failure of German labor market reforms. page 12

FIRST VOLUME OF THE “IZA PRIZE SERIES” PUBLISHED The lifetime achievement of Jacob Mincer (IZA Prize laureate in 2002) is honored in the inaugural volume of the IZA Prize Richard B. Freeman, Klaus Zumwinkel, Horst Köhler, Klaus F. Zimmermann book series. page 17

Institute for the Study of Labor | I Z A COMPACT | November 2007 IZA PRIZE 2007

Award Statement of the IZA Prize Committee

The IZA Prize in Labor Economics 2007 is awarded to Richard lower hiring and training expenses and to increase productiv- B. Freeman (Herbert S. Ascherman Professor of Economics ity, since job tenure and incentives to invest in firm-specific, at Harvard University, Senior Research Fellow at the Centre productivity-enhancing skills rise. Unionism is also likely for Economic Performance and Visiting Professor at the to affect compensation packages, for instance by raising London School of Economics) for his innovative and agenda- the share of deferred c ompensation in the total wage bill. setting contributions to the study of labor markets. In subsequent studies, Freeman has shown that unionism and employee involvement also substantially alter other Richard Freeman has made several path-breaking contribu- personnel practices, which considerably improves worker tions in a variety of areas in labor economics that have had well-being and loyalty to the firm. a massive influence on the profession. His highly original studies combine theory and empirical research to address Equally important as his work on unions is Richard Free- important policy-relevant issues. Freeman has advanced man’s research that pioneered international comparisons our knowledge in fields that had traditionally been stud- of labor markets as a research design for understanding ied by labor economists, such as unionism and collective the impacts of institutional factors and policies on labor activity in the workplace, labor demand and labor supply, market performance. His work shows that labor market or inequality. He has also shaped modern labor economics institutions can have large distributional effects, but that by drawing attention to important social problems and new the effects on efficiency are modest and hard to detect, trends, including the analysis of crime, discrimination, the which supports the notion that there is no single ideal set viability of the welfare state, and political participation. By of institutions. His analyses also show that policies that raising questions that would have otherwise remained unad- work well in one institutional context might be ineffective dressed in the economics literature, Freeman has extended in a different environment. the range of issues in which labor economists are interested. He has thereby opened areas of inquiry that have subse- It is evident that this kind of empirical research is highly rel- quently inspired the research interests of many economists. evant for the design of economic policies. Therefore it is not Freeman’s innovative and highly accessible research on these surprising that Richard Freeman contributed to the policy new themes has greatly enriched the scientific debate, and debate in the United States and across Europe. Scrutinizing although his work does not necessarily represent the final the effectiveness of institutional changes or policies that have answer to any of the questions, his first answers have nearly been proposed to cure the problem of high unemployment always been proven correct through subsequent work. in Europe, he has shown in several instances that popular explanations are, in fact, not the main cause of differential His work on the nature of trade unionism is arguably labor market outcomes in Europe and the United States. For Freeman’s most influential research. He has made several example, by comparing wage structures and skill distribu- fundamental contributions that have revolutionized how tions in Germany and the United States, his research shows labor economists think about the role of trade unions that the low job creation rate and resulting job deficit in and their behavior. In his numerous studies on the impact Germany’s low-wage service sector is not caused by exces- of unionism, he has demonstrated that unions perform sively high German wages. Recently, Freeman has argued multiple economically valuable functions beyond altering that a child-friendly family policy can greatly contribute to wages. Freeman has provided evidence that unions have boosting employment and economic growth in Germany. sizable non-wage effects by reducing turnover and absentee- ism, fostering loyalty and long-term employment relations, Richard B. Freeman has been among the most active, pro- increasing investments in job training, and raising job sat- ductive and leading labor economists for more than three isfaction. These ideas remain highly influential even more decades. As Director of the Labor Studies Program at the than two decades after having been recapitulated in the National Bureau of Economic Research (NBER) he has set co-authored book with James Medoff titled What Do Unions the agenda for a highly influential research program. The Do?, a milestone in modern labor economics. IZA Prize in Labor Economics 2007 honors the work of an exceptional scholar who has greatly advanced and inspired In a paper published in 1976, Freeman put forward that the empirical analysis of labor markets. union leaders do not only represent workers in wage nego- tiations, but that unions also provide a direct channel of George A. Akerlof communication between workers and management. In fact, University of California, Berkeley; IZA a key role for unions is to serve as an institution of collec- Richard Portes tive voice, which provides workers with a say in job-related London School of Economics; CEPR matters and enables them to articulate their interests or Joseph E. Stiglitz discomfort. In a seminal paper, published in the Quarterly Columbia University, New York Journal of Economics in 1980, Freeman provided evidence that Armin Falk unionism reduces quits and permanent job separations and University of Bonn; IZA fosters long-term employment relationships. The reduction Klaus F. Zimmermann in labor turnover due to the existence of unions is likely to IZA; University of Bonn

2 Institute for the Study of Labor | I Z A COMPACT | November 2007 IZA PRIZE 2007

tant contributions, the discipline of labor ed that union influence not only reduces tional position of Germany’s economy cer- economics would not have become what absenteeism but also promotes long-term tainly rests to a large extent upon stable it is today,” said IZA Director Klaus F. Zim- employment relationships by lowering the business conditions and continuity. The mermann in his laudation. “Freeman has number of quits. This reduction in labor German tradition of establishing adequate shown that pragmatically thinking and turnover lowers hiring and training costs. mechanisms to reconcile corporate re- acting unions have important functions More importantly, it increases productiv- quirements with workers’ needs at an early far beyond their role as collective bargain- ity by creating incentives to invest in work- stage has also contributed substantially ers. Modern unions should provide a di- ers’ education and skill enhancement. to this achievement. But in order to sus- rect channel of communication between tain these advantages, it is important to workers and management in order to help In this respect, trade unions that act con- discuss whether and how these successful create and foster long-term employment structively are of vital importance to over- institutions must be adapted to economic relationships.” all economic performance. “Freeman’s and social change.” research shows that non-dogmatic unions IZA President Klaus Zumwinkel, who is the can play a significant role in today’s labor Furthermore, Köhler advocated strength- CEO of Deutsche Post World Net, pointed markets. It should encourage union leaders ening the policy advice activities of inde- out several positive examples of construc- to be more aware of their key responsibility pendent research institutions: “IZA is a tive and sustainable cooperation between for the economy as a whole,” Zimmermann great example of how research on a high the world’s largest logistics group under commented. scientific level and well-founded advice his leadership and the unions – relation- to policymakers can be mutually benefi- ships that are characterized by “mutual German President compliments cial.” According to the President, IZA has respect, fairness and social partnership in IZA on its excellent work become firmly established in the German a true sense of the word.” landscape of economic research and pol- In his speech, German President Horst Köhler icy advice. “Please continue to enrich the By serving as an institution of collective emphasized the importance of unionism: debates on labor market policy with your voice, unions contribute to a higher level of “In many ways, works councils contribute clear analyses and stimulating ideas. This job satisfaction and improve workers’ loy- to economic efficiency and a socially bal- is precisely what we need. There is still alty to the firm. Freeman has demonstrat- anced labor market. The strong interna- much to be done,” Köhler concluded.

German President Horst Köhler IZA Prize Conference, 4.–5. November 2007

Institute for the Study of Labor | I Z A COMPACT | November 2007 3 IZA/WORLD BANK CONFERENCE

Creating More and Better Jobs: Key to Successful Poverty Reduction Second IZA/World Bank Conference in Bonn

Well-functioning labor markets are key forecasted rate in order to absorb its oping countries. The to the sustainable reduction of poverty expanding labor force. need to better un- in developing countries. And since labor derstand the effects is often the main – if not the sole – asset The challenge for many developing coun- of globalization on of the poor, processes of growth that are tries is not only the creation of more jobs, workers and what can not associated with a rise in employment but also increasing the quality of these jobs. be done to compensate will fail to reduce the exclusion and vulner- In many cases, the new jobs being created those who lose is even more urgent in ability of the world’s poorest. The unfa- are of low productivity and low pay and do developing countries, where public social vorable employment outcome observed in not meet the expectations of a more skilled protection systems for the poor are un- many developing countries is the result of labor force. These new jobs do not always derdeveloped. a number of interacting factors. Economic ensure that those who get them will escape growth, while improving in many countries, poverty. Over 500 million people (18% of • In many developing countries, labor has not increased enough to generate suf- the employed) in the world are estimated regulations appear to be ill-suited to fa- ficient jobs for a rapidly expanding work- to be working poor – i.e., earn less than two cilitate this process. To move beyond the ing age population. The larger youth co- dollars per day – and this share is growing trade-off between labor market flexibil- horts that have entered the labor market in many low-income countries. ity and workers’ security, it is necessary over the past decades require sustained to identify the benefits and costs of ex- growth and job creation to absorb this in- There are several key issues that require fur- isting regulations and identify potential crease in labor supply. Given demographic ther research which may guide policymak- alternatives. trends, global economic growth until 2015 ers in developing countries for growth, job would need to be double the forecasted creation and poverty reduction strategies: • There is an urgent need to increase labor rate simply to maintain the current rate force quality in developing countries. In of employment. Africa alone would need • Globalization has increased uncertainty many countries of South Asia and Sub- to grow at approximately three times the for workers in both developed and devel- Saharan Africa, illiteracy rates are still

Second IZA/World Bank Conference: Employment and Development (Bonn, June 8–9, 2007)

June 8 – Opening Remarks Youth Employment Interventions – Minimum Wages Gudrun Grosse-Wiesmann A Global Inventory Katherine Terrell (University of Michigan, USA and (Deputy Director-General – Multilateral and Jean Fares (The World Bank, USA): “A IZA): “Minimum Wages and the Welfare of European Development Policy,BMZ, Germany) Global Inventory of Youth Employment Workers in Honduras” Michal Rutkowski (Director Human Development Interventions: What Could Be Learned?” Mirco Tonin (Stockholm University, Sweden): “Mini- Middle East and North Africa, The World Bank, USA) Discussion: Jochen Kluve (RWI Essen, mum Wage and Tax Evasion: Theory and Evidence” Germany and IZA), Donald Lee (United Na- Carmen Pagés (Inter-American Development Bank, Keynote Address tions, DESA, USA), Frank Tibitanzl (Head of the USA and IZA): “Minimum Wages in Kenya” Jan Svejnar (University of Michgan, USA and Sector Project on Employment, GTZ, Germany) IZA): “Unemployment and Job Creation” Gender and Economic Development Trade and Globalization Hari Nagarajan (National Council for Applied Economic Returns to Education and Schooling Decisions Jean-Pierre Cling (DIAL, France): “Export Research/NCAER, India): “Gender Discrimination Olivier Bargain (University College Dublin, Ireland and Processing Zones in Madagascar: The Impact and Returns to Self-Employment: Evidence from IZA): “Returns to Education in Chinese and Indian of the Dismantling of Clothing Quotas on Rural India” Formal Sectors: Implications for Skills Shortages” Employment and Labour Standards” Niels Spierings (Radboud University Nijmegen, Francesco Pastore (University of Naples II, Italy Laura Hering (University of Paris I, France): The Netherlands): “Women’s Labour Market and IZA): “To Study or to Work? Education and “Market Access Impact on Individual Wages: Participation in Egypt, Jordan, Morocco, Syria Labour Market Participation of Young People in Evidence from China” & Tunisia: A Three-Level Analysis” Poland” Mario Macis (University of Chicago, USA): Xiao-Yuan Dong (University of Winnipeg, Christophe J. Nordman (DIAL, France): “Employment and Welfare Consequences of Canada): “Why Do Women Have Longer “Education and Labour Market Outcomes Centralized Wage Setting: Evidence from Italy” Unemployment Durations than Men in in Sub-Saharan West Africa” Post-Restructuring Urban China?” Child Labor and Educational Choices Informal Sectors Furio Rosati (Understanding Children’s Work/UCW Informal and Underground Economy John Bennett (Brunel University, UK and IZA): and University of Rome Tor Vergata, Italy and IZA): Melanie Khamis (London School of Economics, UK): “Modeling Interactions between the Formal and “Twin Challenges of Child Labor and Youth Em- “Comparative Advantage, Segmentation and Informal Informal Sectors in a Developing Economy” ployment in Ethiopia” Earnings: A Marginal Treatment Effects Approach” Jasper Hoek (U.S. Department of the Treasury, Manisha Singh (India Development Foundation, Roberta Zizza (Bank of Italy, Italy): “Does the Under- USA and IZA): “Labor Flows in Formal and India): “Employment Avenues for the Youth in ground Economy Hold Back Financial Deepen- Informal Labor Markets in Brazil” India: Some Evidence and Some Options” ing? Evidence from the Italian Credit Market” Gabriel Ulyssea (Institute for Applied Economic Roxana B. Gutierrez Romero (University of Research, Brazil): “Job Duration and the Informal Cambridge, UK): “The Effects of Inequality on Sector in Brazil” the Dynamics of the Informal Economy”

4 Institute for the Study of Labor | I Z A COMPACT | November 2007 EMPLOYMENT AND DEVELOPMENT

very high, and enrollment in secondary these issues on a wide front. On June 8-9 countries, dynamic labor market concerns, education is still fairly low in many low the Second IZA/World Bank Conference in self-employment, earnings mobility, em- and middle income countries. Not sur- Bonn, Germany, provided a forum for both ployment and poverty reduction, and mi- prisingly, many employers in these coun- policymakers and researchers to discuss gration and households. tries consider skill shortage as one of their initiatives for employment creation in the main impediments to business expansion developing world. New research was pre- Opening addresses were given by Gudrun and growth. sented in 29 different panels covering a Grosse-Wiesmann (Deputy Director-General, wide range of issues: child labor in develop- German Federal Ministry for Economic • While some developed countries and ing countries, informal sector development, Cooperation and Development/BMZ), regions will experience significant de- trade and globalization, income support Michal Rutkowski (Director, Human Develop- clines in working age population, other schemes for the unemployed in developing ment in the Middle East and North Africa regions will have continued high popula- tion growth. The developing countries with continued strong labor force growth will be extremely hard-pressed to create the millions of additional jobs needed to accommodate the new entrants. This disequilibrium calls for demographic ar- bitrage and ideas on how to structure capital as well as labor flows, in including managed temporary or permanent mi- gration, the better use of remittances in labor-sending countries, and appropriate social policy programs that make return migration individually attractive and fis- cally sustainable for the sending country.

The joint IZA/World Bank Program Area on Akee, Scarpetta, Grosse-Wiesmann, Rutkowski, Zimmermann, Svejnar, Freeman “Employment and Development” addresses

Second IZA/World Bank Conference: Employment and Development (Bonn, June 8–9, 2007)

Dynamic Labor Market Concerns The Effect of Trade Liberalization on Wages An Investigation of Unemployment, Unions and Niels-Hugo Blunch (Washington and Lee University, and Working Conditions Wages” USA): “Multidimensional Human Capital, Drusilla Brown (Tufts University, USA): “Globaliza- Wages and Endogenous Employment Status tion and Employment Conditions” Efficiency of Labor Market Regulations and in Ghana” Raymond Robertson (Macalester College, USA): Interventions Sébastien Merceron (DIAL, France): “Urban Labour “A Framework for Analyzing Globalization and Nancy Chau (Cornell University, USA and IZA): “A Market Dynamics in Cameroon, 1993–2005: Does Working Conditions in Developing Countries” Theory of Employment Guarantees: Contestabil- Growth Transmit to the Households? ” David Kucera (International Labor Organiza- ity, Credibility and Distributional Concerns” Gerardo Jacobs (Universidad de Guanajuato, tion/ILO, Switzerland): “Developing Indicators Rita Almeida (The World Bank, USA and IZA): “The Mexico): “An Occupational Choice of Compliance with Labor Standards” Efficiency-Equity Trade-off of Labor Market Model for Developing Countries” Regulations: Evidence from Brazilian Cities” Self-Selection, Migration and Remittances Carmen Pagés (Inter-American Development Employment and Poverty Reduction Mathias Sinning (RWI Essen, Germany and IZA): Bank, USA and IZA): “Helping or Hurting Catalina Gutierrez (The World Bank, USA): “Does “Determinants of Migrants’ Remittances Workers? Assessing the Effects of De Jure Employment Generation Really Matter for Poverty – Empirical Evidence from Germany” and De Facto Labor Regulation in India” Reduction?” Randall Akee (IZA, Germany): “Who’s Uma Rani (Gujarat Institute of Development Research, Leaving? Deciphering Immigrant Self- Policy Panel Outcomes of Labor Market Policies India): “Household Characteristics, Employment Selection from Developing Countries” – What Do Policy Makers Expect? and Poverty in India” Robert Sparrow (Institute of Social Studies, The Chair: Michal Rutkowski (Director Human Development Bob Rijkers (University of Oxford, UK): Netherlands): “Remittances, Liquidity Constraints Middle East and North Africa, The World Bank, USA) “The Employment Creation Impact of the and Human Capital Investments in Ecuador” Munther Masri (National Center for Human Resources Addis Ababa Integrated Housing Program” Development, Jordan) Labor Market Institutions, Unemployment and Gudrun Grosse-Wiesmann (Director, Multilateral and Conditional Cash Transfer Programs and Child Training Programs European Development Policy, Federal Ministry for Eco- Labor – Three Latin American Case Studies 1 Anke Weber (University of Zurich, Switzerland): nomic Cooperation and Development/BMZ, Germany), Andrea Ferro (University of São Paulo, Brazil): “The “Ganyu Labor in Malawi: Efficiency Problems and Stefano Scarpetta (OECD, France) Impact of Conditional Cash Transfer Programs on Determinants of Supply” Raymond Torres (Head of Division, OECD, France) Household Work Decisions in Brazil” Adriana Kugler (University of Houston, USA and Rolph Van der Hoeven (Director of ILO’s Policy Emla Fitzsimons (Institute for Fiscal Studies London, IZA): “Effects of Youth Training in Developing Coherence Group, International Labor Organization UK): “The Effects of Shocks on Education and Countries: Evidence from a Randomized (ILO), Switzerland) Child Labour: Evidence from Colombia” Training Program in Colombia” Marco Manacorda (University of London, UK): Daniele Checchi (University of Milan, Italy and IZA): June 9: next page ► “Local Labor Demand and Child Labor” “Are Labour Market Institutions Endogenous?

Institute for the Study of Labor | I Z A COMPACT | November 2007 5 IZA/WORLD BANK CONFERENCE

Region, World Bank) and the Mayoress of in different regions. By presenting several for Human Resources Development), Gud- Bonn, Bärbel Dieckmann. country studies, Freeman underscored that run Grosse-Wiesmann, Raymond Torres (OECD labor market institutions as such are not de- Employment Analysis and Policy Division), Two keynote speeches were provided by Jan terrents to growth. He emphasized the role Stefano Scarpetta (OECD and IZA) and Rolph Svejnar (University of Michigan) and Richard of the informal sector in economic develop- van der Hoeven (ILO Policy Coherence Group) Freeman (Harvard University). Svejnar fo- ment as the key issue when it comes to un- discussed crucial topics of labor market cused on unemployment and job creation in derstanding the determinants of sustainable initiatives in developing countries. The con- developing economies, highlighting evidence growth in developing economies. ference presented high-standard research that the different unemployment rates are in the field, showing that labor economics not due to labor market institutions and can A policy panel chaired by Michal Rutkowski plays an important role in future develop- be at least partially explained by the con- represented a wide variety of interests in the ment policy advice. centration of human and physical capital field: Munther Masri (Jordan National Center ► www.iza.org/development

Conference program continued: Trade and Globalization II Segmentation in Transition Economies: June 9 – Opening Address Piriya Pholphirul (National Institute for Development Evidence from Ukraine” Bärbel Dieckmann (Mayor of Bonn, Germany) Administration, Thailand): “Labor Market Issues under Jan Svejnar (University of Michigan, USA and IZA): Trade Liberalization: Implications for Thai Workers” “Unemployment and Worker-Firm Matching: Keynote Address Alvaro Trigueros-Arguello (Salvadoran Foundation Theory and Evidence from East and West Europe” Richard B. Freeman (Harvard University, USA and IZA): for Economic and Social Development, El Salvador): “The “Breaking the Rules: The Success of Developing Coun- Effects of Globalization on Working Conditions: El Employment and Poverty Reduction II tries whose Policies Diverge from Market Ideals” Salvador 1995–2005” Jan Priebe (University of Göttingen, Germany): “The Eric V. Edmonds (Dartmouth College, USA and Targeting and Poverty Effect of the ‘Jefes y Jefas’ Income Support Schemes for the Unemployed IZA): “Trade Adjustment and Human Capital Workfare Program during the Argentine Crisis” Stephan Klasen (University of Göttingen, Germany Investments: Evidence from Indian Tariff Reform” Gauri Kartini Shastry (Harvard University, USA): and IZA): “Surviving Unemployment without “Speaking English in a Globalizing World: State Support: Unemployment and Household Earnings Mobility Information Technology and Education in India” Formation in South Africa” Maria Laura Sanchez Puerta (The World Bank, Marcos Vera-Hernandez (University College USA): “Earnings Mobility in Argentina, Mexico and Employment Protection and Jobs London, UK): “An Extensive Look at the Benefits Venezuela: Testing the Divergence of Earnings and in Developing Countries of Workfare Programs” the Symmetry of Mobility Hypotheses” Markus Poschke (European University Institute Stefano Scarpetta (OECD, France and IZA): “For Florence, Italy and IZA): “Employment Migration and Households Better or for Worse? Jobs and Earnings Mobility in Protection, Firm Selection, and Growth” Timothy Halliday (University of Hawaii, USA): Nine Developing and Emerging Economies” Enrico Saltari (University of Rome La Sapienza, Italy): “Migration, Risk and the Intra-Household Maja Micevska (University of Klagenfurt, Austria): “Do Labor Market Conditions Affect the Strictness Allocation of Labor in El Salvador” “Rural Nonfarm Employment and Incomes in the of Employment Protection Legislation?” Catia Batista (University of Oxford, UK and IZA): Eastern Himalayas” Stefano Scarpetta (OECD, France and IZA): “Brain Drain and Brain Gain: Evidence from an “Assessing Job Flows across Countries: The African Success Story” Self-Employment Role of Industry, Firm Size and Regulations” Hugo Nopo (Inter-American Development Bank, USA Labor Market Diagnosis in Low Income Countries and IZA), Patricio Valenzuela (Inter-American Develop- Long Run Effects of Child Labor Gary Fields (Cornell University, USA and IZA), ment Bank, USA): “Becoming an Entrepreneur” Peter Orazem (Iowa State University, USA and IZA): “Life- Dhushyanth Raju (The World Bank, USA): Jagannadha Tamvada (Max Planck Institute for Econom- time Health Consequences of Child Labor in Brazil” “Developing a Guide for Labor Market Diagnosis ics, Germany): “Religion and Entrepreneurship” Patrick Emerson (Oregon State University, USA): in Low and Middle Income Countries” Courtney Monk (University of Oxford, UK): “Health “Is Child Labor Harmful? The Impact of Chair: Stefano Scarpetta (OECD, France and IZA) Shocks, Job Quality, and Self-Employment in Africa” Working Earlier in Life on Adult Earnings” Discussants: Jeff Dayton-Johnson (OECD, France), Pierella Paci (The World Bank, USA) Special OECD Session: Work and Well-Being in Unemployment: Institutions, Transition and Developing Countries – Concepts, Measurement Programs Child Labor, Labor Markets and Schooling and Policies Axel Heitmueller (London Business School, UK and Ghazala Mansuri (The World Bank, USA): “Migration, Johannes Jütting (OECD, France): “Work and IZA): “Does Unemployment Insurance Help School Attainment and Child Labor: Evidence from Well-Being: Opportunities and Risks in Informal Explain Unemployment in Transition Countries?” Rural Pakistan” Labour Markets” Tito Boeri (Bocconi University, Italy and IZA): “Do Bibhas Saha (University of East Anglia, UK): “Official Miriam Altman (Human Sciences Research Council, Unemployment Benefits Promote or Hinder Duty vs. Private Practice: Teachers and Markets for South Africa): “Formalizing the Informal? – Structural Change?” Tutoring in Poor Countries” A South African Perspective” Jean Fares (The World Bank, USA): “Youth Unemploy- Sonia Bhalotra (University of Bristol, UK and IZA): Pierre Jacquet (French Development Agency/AFD, ment, Labor Market Transitions, and Scarring: Evi- “Early Childhood Investments in Human France): “Stimulating the Informal Economy and dence from Bosnia and Herzegovina, 2001–2004” Capital: Parental Resources and Preferences” Labour Markets Through Skill Development: Some Policy Orientations” Full-text versions of the papers presented at the Social Capital and Labor Market Satisfaction Discussant: Nalia Kabeer (Institute for Development conference are downloadable from the IZA Hai-Anh Dang (University of Minnesota, USA): “What Studies, UK) website: Do Teachers Want and Does It Matter? Job ► www.iza.org/conference_files/worldb2007 Satisfaction and Employee Performance” Transition Economies More information on the joint IZA/World Bank Gilles Spielvogel (DIAL, France): “Neighborhood Ef- Hartmut Lehmann (University of Bologna, Italy and initiative on “Employment and Development”: fects and the Urban Labour Market in West Africa” IZA): “Informal Employment and Labor Market ► www.iza.org/development

6 Institute for the Study of Labor | I Z A COMPACT | November 2007 BEHAVIORAL ECONOMICS

Risk Preferences, Reciprocity and Trust: New Insights from Behavioral Economics

Since individual preferences are impor- tant determinants of human behavior, they have a substantial impact on the eco- nomic success of firms and employees. These issues are at the core of research in behavioral economics, a scientific disci- pline still in its infancy in Germany. Armin Falk (IZA Director of Research until May 2007, since then Program Director for the research area “Behavioral and Personnel Economics,” see separate box) is rec- ognized as one of the leading and most innovative researchers in this field. In joint work with his IZA colleagues Thomas Dohmen, David Huffman and Uwe Sunde, as well as with other co-authors from the IZA network of Research Fellows, he has conducted extensive research dealing with risk preferences, trust attitudes and reciprocity in the working world. Should Klaus F. Zimmermann, Armin Falk, Bentley MacLeod people take risks in their careers, or will a cautious approach pay off in the end? Is the common assumption true that selfish- risk attitudes, but they also gained new • Women in Germany are significantly ness is a career advantage, while coopera- insights, which have so far been largely more risk-averse than men, with an tive team-players are less likely to advance ignored in the working world. average of 3.96 compared to 4.9 points. in their jobs? Is a trusting approach to- This difference holds true for vari- ward co-workers and subordinates ben- • People become more risk-averse with age. ous aspects of life, including driving, eficial or does it encourage exploitation? sports, health, leisure, financial or This article summarizes the most impor- • People willing to take risks self-select career decisions. Since risk-taking be- tant findings of the IZA studies. It also into risky jobs with higher income vola- havior is rewarded with substantially documents the high practical relevance tility but better average pay. Risk-averse higher wages, this may explain part of of this particular approach to labor eco- people, on the other hand, prefer jobs the wage gap between men and women. nomics. with secure careers, such as civil ser- While Germans are most risk-loving vice. in career and leisure activities, they Risk attitudes: An important are rather risk-averse in other aspects indicator for economic success • Risk-loving people are more likely to of life. migrate to regions with better job pros- The IZA studies on risk attitudes are based pects. It is thus not surprising that peo- • Risk attitudes do not only appear to be on survey results regarding individual risk ple in traditional immigration countries similar among spouses, they also seem preferences, which were tested in behav- are more risk-seeking than in Germany: to be transmitted across generations. ioral experiments and eventually analyzed when measured on a ten-point scale, Grown-up children often resemble their through regression analyses. This ap- Americans rank at 5.6 points in terms of parents (particularly their mother) quite proach enabled the researchers to prove risk preferences, well ahead of Germans closely in terms of risk behavior. This some of the existing assumptions about at 4.4 points. phenomenon is most striking for first-

Armin Falk – New IZA Program Director for “Behavioral and Personnel Economics”

Armin Falk, IZA Research Director since 2003, has made The previous coordinator of this research area, Bentley crucial contributions to the establishment and expansion MacLeod (Columbia University), has resigned from this of the IZA research area on Behavioral and Personnel Eco- position but will remain actively engaged with IZA as a re- nomics. Parallel to his numerous tasks at IZA, Falk has also search fellow. been serving as Director of the Bonn Laboratory for Experi- mental Economics (Bonn Econ Lab) since 2004. Although IZA Director Klaus F. Zimmermann commented, “Behavioral he resigned from his position as IZA Research Director to and personnel economics will continue to play a strong role become a full professor of economics at the University of at IZA. The continuing cooperation with Armin Falk provides Bonn, Armin Falk will keep close contact with the institute an excellent opportunity for us to strengthen our ties with in his new role as Program Director for Behavioral and university research programs. We are very grateful to Armin Personnel Economics. Falk and Bentley MacLeod for their outstanding work.”

Institute for the Study of Labor | I Z A COMPACT | November 2007 7 IZA RESEARCH

born and single children. As a result, employment probability as six months a control mechanism. In the experiment, children often make economic deci- of additional education or training. the employees punished the distrusting sions similar to their parents’ – a poten- employers by dramatically reducing work tial reason for the success and longevity According to these findings, person- effort. Control can thus not only lead to of many entrepreneurial dynasties. nel recruiters would be well advised to considerable negative consequences, but search for positively reciprocal workers as also act as a self-fulfilling prophecy: if the The numerous IZA studies on risk pref- these will tend to work more and require employer controls his employees because erences have direct implications for the less control. This aspect could potentially of distrust, they will react by performing labor market. It is safe to assume, for outweigh a deficit in formal qualifica- poorly. This leads the employer to find example, that there is to some extent tions. his suspicion confirmed and results in a “natural” self-selection of risk-averse even more control. A trusting approach people into administrative or civil service Additionally, the analysis can be ap- may therefore be a much more efficient jobs. On the other hand, highly innovative plied to the acceptance of the “give-and- element of personnel management. While firms will have the best chances to find take” principle of the workfare model as the experiment also shows that the rather risk-taking workers who can secure and advocated by IZA: about 84 percent of unrealistic case of “complete control” further advance the vitality of the firm. the participants in a large IZA experiment may lead to a similar job performance as Recruitment and training schemes could consider it fair to impose a work require- the trusting approach, the positive effects be adjusted to better match the risk at- ment on welfare recipients – even if they of a trust strategy prevail, particularly titudes of the employees. The findings are may themselves be affected by this regu- when employee motivation is considered also relevant with regard to remuneration lation. in the long run. schemes: performance pay particularly attracts individuals who are more willing Economic consequences These are just some of the remarkable to take risks. of trust attitudes insights to be gained by research in behavioral economics, with high prac- Homo reciprocans: Armin Falk and his colleagues have also tical relevance for personnel managers Bound for success? experimentally studied the economic and beyond. IZA will therefore continue impact of trust between employees and to pursue and extend its activities in this One of the key issues for behavioral econ- employers. In the study, the participants field. omists is the question of reciprocity at the were grouped into one of those two roles. workplace: do people tend to “reward” The employees received a starting endow- fairness and cooperative behavior while ment, which they could partly “invest” into “punishing” unfair treatment? To gain in- work effort after the employers signaled sights into this behavior, the IZA research- either trusting or controlling behavior IZA DP No. 2215

ers applied regression analysis to relevant (an enforced minimum work effort). The IZA DP No. 2215 The German Labor Market: S

E Still Adjusting Badly? I IZA DP No. 2215

survey items in the German Socio-Eco- employers received double the amount R E The GermanWerner EichhorstLabor Market: S Still AdjustingLutz C. Kaiser Badly? IZAR DP No. 2215 E

nomic Panel. of each employee’s investment. The re- P The GermanWerner EichhorstLabor Market: A

P Still AdjustingLutz C. Kaiser Badly?

DISCUSSIONJuly PAPER 2006SERIES N O Werner Eichhorst TheI German Labor Market:

sults are in stark contrast to standard S Still AdjustingLutz C. Kaiser Badly? S DISCUSSIONJuly PAPER 2006SERIES U WernerC Eichhorst S

LutzI C. Kaiser

The respondents were asked to what economic theory, which holds that an DISCUSSIOND PAPER SERIES July 2006

extent they would return received fa- employer cannot be worse off when using DISCUSSIONJuly PAPER 2006SERIES

vors even if this involved substantial

costs or effort (positive reciprocity), or Forschungsinstitut zur Zukunft der Arbeit Institute for the Study Forschungsinstitutof Labor to what extent they would reciprocate zur Zukunft der Arbeit Institute for the Study ForschungsinstitutForschungofsi nLaborstitu t suffered injustice (negative reciprocity). IZA DP No. 2765: Armin Falk, Christian Zehnder zurzur ZZukunftukunft dderer ArbeitArbeit InstituteInstitute fforor tthehe SStudytudy Forschungsinstitutofof LLaborabor zur Zukunft der Arbeit Discrimination and In-Group Favoritism Institute for the Study of Labor • The research results show that people in a Citywide Trust Experiment who are positively reciprocal are signifi- cantly more successful and willing to IZA DP No. 2735: Thomas Dohmen, work hard. Armin Falk, David Huffman, Uwe Sunde Are Risk Aversion and Impatience IZA DP No. 1930: • Higher positive reciprocity contributes Related to Cognitive Ability? Holger Bonin, Thomas Dohmen, Armin to the willingness to work additional Falk, David Huffman, Uwe Sunde hours in a similar way as better educa- IZA DP No. 2655: David A. Jaeger, Cross-sectional Earnings Risk and Occupa- tion or longer job tenure does. Holger Bonin, Thomas Dohmen, Armin tional Sorting: The Role of Risk Attitudes Falk, David Huffman, Uwe Sunde • Positively reciprocal employees reward Direct Evidence on Risk Attitudes and Migration IZA DP No. 1730: Thomas Dohmen, higher wages with increased work ef- Armin Falk, David Huffman, Uwe Sunde, fort. IZA DP No. 2380: Thomas Dohmen, Jürgen Schupp, Gert G. Wagner Armin Falk, David Huffman, Uwe Sunde Individual Risk Attitudes: New • Negatively reciprocal persons, in con- The Intergenerational Transmission Evidence from a Large, Representative, trast, are much more likely to take sick of Risk and Trust Attitudes Experimentally-Validated Survey days. IZA DP No. 2205: Thomas Dohmen, IZA DP No. 1203: Armin Falk, Michael Kosfeld • Negative reciprocity is also more com- Armin Falk, David Huffman, Uwe Sunde Distrust – The Hidden Cost of Control mon among unemployed individuals. Homo Reciprocans: Survey Evidence on Each additional degree of positive reci- Prevalence, Behavior and Success ► http://www.iza.org/publications/dps procity has about the same effect on

8 Institute for the Study of Labor | I Z A COMPACT | November 2007 WAGE INEQUALITY

Revisiting the German Wage Structure: Growing Inequality and Real Wage Decline at Lower Tail

The trend toward increasing wage inequal- What explains the steady increase in up- gent path of upper and lower tail inequality ity is not restricted to the United States and per-tail inequality throughout the 1980s in the 1980s or for the divergent path of low- other Anglo-Saxon countries. Contrary to and 1990s? What caused the large increase er-tail inequality in the 1980s and 1990s. common perception, wage inequality has in lower-tail inequality in the 1990s? And also been rising in Germany since the late why did the increase in lower-tail inequality De-unionization is important 1970s. Throughout the 1980s, i.e. before occur later in Germany than in the United reunification, the rise in inequality was con- States? The study explores several explana- A further explanation for the widening of the centrated at the top of the wage distribution. tions.One possibility is that the increase in wage distribution is a decline in unionization. In the early 1990s, i.e. after reunification, lower- and upper-tail inequality is spurious In Germany, recognition of trade unions for inequality started to rise at the bottom of and reflects changes in workforce composi- collective bargaining purposes is at the dis- the wage distribution as well. In the United tion, which alone may mechanically lead to cretion of the employer. A firm recognizes the States, on the other hand, the pattern is re- a rise in wage inequality. Dustmann, Lud- union by either joining an employer federa- versed: whereas in the 1980s inequality rose steck, and Schönberg show that it is impor- tion or by engaging in bilateral negotiations at both the lower and upper end of the wage tant to account for changes in workforce with the union. Unlike in the United States, distribution, the increase in inequality in the composition, in particular at the upper end there is so far no legal minimum wage in 1990s occurred only at the top of the wage of the wage distribution. However, these Germany. However, union contracts in Ger- distribution. These are the findings of a changes cannot fully account for the diver- many specify wage levels for specific groups study by IZA Research Fellows Christian Dust- Lohnwachstum nach Einkommensgruppe (1980er und 1990er Jahre) mann (University College London) and Uta Wage Growth by Percentile: Schönberg (University of Rochester), which 1980s versus 1990s was co-authored by Johannes Ludsteck (Insti- MKNR tute for Employment Research, IAB) and is available as IZA Discussion Paper No. 2685.

MKNM IZA - 2007

©

Wage inequality on the rise in Germany MKMR Using a two-percent random sample of social security records for the years 1975–2001 (IAB- MKMM Beschäftigtenstichprobe), the authors analyze in detail the changes in the West German wage JMKMR structure in the 1980s and 1990s. The study `Ü~åÖÉ=áå=içÖ=oÉ~ä=t~ÖÉ JMKNM shows that – contrary to what is commonly change in log real wage believed – wage inequality has been increasing since the late 1970s. The main changes in the JMKNR wage structure are shown in ► Figure 1. The M R NM NR OM OR PM PR QM QR RM RR SM SR TM TR UM UR figure plots the (log) real wage growth along éÉêÅÉåíáäÉ NVTVJNVUV NVVNJOMMN the wage distribution over two time periods: Lohnwachstum nach Einkommensgruppe (1980er und 1990er Jahre) the pre-unification period from 1979 to 1989 Source: IZA Discussion Paper No. 2685 and the post-unification period from 1991 to 2001. In the 1980s, wages grew throughout außerdem statt 0,15 0.15!!!(Komma) The Role of Deunionization, 1995-200 the distribution, but substantially more at MKNR The Role of Deunionization, 1995–2004 the upper than at the lower tail. In contrast, pctile 1979-1989 1991-2001 between 1991 and 2001, wage growth has NRMKNM0 0.00 0.00 1 0.00 0.00 been negative up until the 25th percentile, NM2 0.00 0.00 IZA - 2007 with wage losses of more than 10 log wage MKMR3 0.00 0.00

R © points at the 5th percentile. Wage earners at 4 0.034838 -0.14 5M 0.04 -0.12 the 85th percentile, in contrast, experienced MKMM6 0.05 -0.10 a wage growth of about 10 percent. JR7 0.04 -0.09 JMKMR8 0.05 -0.08 JNM9 0.06 -0.06

German and U.S. development äçÖ=ï~ÖÉ=ÅÜ~åÖÉ 10 0.06 -0.06 JNR log wage change similar but time-lagged `Ü~åÖÉ=áå=içÖ=oÉ~ä=t~ÖÉ JMKNM11 0.06 -0.05 JOM12 0.06 -0.04 The authors conclude that the United 13 0.06 -0.05 JORJMKNR14 0.06 -0.04 States and West Germany experienced 15 0.07 -0.03 MM R R NM NM NR NR OM OM OR OR PM PM PR PR QM QM QR RM RR RR SM SM SR SR TM TM TR TR UM UM UR UR similar changes at the top of the wage dis- 16 0.06 -0.03 éÉêÅÉåíáäÉéÉêÅÉåíáäÉ tribution throughout the 1980s and 1990s. 17 0.06 -0.03 18 0.06 -0.03 NVTVJNVUV NVVNJOMMN However, the two countries markedly differ Ñ~Åíì~ä=ÅÜ~åÖÉ ìåáçåáò~íáçå=Åçåëí~åí with respect to the lower end of the wage Note: The figure plots actual wage growth by percentile from 1995-2004, as well as the wage distribution. The rise in lower-tail inequality growth that would have prevailed if unionisation had remained at its 1995 level. The figure is based on the LIAB, a linked employer-employee panel data set happened in the 1980s in the United States, außerdem statt 0,15 0.15!!!(Komma) but a decade later in Germany. Source: IZA Discussion Paper No. 2685 pctile 1979-1989 1991-2001 0 0.00 0.00 1 0.00 0.00 2 0.00 0.00 Institute for the Study of Labor | I Z A COMPACT | November 20073 0.00 0.00 9 4 0.034838 -0.14 5 0.04 -0.12 6 0.05 -0.10 7 0.04 -0.09 8 0.05 -0.08 9 0.06 -0.06 10 0.06 -0.06 11 0.06 -0.05 12 0.06 -0.04 13 0.06 -0.05 14 0.06 -0.04 15 0.07 -0.03 16 0.06 -0.03 17 0.06 -0.03 18 0.06 -0.03 Figure 3: Percentage Change in Employment Share by Job Ranking by Median Wages (1979) Panel A: 1979-1989

0.2

0.1

0 ÖêçïíÜ=ê~íÉ -0.1 IZA RESEARCH Figure 3: Percentage Change in Employment Share by Job Ranking by Median Wages (1979)-0.2 Panel A: 1979-1989 1 2 3 4 5 6 7 8 9 10 Percentage Change in Employment Share by Job Quality Decile Ranking by Median Wages (1979) Panel B: 1991-2001 Panel A: 1979–1989 Panel B: 1991–2001 0.2 0.2 IZA - 2007

©

0.1 0.1

0 0 ÖêçïíÜ=ê~íÉ ÖêçïíÜ=ê~íÉ -0.1 -0.1

-0.2 -0.2 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Note: The figure plots the percentage change in the employmentPanel share B: 1991-2001by job quality decile, from 1979 to 1989 and 1991 to 2001. The 130 occupations are ranked by median wages in 1979, and then grouped into 10 equally sized groups. Source: IZA Discussion Paper No. 2685 0.2

in specific sectors and can be considered Technology contributes to the A focuses on the 1979–1989 period, and an elaborate0.1 system of minimum wages. In increase in upper-tail inequality Panel B on the 1991–2001 period. Both pe- the 1990s, West Germany witnessed a sharp riods show similar trends. The employment decline in unionization rates. Data from the The divergent path of wage inequality at the share of occupations at the top of the wage IAB firm panel0 show that between 1995 and lower and upper tail in the 1980s and 1990s distribution (the 8th decile onwards) has in- 2004 the share of workers who were covered is difficult to reconcile with a simple theory creased substantially in both. The employ-

by eitherÖêçïíÜ=ê~íÉ an industry- or firm-level agree- of skill-biased technological change, ac- ment share of occupations in the middle ment decreased-0.1 by 16 percentage points. cording to which technology symmetrically of the wage distribution (4th through 7th Data on union membership further suggest affects the bottom and the top of the wage decile), in contrast, declined. Occupations that unionization rates were largely stable distribution. But suppose that computeriza- at the low end of the wage distribution have during the 1980s. tion decreases the demand for jobs that re- experienced neither strong losses nor strong -0.2 quire routine analytical or clerical skills and gains. This is not dissimilar to what has been If a decline in unionization1 2 3 increases 45 lower- 6 7increases 8 the 9 demand 10 for non-routine cog- found for the United States and the United tail inequality more than upper-tail inequal- nitive and interpersonal skills. Furthermore, Kingdom. The authors also provide evidence ity, it could partly explain why lower-tail in- suppose that computer technology neither that occupations in the middle of the wage equality in Germany rose in the 1990s, but strongly complements nor strongly substi- distribution indeed predominantly use rou- not in the 1980s. And since in the United tutes manual tasks, such as cleaning, repair- tine tasks, while occupations at the top are States both the decline in unionization ing or accommodating. If routine analytical characterized by high usage of non-routine and the fall in the minimum wage occurred skills are predominantly used in the middle analytic and interactive tasks. mostly in the 1980s and not in the 1990s, de- and manual and interactive skills at the bot- unionization could potentially also account tom and top of the wage distribution, tech- The IZA Discussion Paper concludes that for why the increase in lower-tail inequality nological change may lead to ‘polarization’ technological change is an important occurred a decade later in Germany than in and, thus, differently affect lower- and up- driving force behind the widening of the the United States. per-tail inequality. Dustmann, Ludsteck and wage distribution, particularly at the Schönberg test a key implication of this hy- top. However, the widening of the wage The authors use data from a linked employ- pothesis. Occupations in the middle of the distribution at the bottom that occurred er-employee dataset to recover the counter- wage distribution in the late 1970s, for in- in the 1980s in the United States but in the factual wage distribution that one would ob- stance, should have lower growth rates than 1990s in Germany may be better explained serve in 2004 had unionization remained at occupations at the bottom and top of the by episodic events, such as the decline its 1995 level. Results can be found in Figure wage distribution. ▲ Figure 3 provides evi- in unionization. 2 (previous page, ▲). It illustrates that work- dence in favor of this ers throughout the wage distribution would hypothesis. The figure have experienced a higher wage growth ranks the 130 occu- over this period had unionization rates pations in the data- Christian Dustman Johannes Ludsteck not declined. However, the impact of de- set according to their IZA DP No. 2685 unionization is substantially stronger at median wage in 1979. Uta Schönberg Revisiting the German Wage Structure the lower end of the wage distribution. For Occupations are then Christian Dustmann Johannes Ludsteck Uta Schönberg Revisiting the instance, wages in 2004 would have been put into 10 groups of DISCUSSIONMarch PAPER SERIES 2007 German Wage Structure 8 percent higher at the 5th percentile, but roughly equal size. The only 0.5 percent higher at the 85th percen- figure shows the per- IZA Discussion Paper No. 2685 tile. This suggests that the large wage losses centage change in the ► http://ftp.iza.org/dp2685.pdf

Forschungsinstitut at the lower end could have been partly employment share for zur Zukunft der Arbeit Institute for the Study avoided had unionization not declined. the 10 groups. Panel of Labor

10 Institute for the Study of Labor | I Z A COMPACT | November 2007 INTEGRATION OF IMMIGRANTS

The Labor Market Integration of Turkish Immigrants in Germany and the Netherlands

The impact of immigration and integration of their number is the result of past labor come conditions were imposed, the Dutch policy on the success of immigrants in a host migration ( Figure 1). Both Germany and policy was liberal. Although the recruitment country is difficult to determine. Studies the Netherlands went through a long period of guest workers had stopped completely in show that the selective immigration policies of economic growth during the 1960s, and in the 1980s, the number of Turkish immigrants of Australia, Canada and New Zealand are both countries the number of Turkish ‘guest living in the Netherlands continued to grow. successful. However, part of their success workers’ started to grow strongly from the A third major difference was in remigration can be attributed to the attraction of immi- end of the 1960s onwards. The number of policy. While Germany followed an active re- grants from certain countries. An important labor migrants remained high until the migration policy in 1983 and 1984, giving op- open question is: what is the scope of immi- early 1970s. The first oil crisis marked the portunities to return for those who were less gration and integration policy for a group of end of official recruitment, and the number successful, the Netherlands never implement- immigrants from a given country? Interna- of entrants decreased. For Germany, the ed such a policy. A fourth major difference tional comparative studies encounter prob- slowdown in the growth of the number of was in integration policy. Germany expected lems as host countries receive immigrants immigrants was, however, temporary, and permanent immigrants to assimilate, and from different countries, and host countries the number of new entrants again peaked offered limited possibilities to integrate and use different definitions for immigrants. in the 1980s. The second oil crisis resulted simultaneously preserve their own culture. In in an economic crisis in both countries, and contrast, the Netherlands followed an active An IZA Discussion Paper, authored by IZA long-term unemployment became a serious integration policy based on multiculturalism, Research Fellow Rob Euwals (CPB Nether- problem. From that moment on, migration offering immigrants the chance to become lands Bureau for Economic Policy Analysis) from Turkey consisted almost exclusively of part of the society while preserving their own finds answers to this question by studying family and asylum migration. Immigration culture. the example of Turkish immigrants in Ger- and remigration policy started to develop many and the Netherlands. Turkish immi- differently in both countries. Education plays a role grants constitute a large immigrant group in both countries, arrived there in about the Differences in policy focus The data sources for the study are the Ger- same period, and unique survey data exists man Socio-Economic Panel 2002, the Dutch for both countries. Even more importantly, Although Germany and the Netherlands have Social Position and Use of Provisions Survey both countries followed a different im- labor market institutions that are similar in 2002 (for Turkish immigrants), and the Dutch migration and integration policy. In which many aspects, the immigration and integra- Labor Force Survey 2002 (for natives). The country are the Turkish immigrants more tion policies were and still are different. A paper compares employment rates, tenured successful in the labor market? Can differ- first difference concerned the requirements job rates and ISEI job prestige scores, which ences in success be attributed to differences for a permanent residence permit. In Germa- is a measure for the relative job position on in immigration and integration policy? ny, immigrants could apply for such a permit a scale from 10 (low) to 90 (high), between after eight years of stay and were required to Turkish immigrants and natives. Main channels of immigration prove to be economically self-reliant. In the have changed over time Netherlands, the term was five years and re- The contrasting results between the two quirements with respect to economic self-re- countries are remarkable. First, employment In Germany, the Turkish immigrants are the liance were more lenient. A second major dif- rates of Turkish immigrants are more unfa- largest immigrant group, while in the Neth- ference was in family reunification and family vorable in the Netherlands. Of course, the erlands they share this position with the Su- formation policy. While the German policy Turkish immigrants’ lower level of education rinamese immigrants. The substantial size was rather restrictive as employment and in- plays an important role for both genders in

Turkish Immigrants as a Percentage Difference in Labor Market Position, of the Population, 1967 – 2004 Turkish Immigrants versus Natives, 2002a

West-Germany Netherlands Employment rate (%, men) unadjusted difference -14 -23

3 IZA - 2007 IZA - 2007

b ©

© adjusted difference -6 -21 Employment rate (%, women) unadjusted difference -31 -32 adjusted difference -7 -20 Tenured job rate (%, employed) 2 unadjusted difference -5 -15 adjusted difference 0 -12 c

percentage Job prestige ISEI (score, employed) unadjusted difference -13 -11 adjusted difference -7 -4 1 a Turkish immigrants include both first and second generation immigrants. b Difference remaining after correction for observed individual characteristics with the Blinder-Oaxaca decomposition method. The individual characteristics include age, education and the presence of children younger than 16 in the household. c The ISEI job prestige score is based on the average levels of education and 0 earnings in an occupation, ranging from 10 (low) to 90 (high). 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 Source: German Socio-Economic Panel 2002, Dutch Social Position and Germany the Netherlands Use of Provisions Survey 2002 (for Turkish immigrants), and Dutch Labour Source: IZA Discussion Paper No. 2677 Force Survey 2002 (for natives).

Institute for the Study of Labor | I Z A COMPACT | November 2007 11 IZA EXPERT MEETING

both countries. But in Germany, educational gap. The Netherlands perform better in terms A second explanation is in the immigration attainment explains a substantial part of the of career opportunities for those who have a and remigration policy. The more restric- unadjusted gap, leading to a substantially job. But performance on this labor market tive German immigration policy is likely smaller adjusted gap. In the Netherlands, the outcome relative to Germany does not seem to have led to a more positive selection of adjusted gap remains large for both men and to compensate for the poor performance the immigrants, and the economic con- women. Second, tenured job rates are less fa- of (tenured) employment opportunities for ditions for permanent residence permits vorable in the Netherlands as well. The young Turks. The immigration of low-skilled Turkish and family reunification imposed impor- age of the second generation explains an im- immigrants is not a “success story,” but the tant incentives to be employed. Economic portant part of the difference in both coun- relative success of Germany compared to the self-reliance was, therefore, much more tries. But while in Germany the gap between Netherlands calls for an explanation. important in Germany compared to the Turks and natives disappears after correction Netherlands. This is clearly consistent with for age, the unadjusted gap remains large in A first explanation for the relatively poor per- the smaller gap in the (tenured) employment the Netherlands. Third, job prestige scores formance of the Netherlands is the unfavor- rate in Germany, which after correction for are more unfavorable in Germany. Again, ed- able economic history of this group of im- the observed individual characteristics even ucational attainment is important. But while migrants. The combination of the economic becomes rather small. in the Netherlands the gap between Turks crisis of the 1980s and and natives becomes substantially smaller the deactivating social after correction, the unadjusted gap remains security arrangements of Rob Euwals large in Germany. the time are likely to have Jaco Dagevos been important. Many Mérove Gijberts IZA DP No. 2677 Hans Roodenburg Generous welfare system lowers Turkish men became Immigration, Integration and the Labour Market: entitled to an unemploy- Turkish Immigrants in Germany and the Netherlands employment rate of immigrants Rob Euwals Immigration, Integration Jaco Dagevos Mérove Gijsberts ment, disability or wel- Hans Roodenburg and the Labour Market:

DISCUSSIONMarch PAPER SERIES 2007 Overall, Germany performs substantially fare benefit during that Turkish Immigrants in Ger- better in terms of leading Turkish immigrants period. This explanation many and the Netherlands into (tenured) employment. Although the is consistent with a low IZA Discussion Paper No. 2677 difference between Turks and natives is large employment rate of older

Forschungsinstitut ► http://ftp.iza.org/dp2677.pdf zur Zukunft der Arbeit in Germany as well, an improvement in the Turkish men in the Neth- Institute for the Study of Labor educational attainment could help close this erlands, in particular. IZA Expert Meeting: Taking Stock of the Reforms to Active Labor Market Policy in Germany

The implications of the Hartz Reforms for the evaluation research. Among the speakers content-related and person-specific differ- future of German labor market policy were dis- were representatives of the research projects ences with regard to the effects of active la- cussed at the IZA symposium “Reformbilanz that were involved in the Hartz evaluation. bor market policy instruments. Hugh Mosley der aktiven Arbeitsmarktpolitik,” which was (Social Science Research Center Berlin/WZB) held March 21-22 in Bonn. The symposium Susanne Rässler (Institute for Employment Re- evaluated the reorientation of job placement, offered an ideal forum to present and discuss search/IAB) presented the research results of which he found has led to a notable increase current scientific findings surrounding the a cooperative project conducted by the IAB, in service quality. Despite these generally evaluations of the Hartz Reforms as well as the Federal Employment Agency and Harvard positive results, there is still room for organi- other related research. The event, which was University. The impact analyses are based on zational improvement of the customer service organized by Lutz Kaiser and Hilmar Schneider a complete survey of the administrative data centers: inadequate customer allocation due (both IZA), was primarily geared towards ex- of the Federal Employment Agency, starting to insufficient profiling is still a major prob- perts from the practical fields of labor agen- in 2001. The dataset available for this project lem, which may result in significant follow-up cies, educational institutions, local politics, allows for sophisticated research that is not costs. Moreover, the group of “intensive ser- social administration and federal ministries, usually possible due to insufficient sample vice clients,” who account for about 30% of but it also addressed academics working in size. Some of the results exhibit large regional, the unemployed, receive support too late.

Hilmar Schneider Susanne Rässler Hugh Mosley

12 Institute for the Study of Labor | I Z A COMPACT | November 2007 ACTIVE LABOR MARKET POLICY

Further presentations dealt with training Another vital instrument of active labor can be found, which equals an increase in measures, placement-related services, busi- market policy – further occupational train- labor market turnover and a reduction in ness startup grants, the promotion of fur- ing (FbW) – was at the center of the pre- individual unemployment durations. In gen- ther occupational training (FbW) and inte- sentation by Hilmar Schneider. The FbW eral, the results indicate an increase in labor gration allowances (employer subsidies for reform aimed at improving the quality of market dynamics and matching speed in the hiring older workers). Stephan Lothar Thomsen training by introducing competition be- wake of the Hartz I/II and III reform waves, (Centre for European Economic Research tween educational institutions and by im- which cannot be attributed to cyclical, sea- in Mannheim/ZEW) spoke on the effects of plementing quality management within the sonal or statistical variation, but directly to training programs on the duration of indi- labor agencies. Among the new instruments the reforms. The strongest impact is found vidual unemployment durations in Western were training vouchers and a certification in the manufacturing industry. Germany. The results of his study show that process for training programs and service training programs have a positive impact on providers. On the whole, the impact of the That the effectiveness of active labor market reemployment rates – particularly during FbW reforms can be regarded as positive. policy also depends on regional conditions the first six months of program participa- While program participation had already was shown by Michael Fertig (Institut für So- tion. However, no effects can be found after significantly improved individual employ- zialforschung und Gesellschaftspolitik/ISG). one year of participation, meaning that the ment prospects before the reform, this For his study, he resorted to a specific divi- initially positive impression of the current re- effect was reinforced by the reform. How- sion of 91 regional labor markets. The results sults must be supplemented with more far- ever, it must be criticized that the preselec- were again measured in the size of worker reaching analyses. tion of participants is often based on the flows in the labor market. Furthermore, in- wrong criteria. Instead of promoting the formation from a survey of all labor agen- Doris Hess (Institute for Applied Social Sci- unemployed whose chances of employment cies was used to identify the causal effects ences in Bonn/infas) analyzed several in- are particularly low without further training of the policy. The results from the statistical struments of placement-related services and whose opportunities can be improved analysis suggest that only a few measures (personnel service agencies, placement comparatively well by such a measure, the have a significant effect on the net exits from vouchers, outcontracting). The goal of these program instead focuses on the easy-to- unemployment and that the impact of poli- services is to strengthen the competition and place groups. This leads to a kind of “elite cies hardly differs before and after the Hartz innovativeness of various labor market ser- selection,” which limits the instrument’s Reforms. Thus, considering regional dispari- vice providers, especially by involving more potential to improve employment oppor- ties, Hartz Reforms I/II and III can only be private providers. On the whole, however, tunities. Therefore, regardless of the over- said to have had a moderate effect. only small positive effects can be found for all positive result of the evaluation, the the three instruments above. Private service process must still be improved substan- The last item of the symposium centered providers have been primarily successful in tially. on the future perspectives of labor mar- finding employment for individuals that can ket policy and its evaluation. Susanne Koch be considered easy to place. In fact, only in For many older employees in Germany, the (IAB) presented interim results on the first the case of placement vouchers have private chances of reentering the labor market are two years of the new Social Code II from service providers achieved better placement rather low. Bernhard Boockmann (ZEW) pre- the point of view of research on its effects, outcomes than the Federal Labor Agency. sented a study that dealt with the question and she presented first findings concerning Given that the marketbased instruments of whether integration allowances (EGZ) for the structures of Unemployment Benefit II have only moderately increased effective- employers who hire older workers reduce recipients, distribution effects, the imple- ness, there is still much room for improve- unemployment among this group. The EGZ mentation of the law at the procedural and ment. for older employees were merged with the instrumental levels, the question of focus general integration allowances as part of the group orientation, and the modification Marco Caliendo (German Institute for Eco- Hartz Reforms. Although the possibilities of of placement processes. The high hopes nomic Research/DIW Berlin) highlighted the promoting reintegration were broadened in that were placed on the reform have not promotion of self-employment among the this process, this did not increase the tran- yet come to fruition. In particular, the idea unemployed. Business startup grants for the sition rates into employment. On the other of activating the unemployed has not been unemployed were one of the most important hand, the program merger did not cause fully realized, and there is still some need for instruments of German active labor market the prospects of the older unemployed to adjustments in the design and focus group policy in the form of the so-called Ich AG (“Me deteriorate in comparison to their younger orientation of the instruments implemented Inc.”) and the bridging allowance. Judging colleagues. Both effects are due to the fact by Social Code II. by their achievement rates, these programs that firms reduce the number of nonsubsi- can be regarded as successful. The par- dized hirings if subsidies are available for Werner Eichhorst (IZA), in his presenta- ticipants of both programs exhibit a signifi- hiring unemployed workers. In this case it is tion “Evaluation of the Evaluation – Parts cantly lower unemployment probability than only rational to take advantage of subsidies Unknown on the Map of Evaluation,” called a control group of nonparticipants. At the for new hirings that would have taken place attention to the fact that only a small share same time, they are more likely to be (self-) anyway. The results of the analysis underline of the entire set of instruments has been employed and they earn higher incomes. Ad- the high relevance of windfall gains when it evaluated so far, while many costly pro- ditional cost benefit analyses show that at comes to assessing the effects of active labor grams, such as those aimed at youths, have least the bridging allowance is used efficient- market policy instruments. not yet been subject to evaluation research. ly. The merger of both programs in August Eichhorst called for a reorganization of the 2006, which resulted in the new “founders’ Uwe Sunde (IZA) tackled the issue of whether current array of over 80 instruments: only allowance,” must be critically examined since the Hartz Reforms achieved their primary those programs that have actually prov- an efficient and effective instrument – the goal, which is the reduction of unemploy- en their effectiveness, he argued, should bridging allowance – was combined with an ment duration. He arrived at a mostly posi- receive continuing support. instrument whose long-term effects are still tive conclusion: in the post-reform phase, a undetermined. remarkable acceleration of vacancy fillings www.iza.org/conference_files/Reform2007

Institute for the Study of Labor | I Z A COMPACT | November 2007 13 IZA / DIW DC

IZA Steps Up Its Activities in the United States Cooperation with DIW DC

Through its extensive network of Re- just set up operations as an independent In addition, the Washington-based search Fellows, IZA has cultivated strong and non-profit research institution in the institute will pave the way for future col- ties with researchers and cooperating nation’s capital. The primary objective of laborations between think tanks and uni- institutions in the United States. From DIW DC is to provide U.S. policymakers versities. now on, IZA will be able to further ad- with economic expertise on Germany and vance this cooperation through an at- Europe and to promote the transatlan- Cooperating closely with both DIW Berlin tractive new infrastructure: DIW DC has tic dialog on issues of economic policy. and IZA, the new institution is also well- connected with Georgetown University. It is bound to become an ideal platform for IZA Research Fellows to organize re- search and publication projects in Wash- ington. During the official inauguration of DIW DC on October 23, 2007, IZA Director Klaus F. Zimmermann, German Ambassador Klaus Scharioth, and Chair- man of the U.S. Council of Economic Advisers Edward Lazear, who received the 2004 IZA Prize in Labor Economics, un- derscored the importance of an inter- national focus on scientifically founded policy advice.

DIW DC is headed by Executive Director Amelie Constant, who is Visiting Professor of Economics at Georgetown University and will continue to serve as IZA Deputy Edward Lazear, Klaus Scharioth, Amelie Constant, Klaus F. Zimmermann Program Director for Migration.

IZA Topic Week Conference on “Non-Market Time in Economics”

From May 30 through June 2 the “Future mesh examined the amount of total work of Labor” Program at IZA held a “Topic – for pay and at home – in 25 countries, Week” meeting on the subject of Non- showing that in rich non-Mediterranean Market Time in Economics with generous countries all over the world men and wom- financing from the Fritz Thyssen Stiftung. en perform essentially identical amounts Organized by Ana Rute Cardoso (IZA) and of work in total. The study tried to explain Daniel Hamermesh (University of Texas at this result with a theory of social norms, Austin and IZA), the meeting provided an which seems consistent with evidence that ideal forum for knowledge exchange on this in countries where both men and women tions are observed; but the main point is important topic. view men as more deserving of scarce jobs that these interactions are uniquely visible women wind up doing relatively more total in time-diary data. Rachel Connelly (Bowdoin A number of papers considered gender or work than men. Anzelika Zaiceva (IZA) looked College) and Jean Kimmel (Western Michigan gender-related issues. Zhong Zhao (IZA) ex- at gender differences in time spent on mar- University) look at a similar issue using the amined how the burden of work at home ket work, childcare, religious activities and very extensive American time-diary data. (activities for which market substitutes food preparation/clean-up by ethnicity in Focusing on the fraction of each spouse’s might be purchased) affects husbands and the United Kingdom. Ethnic differences time devoted to each of four major sets of wives differently. With data on time use in – between European-ethnicity Britons and activities, and with special interest in time rural China he developed an unusual mea- others – in all of these except childcare are spent in childcare, they, too, demonstrate sure of the wife’s power in the household: greater among women than men. the importance of spousal interactions. whether the child or children are boys, highly preferred in China and some other Norbert Neuwirth (University of Vienna) used An additional focus of the Topic Week Asian countries. In the data, women did in Austrian time-diary data to examine the was on trends in time use. Lindsay Tedds fact perform smaller shares of household extent of interactions between husbands’ (University of Victoria) used Canadian data work when their offspring was male (and and wives’ time use. Of particular interest from 1986 through 2005 to examine trends thus when the women implicitly had more is whether their time is complementary or in leisure, household activities and mar- power in the household). Daniel Hamer- substitutable. In fact, both types of rela- ket work. These time diaries, in which the

14 Institute for the Study of Labor | I Z A COMPACT | November 2007 IZA TOPIC WEEK

categories are defined consistently over time to study outside school devote less on time use. Of particular interest is time, are among the few where such time to leisure activities. whether those who have the characteris- trends can be readily identified. In these tics that lead one to smoke, but who cur- data, there is surprising evidence of an in- A major factor motivating the growing rently do not smoke, behave differently crease in time spent in market work on a interest in collecting time-diary data is in in their time use than those people who typical day by both men and women. Scott their potential use in measuring the value do not smoke. Integrating the American Fuess (University of Nebraska at Lincoln of non-market output. Measuring time in Time Use Survey with other information on and IZA) examined trends in leisure in Ja- such non-market activities as childcare is its respondents’ smoking activities, he pan between 1986 and 2001 using time- difficult; valuing each unit, so that one can showed that former smokers behave diary data. With a macroeconomic focus compare it to market output, particularly differently from never-smokers – they do he showed that, while leisure time has in- GDP, is still more difficult. Killian Mullan less work for pay, and spend more time creased, the evidence for greater leisure is (University of Essex) advanced this litera- eating and drinking. Indeed, they behave not strong when one accounts for changes ture by using British data on both parents’ much more like current smokers than never- in unemployment and job opportunities childcare time and children’s time with par- smokers. over this period. ents to give both input- and output-based measures of childcare. Using this appropri- Volunteer activities are important in all Much of the focus of research using time- ate dual approach, he calculated a consis- countries and are a particular focus of diary data has been on studying behavior tent set of measures of the contribution of policy interest in the United States. Sara at different stages of the life cycle. One childcare to total economic activity. Helms (University of Alabama at Birming- topic of continued interest have been par- ham) examined this issue in the context ents’ interactions with children and, more At the other end of the life cycle, Vimal of inferring trends in volunteer activity. specifically, the burden of childcare. Jay Ranchhod (University of Cape Town) was The difficulty is in measuring the amount Stewart (U.S. Bureau of Labor Statistics) interested in how substantial income of volunteer activity – even defining it is went beyond the well-known literature grants to elderly persons might affect difficult. One might hope that time-diary on the amount of parental childcare time time use by other adults in their house- data would be more reliable; but Helms to examine how market work affects the holds. Studying the impact of a large-scale showed that, because those who volunteer timing of childcare. He showed that part- grant received by most poor households are also much more likely to respond to time workers are caring for their children in South Africa using new time-diary data, questionnaires, such data are no more use at the same times on weekdays and week- he showed that a major impact of these in obtaining accurate measures of the to- ends, but that full-time workers’ childcare grants was to reduce the time that women tal amount of volunteer activity than data schedules look substantially different on in the poor households devoted to both from other types of surveys. Her study also weekdays from the norm on weekends. home and market production, with much showed that the much-publicized decline Charlene Kalenkoski (Ohio University) used smaller effects on men’s behavior. Marie in volunteering in the U.S. may merely be new American data to examine time spent Connolly (Cornerstone Research) studied a an artifact of decreasing response rates by 15 to 18-year-old teenagers who have different grant program, the major reform on surveys aimed at measuring volunteer not finished secondary school. The partic- in support to poor households that was in- activity. ular focus was on the impact on time use stituted in the U.S. in the mid-1990s. While of being in a low-income family, with the she replicates the accepted result that the In addition to the papers presented, two interesting finding that adolescent girls in program was related to increases in market distinguished experts on time-use data poorer households spend more time work- work by members of poor households, she and household economics gave special ing in the market and at home, while disad- also shows that this was not accompanied lectures: Robert Pollak (Washington Univer- vantaged adolescent boys spend less time by any decline in time devoted to child care, sity-St. Louis and IZA) discussed the eco- in both forms of work. Elsa Fontainha (Tech- coming instead at the cost of less leisure, nomic theory of time use in the household, nical University of Lisbon) considered how particularly less television-viewing. with particular focus on spousal sharing of students’ time in school-related activities tasks and marital bargaining. Joachim Merz outside the classroom differs among coun- Younghwan Song (Union College) studied (University of Lüneburg and IZA) presented tries and how it relates to leisure time. In the role of smoking – and the underlying examples of how time-diary data might be most countries students who devote more characteristics that lead people to smoke – used to answer a variety of questions about work-hours flexibility and the impact of public holidays. Furthermore, Georgios Tas- soukis (IZA Database Manager) lectured about how researchers worldwide could readily use the IZA International Data Ser- vice Center and mainly the extremely rich German Zeitbudgeterhebungen (1991/2 and 2001/2), which are available – with con- fidentiality restrictions – for use through the IZA secure data-access site. Several of the researchers present are now modifying their work to include these additional da- tasets. All papers and lectures of this IZA Topic Week are available from the IZA web- site.

► http://www.iza.org/conference_files/ IZA Topic Week “Non-Market Time in Economics” (May 30 – June 2, 2007) nmte_tw2007

Institute for the Study of Labor | I Z A COMPACT | November 2007 15 IZA SUMMER SCHOOL

Teaching the Future of Labor: 10th Anniversary of the IZA Summer School

In April 2007, the IZA European Summer School in Labor Economics took place for the 10th time – an occasion for a cer- emony that added a festive atmosphere to this year’s event. There is indeed good reason for celebration: the IZA Summer School has established an outstanding reputation as one of the most influential forums for interaction between renowned and up-and-coming junior labor econo- mists. Over the years, a total of 340 Ph.D. students – with females making up a re- markable share of 44% – have undergone the tough selection process to participate in the Summer School, for which 21 top representatives of the state-of-the-art in labor research have served as lecturers. Participants representing over 40 nation- alities and universities located in over 20 10th IZA Summer School (April 23–29, 2007) countries made for a colorful and produc- tive blend. The Alumni of the IZA Summer School now succeed in careers in aca- The 10th IZA European Summer School seled by the communications expert Ra- demia and international organizations, in Labor Economics took place on April chel Hardy (Warwick University) on “How with over two thirds of those who are no 23-29, 2007, as always at the confer- to Prepare and Present Your Poster,” the longer students currently working as pro- ence center of Deutsche Post World Net students presented their work either giving fessors or researchers at universities and at the Ammersee Lake (near Munich) in a talk or hosting a poster session. other research centers. Bavaria, Germany. This year, 34 students of nineteen different nationalities attend- IZA Director Klaus F. Zimmermann, who For the past four years, the Summer School ed the event, which featured lectures by attended the event along with advisory has been funded by the European Union Giuseppe Bertola (University of Turin) and committee member Peter Jensen (Aarhus under the “Sixth Framework Programme, Richard B. Freeman (Harvard University and School of Business) representing ESPE, Marie Curie Conferences and Training London School of Economics). underscored IZA’s continued commitment Courses.” In addition, four major scientific to promoting the future elite in labor eco- associations in Europe support the event While Bertola’s subject was “Labor nomics: “From the very beginning of IZA, through an Advisory Committee: the Cen- Markets and Economic Integration: Im- the Summer School has been an integral tre for Economic Policy Research (CEPR), perfections, Regulations, and Reform,” part of our efforts to reap the synergies the European Economic Association (EEA), Freeman taught on “Schizophrenic Eco- of fruitful interaction between junior the European Association of Labor Econo- nomics,” contrasting the traditional con- researchers and well-established labor mists (EALE), and the European Society for cept of the homo oeconomicus with recent economists. This success story is set to Population Economics (ESPE). research on behavioral economics. Coun- continue.” EEA European Economic Association

Ranking in German Newspaper Handelsblatt Top Position for IZA in Survey on Research Output by German Institutes

According to a recent survey conducted for ahead of next-ranked WZB (1.28 pages) and even include the highly productive network the German business daily Handelsblatt, IZA’s over four times the average of 0.45 pages for of IZA research fellows, who accounted for in-house researchers are the most productive the staff of all other seven institutes. 63.0% of the output produced by all fellows among Germany’s nine major research insti- of the nine German institutes in 2006. With tutes in terms of publications output in 2006. Despite its comparatively small size and its staff researchers and fellows combined, Compared to the period 2000-2006, IZA unique specialization in labor economics, IZA’s market share of 32.0% percent is the more than doubled its output to 1.99 pages IZA now holds a remarkable “market share” highest of all institutes – followed by Ifo (quality-weighted) per employee. This is well of 12.8% in Germany. These figures do not (28.3%).

16 Institute for the Study of Labor | I Z A COMPACT | November 2007 NEW BOOKS

IZA Prize Series Honors the Lifetime Achievement of Jacob Mincer

A new book, the first in the IZA Prize Series in 2002. According to the award statement available to the author for many enlighten- published by Oxford University Press, ana- by the IZA Prize Committee, “Jacob Mincer ing discussions that made this exceptional lyzeslyzes thethe workwork ofof oneone ofof thethe mostmost importantimportant isis tthehe foundingfounding fatherfather ofof modernmodern empiricalempirical volume possible. Depicting Mincer’s varied economists of the 20thth century:century: JacobJacob MincerMincer, laborlabor economics.economics. HisHis effortsefforts inin developingdeveloping research activities against the background of thethe inauguralinaugural recipientrecipient ofof thethe IZAIZA PPrizerize inin La-La- thethe scientificscientific instrumentsinstruments andand methodsmethods usedused an eventful life, this book is a necessity for ev- bor Economics. Since 2002 IZAIZA hhasas aawardedwarded byby today’stoday’s eeconomistsconomists toto analyzeanalyze thethe prob-prob- eryone interested in the development of what thisthis prizeprize forfor outstandingoutstanding contributionscontributions toto lemslems aandnd pprospectsrospects ofof thethe workingworking worldworld areare has become the policy-relevantpolicy-relevant laborlabor marketmarket researchresearch andand almostalmost unparalleled.”unparalleled.” TheThe completecomplete texttext ofof standard toolset methodologicalmethodological progressprogress inin thisthis sub-disciplinesub-discipline thethe documentdocument iiss ccontainedontained inin thisthis book.book. of today’s labor ofof e economicconomic science.science. AllAll prize-winnersprize-winners con-con- economists. tribute a volume to the IZA PrizePrize Series,Series, whichwhich TheThe newnew volumevolume providesprovides a hashas bbeeneen eestablishedstablished ttoo pproviderovide aann ooverviewverview – l longong o overdueverdue – a accountccount o off Pedro N. Teixeira ofof tthehe laureates’laureates’ mostmost significantsignificant findings.findings. Mincer’sMincer’s influentialinfluential career.career. ItIt isis a authoreduthored byby thethe PortuguesePortuguese Jacob Mincer: The Founding This first volume of the IZAIZA PrizePrize SeriesSeries isis economisteconomist andand IZA Research Father of Modern Labor unique in many respects. It is the first com- Fellow Pedro Teixeira (University Economics prehensive account of the lifetime achieve- of Porto), a veritable expert on Oxford University Press, 2007 ment of the great pioneer in labor econom- Mincer and his work. Remark- ISBN 978-3-540-69381-0 ics, Jacob Mincer, who won the first IZA Prize ably, Jacob Mincer was always

New Book: “The Economics of Language”

Authored by IZA Program Director Barry The book consists of six parts. In “The De- Distance” connects the distance between Chiswick (University of Illinois, Chicago) and terminants of Language Proficiency”, the the mother language and the destination IZA Research Fellow Paul Miller (University authors describe three important variables language of an immigrant to his linguistic of Western Australia), a new volume com- explaining language proficiency: exposure accomplishments. The overall results sug- prises important essays on “The Economics to the destination language, efficiency in the gest that language is an important factor of of Language” exploring the determinants acquisition of the language, and economic labor economics. Specialists in labor eco- of dominant language proficiency among incentives to acquire the language. “The nomics, linguistics as well as a number of immigrants and other linguistic minorities Effects of Language Proficiency on Labor researchers in other disciplines can use this and the consequences of this proficiency Market Outcomes” suggests that there are volume as an excellent resource. for the labor market. Using empirical mate- large effects of language proficiency (flu- rial from different countries, the authors, ency, literacy and numeracy) on both earn- both internationally renowned experts in ings and employment. Further the field, develop a range of models of the essays investigate “The Interac- Barry R. Chiswick determinants of dominant language pro- tion of Language and Earnings Paul W. Miller ficiency and use econometric techniques Among Immigrants” and “Lan- to test them and estimate the magnitude guage and Earnings Among The Economics of Language of the effects. The countries being investi- the Native Born”. Focusing on International Analyses gated are the US, Canada, Israel, Austra- linguistic enclaves established Routledge Studies in the lia and Bolivia, to ensure that various lan- by immigrants, another part of Modern World Economy guages and countries are included, so that the book explains the effects London, 2007 the measured effects can be regarded as of “Language, Networks and ISBN 9780415771818 universal. Enclaves”, while “Linguistic

Balancing Family and Work: Germany Rates Poorly in Recent Study A recently published cross-country study The book published in German language on the compatibility of family and work by the Bertelsmann Foundation is the reveals Germany’s shortcomings with result of joint research activ- respect to female labor market partici- ities by IZA (represented by Werner Eichhorst pation. Given the need for more high- Werner Eichhorst and Lutz Kai- Lutz C. Kaiser skilled workers and the socially desired ser), the Bertelsmann Foun- Eric Thode equality of opportunity for women, as dation and the Berlin-based Verena Tobsch well as the declining birth rate, a family- research institute ExAKT. friendly policy is an essential investment Dealing with the interplay Vereinbarkeit von Familie in the future. Among the key fields of between economic and in- und Beruf im internationalen action are reforms of the tax, welfare stitutional processes and the Vergleich and transfer systems, the improvement public and private sectors, Verlag BertelsmannStiftung of institutional childcare facilities, and the study underscores the Gütersloh, 2007 the establishment of a market for family- urgent need for reforms in ISBN 978-3-89204-931-9 related services. Germany.

Institute for the Study of Labor | I Z A COMPACT | November 2007 17 IZA SHORT NEWS

Kuznets Prize for Jinyoung Kim

On June 14, IZA Director Klaus F. Zimmer- of the journal, which is headquartered at mann presented the 2007 Kuznets Prize to IZA. The Kuznets Prize – named after the Jinyoung Kim (Associate Professor of Eco- late pioneer in population economics and nomics, Korea University Seoul) for his arti- former Harvard professor Simon Kuznets cle in the Journal of Population Economics – honors the best article published in the 18, 2005 on “Sex Selection and Fertility in a Journal of Population Economics during Dynamic Model of Conception and Abor- a three-year period. The fourth prize was tion.” The Journal of Population Economics awarded for the period 2004-2006. Nobel is an international quarterly that publishes Prize Laureate Gary Becker (University of original theoretical and applied research Chicago), who supervised Kim’s disserta- and survey articles on topics dealing with tion in 1994, attended the award ceremony broadly defined relationships between that took place during the Annual Confer- economic and demographic problems. ence of the European Society for Popula- Gary S. Becker, Jinyoung Kim, Klaus F. Zimmermann Zimmermann serves as Editor-in-Chief tion Economics (ESPE) in Chicago.

3000th Paper Published in IZA Discussion Paper Series With the publication of its 3000th paper, Fellow Anders Björklund (Stockholm Uni- Anders Björklund the highly successful and influential IZA versity). The paper examines trends in the Markus Jäntti Discussion Paper Series has reached an- importance of family background for adult Matthew J. Lindquist other milestone. As of this year, an aver- income in Sweden. The authors find a de- age of two new studies is made available clining “brother correlation” in income, Family Background and Income online each day. Restricting authorship to which indicates that family background is during the Rise of the Welfare State: IZA in-house researchers and members of less important today in determining future Brother Correlations in Income for the institute’s international research fel- income. Instead, education policies have Swedish Men Born 1932-1968 low network guarantees the high academ- been shown to be a key factor in equalizing IZA Discussion Paper No. 3000 ic standard of the series. IZA DP No. 3000 life chances in Sweden. ► http://ftp.iza.org/dp3000.pdf is a study co-authored by IZA Research

Awards and Appointments

EALE Young Economist Award Goes to IZA Research Affiliate IZA Research Affiliate Thomas Siedler received the tics: Does Parental Unemployment Cause Right-Wing “Young Economist Award” at the Annual Conference Extremism?” finds statistically significant correlation of the European Association of Labor Economists between unemployment of parents and future right- (EALE) in Oslo for the best research paper written by wing extremism among their children. a young economist. His paper on “Family and Poli-

Thomas Siedler Hartmut Lehmann to Advise OECD and German Bishops’ Conference Hartmut Lehmann (University of Bologna), IZA Program which was founded in 1989. In cooperation with Hart- Director of the Program Area “Labor Markets in Emerg- mut Lehmann, the expert advisory board will present ing and Transition Economies,” has been appointed as a study on “Relocation of employment into developing a member of the expert advisory board “World Econ- and transition countries“ within the next year. omy and Social Ethics” by the commission “Universal Church” of the German Bishops’ Conference. Inter- By invitation of the OECD, Lehmann has also joined disciplinary exchange on issues of ethical orientation the high-ranking panel of experts that will prepare the in a globalized economy as well as the development first issue of the “Black Sea and Asian Economic Out- Hartmut Lehmann of science-based approaches to problems of underde- look,” which is expected to be available in early sum- velopment are among the tasks of this working group, mer 2008.

Hilmar Schneider Appointed to the German Census Commission The Federal Ministry of the Interior (BMI) has installed a IZA Research Fellow Gert G. Wagner (TU Berlin and DIW “Census Commission” that will advise the German gov- Berlin), the commission will work on an honorary basis ernment and statistical offices on the concept and meth- until 2013. Its members include IZA Director of Labor odology of the 2011 census, which will be the first of its Policy Hilmar Schneider and eight other renowned Ger- kind in Germany to be based on register data. Headed by man experts from various relevant disciplines. Hilmar Schneider

18 Institute for the Study of Labor | I Z A COMPACT | November 2007 IZA TOWER TALK

Generations and Integration: The Future Challenges of Politics NRW Minister Armin Laschet Speaks at IZA Tower Talk

Armin Laschet (CDU), Minister for Inter-Gen- life expectancy, which will add more than eration and Family Affairs, Women and In- two decades of individual life performance tegration of the State of North Rhine-West- and consumption to the older population. phalia, gave a speech at the 17th IZA Tower The aging population will not only want to Talk on May 9 2007. His ministry is the first actively participate in social life, they will in Germany to combine the important issues also become a major economic factor, he of inter-generational demographic changes, emphasized. family-oriented policies and integration. Laschet spoke on the enormous conse- Laschet commented on the necessity to quences of Germany’s aging society, which improve the compatibility of family and range from the absence of young profes- employment, given that the existing sup- sionals and the loss of economic vitality to ply is well below demand. According to the a massive shift in power for the democratic Minister, an active selection of immigrants Since May 2005 Armin process. Political reforms, Laschet said, based upon economic criteria must take Laschet (CDU) has been must react to these changes. For example, place. Previous immigration legislation is Minister of Intergenera- they must ensure that families and youths not enough, because it has only resulted in a tional Affairs, Family, still have lobbyists in the future, despite negligible number of highly-qualified immi- Women and Integration their shrinking proportion in the total popu- grants. A reduction of barriers would make of the state of North lation. At the same time, according to Las- sense in order to stimulate the domestic la- Rhine-Westphalia. chet, a focus must be placed on increased bor market.

Negative Income Tax vs. Workfare: Debate on Promoting the Low Wage Sector The quest to find the silver bullet to fight a subsidy equal to the amount of the social persistently high unemployment among the insurance contributions, which would be low-skilled in Germany was the focus of the paid to recipients of low wages who work 18th IZA Tower Talk in Bonn on August 8, 30 hours or less in a full working week. This 2007. Peter Bofinger, member of the German would present a significant incentive for Council of Economic Experts, presented his job-seekers to accept full-time employment. Since March 2004 Peter model of supplementing low incomes with a Above all, this concept would de-stigmatize Bofinger (University of kind of negative income tax, while IZA Direc- the target group, enabling them to return to Würzburg) has been a tor of Labor Policy Hilmar Schneider, present- the labor market “with dignity” instead of member of the German ed IZA’s workfare concept. In a discussion being permanently labeled “needy”. Council of Economic chaired by Joachim Westhoff, Editor-in-Chief Experts. of Bonn’s General-Anzeiger, Bofinger and Hilmar Schneider contrasted this model with Schneider discussed the political necessi- IZA’s workfare approach, which would result ties in light of these quite different yet, from in much higher employment effects, while be filled anyway. On the other hand, there Bofinger’s point of view, reconcilable mod- cutting the welfare state costs to a much has also been a remarkably high level of els. Bofinger and Schneider both, however, greater extent. By introducing an obligatory activity in the shadow economy. Schneider doubted the readiness of policymakers to reciprocal service in the form of non-profit pointed out that the Bofinger Model, like implement the adjustments to the struc- full-time work for employable recipients of every in-work benefit concept, was likely to tures of the welfare state and its incentive unemployment benefits (ALG II), the disin- generate significant windfall gains, since in- mechanisms that have been suggested by centives inherent in the current social secu- dividuals earning higher hourly wages might the Council of Economic Experts. rity system could be removed. Due to these reduce their working hours in order to enjoy wrong incentives, very few low-qualified the subsidies and more spare time, while their In his presentation, Peter Bofinger cited the workers have found it worthwhile to even income would remain constant. In contrast, all too high burden of social insurance con- consider seeking a job since the likelihood of workfare would offer massive incentives for tributions on the low wage sector among achieving a wage considerably higher than transfer recipients to take up gainful employ- full-time employees (Germany’s is the sec- the amount received through transfer pay- ment, as they could achieve a higher income ond highest in all of the OECD) as the cen- ments was pretty low. However rational this – while working the same number of hours tral cause of unemployment. In order to mindset may be, it has resulted in a decreas- – if they accepted a job that was only slightly alleviate this situation, his model proposes ing supply of such jobs, which could hardly better paying than the transfer receipt.

Forthcoming IZA Workshops and Conferences: May 5–6, 2008 Third IZA/World Bank Conference on Employment and Development Deadline 01/20/2008 May 12–18, 2008 11th IZA European Summer School in Labor Economics Deadline 02/07/2008 May 19–23, 2008 IZA Annual Migration Meeting (AM²) and Topic Week Deadline 02/15/2008 May 22–25, 2008 Seventh IZA/SOLE Transatlantic Meeting of Labor Economists Deadline 01/11/2008 May 26–27, 2008 IZA Workshop: Research in Economics – Rewards, Evaluation and Funding Deadline 01/02/2008

Institute for the Study of Labor | I Z A COMPACT | November 2007 19 I Z A COMPACT

>> Opinion A New Strategy for Development Cooperation

Far from achieving any sort of breakthrough in shaping the veloping nations. A lack of effective unemployment assis- global agenda, the G-8 summit in Germany was once again tance, combined with insufficient labor market flexibility, largely confined to collective declarations of intent. It is, leaves a considerable potential for employment unused. of course, unrealistic to expect a solution to important Special attention must be paid to the vast informal labor global issues from such a short meeting of the world’s lead- markets that exist in African nations. It is unlikely that their ers. Perhaps the most noteworthy success of the summit role will decline in the future. in Heiligendamm was the dialogue with African nations about future development cooperation, which raises the Moreover, we need joint efforts to deal with the demo- hopes that development assistance may not only become graphic disequilibrium between Africa and the western more sizeable, but also more effective. world. Better training, better jobs, and higher economic growth will even further increase the emigration potential, Many of the previously deployed efforts have failed to since the propensity to migrate is greatest among young, achieve their goals due to a lack of focus and insufficient better-educated people with financial means. This is why coordination on the international level. Hardly any of the development strategies must be systematically dovetailed programs have undergone a scientific evaluation. Further- with migration policies. For instance, short-term labor mi- more, corruption in many recipient countries has contin- gration from developing nations should be encouraged as ued to cause much-needed aid funds to trickle away. While well as entry for education and training purposes. At the new initiatives to support the health sector, to facilitate same time, skilled workers trained in the west must be pro- corporate investment, and to fight corruption in develop- vided with strong incentives to return to their homelands. ing nations are certainly applaudable, these efforts cannot be successful in the long run unless close attention is paid Development cooperation must incorporate all of these to the needs of the African labor markets. elements in order to have a long-term impact. This also means that the markets of industrialized nations must Globalization has propelled economic growth all over the become more open to the products of developing coun- world, but it has also made individual income less secure tries. For the sake of credibility, we need to get rid of such – most noticeably in African nations that still lack an ef- anachronisms as trade barriers and subsidies. The western Klaus F. Zimmermann fective system of social security. High unemployment rates nations cannot simply buy themselves out of their own sins – particularly among young people – go hand-in-hand with by announcing more development funds. an insufficient supply of jobs providing a living wage. Since new jobs are often created in low-productivity sectors, In sum, international development strategies desperately they are mostly low-paid and fail to provide a way out of need new impulses, a new focus, better coordination, more poverty. This problem will be aggravated by the current exchange between academics and policymakers, and a population trends: While the labor force in many industrial more critical evaluation. The research community can and nations is shrinking, the working-age population in most must make a substantial contribution to the reform of de- African nations keeps growing at a rapid speed. velopment policy. To this end, IZA has been coordinating a global network of economic and development experts on “Poverty reduction through employment” is the silver bul- behalf of the World Bank. let to efficient development. Well-targeted, internationally coordinated projects can contribute to modernizing the often inefficient and rigid labor market structures of de-

Institute for the Study of Labor

Editor: Prof. Dr. Klaus F. Zimmermann Managing Editors: Holger Hinte, Mark Fallak Address: IZA, P.O. Box 7240, 53072 Bonn, Germany Phone: +49 (0) 228 - 38 94 222 Fax: +49 (0) 228 - 38 94 180 E-Mail: [email protected] Web: www.iza.org Graphics/Photographs: IZA Printing: Güll GmbH, Lindau, Germany Layout: IZA

20 InstituteInstitute for for the the Study Study of of Labor Labor | |I ZI ZA A COMPACT COMPACT | |November April / May 2007 2006