Lorenzo on Labor

Lorenzo first shared this post with me a couple days ago, billing it as a "sticky wages" post.

It's actually a lot more than that - a mix of great thoughts on labor heterogeneity, signalling, soft skills, job search through networks, and the interaction of all these factors in culturally diverse labor markets. Oh ya, and of course there's good stuff on sticky wages in there too.

He mentions Heckman's more recent work on "soft skills", which is very important. Bob Lerman (Urban Institute and American University) has a chapter coming out in a book edited by Heckman on this topic - I looked around for a draft but couldn't find one online. This is a recent op-ed of his that touches on some of these issues, though. I was impressed, in investigating the long-term care apprenticeships, with the extent to which the training had to do with "soft skills". I would say perhaps a majority of the training was the soft-skills of care work, and a minority was technical skills. If you question how important that training is for actual health outcomes and the ultimate cost of care, go visit a nursing home. And it's not just intuitive or instinctive.

My favorite part of the post was the discussion of how signalling and labor market regulation interacts with cultural integration (in this case, in European countries):

"Given the difficulty in discerning the relevant characteristics, the harder it seems to “read” someone, the less attractive they are as employees. Language and cultural differences–to the extent they seem to make it harder to discern characteristics, communicate information and predict behaviour–become an employment negative. Effects which can be hard to distinguish from actual ethnic antipathy.

So, if you are a young Muslim male in a Western European country with strong “job protection” legislation, your chances of employment are not good. Or even just being young; there are reasons why France exports young people to Britain (while Britain exports retirees to France), as these job emigres in London (helping to make London France’s sixth biggest city) can attest:

Marine Schepens, who works for a fashionable advertising agency, says UK companies are more prepared to give young people a chance because it is easier to terminate their contracts than in France.

“I changed careers a year ago but I would have never done that if I was still in France. I’d have thought, ‘I’m so lucky to have a job – I must hang on to it.’” …

Hamid Senni, a business consultant based in London, was one of eight children born to Moroccan immigrants in the south of France. A well-meaning teacher at his school suggested he change his name to Lionel.

“Because of your name you will be discriminated against, because of your skin colour, and even the address on your CV can stop you from getting a job … As for your skills and competencies – none of that counts in France if you don’t fit in the box – so I left”

Making employing people riskier is also not good for social integration.

Conversely, once you have a clear (and sufficiently positive) sense of an employee, you want to hang on to them. They are a known quantity; and merely being a known quantity is a positive in itself."

There are two citations I like to resort to in discussing these problems (for blacks in the U.S.): Race and the Invisible Hand (2003), by Deirdre Royster, a sociology professor of mine at William and Mary (now at NYU), and Ritter and Taylor's (2011) RESTAT article Racial Disparity in Unemployment. The first notes that even with similarly skilled black and white middle-skill workers (graduates of the same vocational program in Baltimore), different employment networks lead to radically different employment outcomes. The second provides a model where employers can more accurately interpret labor market signals for same-race employees, leading to less precision in estimates of employees of a different race. This can result in lower employment even if average skill levels are comparable. The interesting twist in this article is that because ability is observed after hiring, this effect only really matters for hiring. More traditional human capital factors (which can be observed after hiring) matter for wages.

The sticky wages discussion is good too. Lorenzo cites an implicit contract to help manage risk for the employee. This is OK, I think. But explanations like this always make me wonder why workers would implicitly accept risks associated with layoffs. I think part of the problem also has to do with nominally fixed expenditures that people get into a habit of making. Certain consumer prices can move, of course. But others can't. The more nominally rigid your expenditures, the more you're going to want to guarantee a nominal income stream. Getting a wage cut to preserve your job may not be all that attractive with nominally rigid expenditures. You might prefer to take the risk of losing your job.