Labor market policies meet their objectives only to the extent to how they accurately account for how individuals make their decisions about leisure and work, job search, and seizing opportunities for training and education. These models are predominantly built around the classic neoclassical assumptions that people are perfectly rational, time consistent and entirely self-interested. Recent research from the behavioral economics is providing more realistic and empirically centered findings about human behavior. This research has found that people can be put off by complexity, they procrastinate and that they hold non-standard preferences and beliefs. To the extent that these are relevant in labor markets, they change our understanding of what polices and how policies should be designed to meet their set objectives.
In what follows we will look at the following three labor market policies that are relevant to boosting employment within the model we have just explored:
1). The first involves unemployment compensation and its effect on job search intensity. One solution to the negative effects on job search intensity caused by unemployment benefits is the inclusion of some sort of wage-loss insurance. Wage-loss insurance assists individuals with the psychological adjustment that comes with changing labor market conditions and helps mitigate likely biases in wage expectations that more than likely deter work incentives.
2). The second is with respect to employment services and job search assistance. These programs help to match employers with employees and thus improve matching efficiency. It is argued that these should be expanded to provide accessible and meaningful information about labor market conditions and occupational projections. These should help address procrastination in job search and provide help to the unemployed and low wage individuals in a way that both reflects and takes advantage of the way people process information.
3). When dealing with mismatch (as we have discussed) job training is essential to moving workers from dying industries to thriving ones. It is suggested that these job training programs should simplify take-up, navigation and completion and provide user-friendly information of the quality of training providers. These should also structure choices to reflect limited abilities of individuals to manage complexity and exert self-control.
Unemployment Benefits
Unemployment compensation policies are essential for sustaining consumption over the business cycle by helping the unemployed to survive without completely relying on there savings habits (people in the United States generally have pretty poor saving habits). The problem as stated earlier is the tendency of these benefits to distort incentives to search for and take new employment. Increases in the generosity of benefits, either through increases in benefit levels or the duration of benefits, seem to lengthen the unemployment spells of those receiving unemployment insurance. Individuals return to work when they receive a job offer that pays more than their reservation wage.
Reservation Wage: The wage w^r is called the reservation wage and represents the lowest wage offer that an unemployed worker will accept.
One thing that behavioral economics tells us is that individuals have imperfect self-control which are expressed by time-inconsistent preferences. As a direct consequence, workers may procrastinate in their job search efforts even when such delay goes against their own long-run self interest. The unemployed may be hesitant to consider and slow to accept even quite reasonable job offers. Individuals holding out for offers that will never come remain on unemployment insurance for inefficiently long periods. One reasonable possibility is that individuals will set their reservation wage at the level they have received in the past, but this may prove to be a severe upward bias in their wage expectations given current labor demand conditions. Additionally, individuals might be loss averse in the sense of having preferences that rely on previous wages with a potentially large demoralizing psychological cost of taking a job paying below their previous earnings. Restated another way, people would rather not take a job that paid below what they think they're worth (because it may seem degrading or "beneath" them) than take a job and at least have some working income.
Loss aversion: An individuals tendency to strongly prefer losses to acquiring gains.
These effects lead individuals to be reluctant when accepting job offers below their previous wage, to be unwilling to move or relocate to areas with greater job opportunities and to search for jobs mainly just like the one they just got fired from or even to pass up reasonable opportunities while waiting for their old job (or a very similar one) to return. This observation is sometimes referred to as "retrospective wait unemployment" and is particularly important for long-termed unemployed workers displaced from high wage sectors in decline (like the automobile and steel industries). It is reinforced by the social status and personal identities of many workers strongly tied to their former jobs, after all it is what they are good at and comfortable with. Wage-loss insurance is one promising policy which may help to address these issues.
Wage-loss Insurance
Wage-loss insurance (also called wage insurance) is a policy which temporarily subsidizes worker earnings upon reemployment when the wage they receive on their new job is less than that of their old job. It lowers the reservation wage of the individual receiving unemployment insurance thus leading to shorter durations of unemployment. By manipulating the realized value of wages and making job offers more attractive, it takes care of some of that psychological fear that most workers have about making less than before. In the longer run, it may even smooth the painful but sometimes necessary process of psychological adjustment to a lower wage employment. In making job offers more appealing, a wage-loss insurance program would effectively lower wage expectations and mitigate the effect of loss aversion. By taking away the social stigma of accepting a lower wage wage-loss insurance encourages the search effort of the unemployed and increases the job acceptance rate of those receiving unemployment benefits.
Employment Services and Job Search Assistance
One major goal of labor market policies is to help searching individuals find a job. These policies therefore effect the efficiency with which job matches occur and directly impact our matching function. There are currently a handful of interconnected programs that enhance the returns from job search and these include informational services as well as actual job search help. The Employment Service provides placement assistance to both workers and employers, maintains labor exchange listing, and performs outreach to employers. The Workforce Investment Act (WIA) provides both counseling and assistance for job seekers. Workers obtain access to these services through multiple channels, the most important of which are referrals from workers taping into the Unemployment Insurance (UI) program. The goal of these programs is to help individuals return to work quickly and even help improve the quality of matches between workers and jobs.
Searching for work is a strenuous and complicated process. Behavioral economics stresses that individuals are limited in the attention and computational capacity they can bring to multifaceted problems. In fact, the speed and quality of employment matches may suffer due to the less than perfect ability of individuals to manage the complex tasks of job search. Looking for work is a substantial information problem. Workers have to understand labor market conditions, have knowledge of openings and application processes, posses an accurate understanding of their own still sets and how firms and markets may value those skills. Additionally, searching for work requires willpower, which can be difficult for people with zero will power (we call these people unmotivated). Workers, more likely than not, will be tempted to procrastinate in their job search in favor of other activities, like watching AMC and making daily trips to United Dairy Farmers convenience stores. Properly designed job search assistance programs can help deal with these issues.
Policy Options
Increase Enrollment
Employment services and job search programs generally work well. So one idea is to increase the amount of people using these resources and maybe even mandating that those on unemployment insurance must enroll into one of these programs. This would certainly help individuals to overcome the desire to procrastinate. There is even evidence that the threat of enrolling someone into a job search program will cause them to accept a job much sooner than they would have otherwise.
Simplify and Streamline the Experience
Simplifying and streamlining the experience should help individuals with managing the complexity found in the job search process. Employment and job search assistance tools should be widely available and easy to use, both physically with One-Stop Career Centers (the Walmart for job search) and online.
Job Training
As we have seen one of the causes for outward shifts in the Beveridge curve are when employees skills become obsolete. One vital set of labor market policies, alleviates this impact as they are aimed at providing workers with the skills they need to take advantage of career opportunities. The current workhorse of these U.S. public-sector job training efforts is the Workforce Investment Act (WIA). The WIA offers occupational skills training and on-the-job training programs to both dislocated and disadvantaged workers. Services are delivered through One-Stop Career Centers and funds are made available in Individual Training Accounts (ITAs). Other major supports for job training include Pell Grants, which low-income workers can use to fund educational programs that lead to a certificate or degree, and the Lifetime Learning Credit, which is a nonrefundable tax credit available to offset educational expenses.
Overall the results of these programs are found to be disappointing. Although the labor market returns to education are well established, programs that support job training for mid-career individuals have a mixed-record. For women the returns through improved earnings are significant, but men have seen little improvement in earnings.
Behavioral economics suggests that the unsatisfying results of some job training programs may be due in part to a failure of such programs to respond accurately to the psychology of workers who could benefit from training. Results from behavioral economics suggest that the determination and whether to undertake job training, the selection of a field to be trained in as well as a provider, and the pursuit and completion of that training, represents an inherently challenging sequence of choices and actions for imperfect individuals. Individuals often fail to choose optimally under stress and have difficulty exerting self-control in starting up and persisting in investment activities with distant payoffs. People are inherently short-sighted. Therefore, a successful job training program is one that reduces complexity and the need for willpower.
Current job training programs focus on administrative efficiency rather than end user experience. As a result, these programs are complicated to use and access. Furthermore, there has been a push from publicly providing job training to providing individuals access to funding to pursue their own choice of training. This policy may put too much responsibility in the workers hands, as they may be ill equipped to manage all of the tasks involved. There is a very strong possibility that the very individuals who might benefit most from the training may have the most difficulty in obtaining it.
Policy Proposal: Simplify
Following from the above observations- an explicit goal of the WIA program should be to provide job training services in a streamlined and user friendly fashion. Job training programs should be user friendly not administrative friendly. These job training programs should take steps to reduce the barriers to entry that are so currently prevalent. At the very least they should ensure that the requirements are not more onerous for those that need it the most.
Training programs provided through One-Stop Career Centers should emphasize reducing complexity and providing guidance to participants as priorities. Additionally, access to Pell grants should be simplified and programs should be integrated. For example Pell recipients enrolled at a community college should receive services through the associated One-Stop Career Center. The One-Stop system is deemed by many to be the right model on which to build, but regardless policy should reflect an emphasis on the user friendliness from the participant perspective.
This section is based on work done by Babcock, Congdon, Katz, and Mullainathan (2010)
Well, this post wraps up my special mini-series on the modern job search and matching theory of unemployment. If you would like more information please refer to the paper from which all of this is the basis of. This will probably be my last post for a while, thank you.
Listed below are all of the references for this special mini-series:
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