Forecasting Errors: Yet More Problems for Identification?

Forecasting errors pose a serious problem of identification, often neglected in empirical applications. Any attempt of estimating choice models under uncertainty may lead to severely biased results in the presence of forecasting errors even when individual expectations on future events are observed together with the standard outcome variables.identification, forecasting errors, subjective probabilities

Testing Bounded Rationality Against Full Rationality in Job Changing Behavior

In this paper I question the hypothesis of full rationality in the context of job changing behaviour, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). Workers’ performance is compared at the end of a three-year time window that starts when choices are expressed, under the accepted notion that the main driving forces of job change are future real wages and expected job quality. Bounded rationality suggests that individuals will search for new options capable to attain “satisfactory” targets (aspirations levels, standards, reference points, norms), based on conditions prevailing in their own local environments. The empirical strategy consists of appropriately defining such environments (cells) and observing the ex-post individual performance vis-à-vis their targets, in terms of degree of dispersion, clustering and mobility within and between cells. Under full rationality the following are to be expected: - large dispersion around the targets; - clustering in the vicinity of the theoretical efficiency frontier; - high inter-cell mobility; None of the above expectations are confirmed in this exploration. My conclusion is that workers appear to behave according to principles of rationality different from those of “full rationality” assumed in the vast majority of contemporary empirical (and theoretical) studies. The idea of “bounded rationality” à la Simon seems to provide a better fit to our observations.

Youth Employment in Europe: Institutions and Social Capital Explain Better than Mainstream Economics

Why did employment growth – high in the last decade – take place at the expense of young workers in the countries of Central and Southern Europe? This is the question addressed in this paper. Youth unemployment has approached or exceeded 20% despite a variety of factors, common to most EU countries. According to neo-classical economics all would be expected to exert a positive impact on its evolution: population ageing and the demographic decline, low labor cost of young workers, flexibility of working arrangements, higher educational attainment, low unionization of young workers, early retirement practices of workers 50+. But neither seems to provide a convincing explanation. Historically based institutions and political tradition, cultural values, social capital – factors that go beyond the standard explanation of economic theory – provide a more satisfying interpretation.youth employment, unemployment, social capital, institutions

Job Changes and Wage Dynamics

In this paper we investigate the relation between wage growth and labour mobility on a panel of Italian dependent workers observed between 1986 and 1991. We use an employer-employee linked panel of 30167 workers, built from Italian Social Security (INPS) administrative sources. In order to investigate the impact of individual vs. firm characteristics on wage dynamics, we decompose individual wage change 1986-91 in two parts: the mean wage growth observed across firms of origin and firms of destination (the two coincide for the stayers), and the wage premium gained over the mean wage change by movers attributable to their own personal characteristics. Our main findings may be summarized as follows: 1 In general, movers do better than stayers at young age (20-30), but the difference tends to vanish as age progresses; 2 mover-stayer differentials are larger among white-collars than blue-collars, in line with the higher variance of earnings of the former; 3 total wage growth is driven by the wage - firm size positive correlation only for the blue-collars: job-switches from small to large firms often yield substantial pay improvements relative to stayers; job switches from large to small size often end up in wage cuts. For the white-collars, however, job changes in either direction tend to improve onÈs position relative to stayers; 4 there is a quasi-reverse pattern on the individual premiums of the blue-collars (switches from small to large carry negative premiums, from large to small positive). This is likely to be a consequence of firm-based wage policies, the impact of which by far exceeds that attributable to individual characteristics; 5 personal characteristics contribute, instead, to determine the white-collars' individual premiums. Job changes of adult and mature workers, presumably endowed with skills and experience, result in sizeable wage gains; 6 all workers employed at firms that either close down or go through drastic employment cuts during the observation period suffer wage losses; 7 prolonged unemployment spells have somewhat of a negative impact on the wage growth of white-collar employees (up to 5 p.p.), almost none on the blue-collars; 8 a certain amount of job-switching has a positive effect on the wage growth of the younger white-collars. If job changes become too frequent, however, its positive impact vanishes; 9 we find a rather strong effect of initial conditions on the wage profile of blue-collar employees, and almost none on the white-collars'; 10 there is evidence of a trade-off between job security and pay in concomitance with a job-to-job switch. When adverse shocks are in sight - as was the beginning of the Nineties - it is reasonable that people may leave their current position, if it is perceived at risk, giving up some pay for longer expected tenure, or may choose to accept a higher pay with a less reliable (i.e. more exposed to short-term fluctuations) employer. At the end of the paper I argue that there are reasons to believe that the extent of labor market segmentation may be increasing in the EU as a consequence of policies aiming at helping entry of youth into employment.

Earnings Mobility and Labor Market Segmentation in Europe and USA: Preliminary Explorations

This study is a preliminary exploration on the extent of labor market segmentation (LMS) in Europe and the United States, based on data of earnings mobility prepared for the OECD in the late Nineties. Assessing segmentation is important for a balanced view on the pros-and-cons of labor market flexibility. Labor market segmentation implies that, while there has to be a vast persistence in bad jobs or no job at all, there is, at the same time, a vast segment of working population characterized by a high degree of earnings mobility. A simple method to investigate the extent of LMS consists in contrasting two immobility indicators derived from transition matrices of earnings mobility, one computed in a partition of North-West cells (denoting persistence in low earnings), the other in a partition of South-East cells (denoting persistence in high earnings). The result of this exploration is that the USA and certain European countries appear to be at the extremes of a hypothetical ranking of wage structures, which is, however, far from linear: in the USA coexist a great deal of earnings mobility and an important chunk of labor market segmentation of the least previledged; in Italy, Germany and France earnings mobility is lower, but also the degree of segmentation is smaller than that found in the USA. The UK is somewhat closer to the USA, France follows at distance, while at the opposite extreme stand Germany and Italy. At the end of the paper I argue that there are reasons to believe that the extent of labor market segmentation may be increasing in the EU as a consequence of policies aiming at helping entry of youth into employment.

Disposable Workforce in Italy

This paper explores the "disposable" patterns of workforce utilization in Italy, well under way before the cyclical downturn of the early 90's and before the main reforms of the Italian labor market. The term "disposable" reflects the fact that many young people enter the labor market, their services are "used" as a disposable commodity for a few years, after which they leave the labor market altogether and are no longer observable in the official (administrative) data. Workforce disposal is evident and dramatic: out of 100 new young entries, about 70 are still in the labor market 10 years after entry if their first job spell was at least one year long. For those – three times as many – who have started their career with a short employment spell (youth employment, unemployment, unemployment duration

Econometric Explorations on Bounded Rationality: The Case of Job Changing Behavior

In this paper we question the hypothesis of full rationality in the context of job changing behaviour, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). A rational outcome of the job matching process implies a positive tradeoff between future wages and risk-on-the-job. The main result of this paper is that no “rational” tradeoff is observable after controlling for a variety of possible shifters. However, if we control for individual characteristics and replace wage growth by its predictor net of individual effects, the picture changes with the emergence of a significantly positive tradeoff between wage growth and risk-on-the-job. The interpretation is suggestive: while market forces (net of individual effects) drive towards a rational outcome, individual characteristics, instead of reinforcing the “rationality” of a positive tradeoff, lead towards the opposite direction of confounding good and bad options. Our explanation for these findings is that people act on the basis of bounded rationality à la Simon. If our assessment is correct, the implications are powerful: are there reasons to believe that such patterns are found only in the context of job search and worker mobility and not in other instances of economic behaviour ? Recent literature on bounded rationality strongly suggests the contrary. . Why, then, should economists leave unchallenged and unchallengeable the hypothesis of full rationality ? Had our investigation aimed at estimating the elasticities of wage growth and job safety of the workers’ utilities, we would have miserably failed. Is this a consequence of a mis-specified model or of the wrong behavioral assumptions ? Our support unquestionably goes to the latter.

On the Welfare Effect of a Wage Subsidy on Youth Labor: Italy’s CFL Program

While a vast literature has analysed the wage and employment effects of active labor market programs (ALMPs), a welfare analysis of such programs is seldom implemented (Kluve and Schmidt, 2002). In an attempt to measure the welfare effect of a wage subsidy on youth labor, this paper performs a rudimentary cost-benefit analysis of Italy’s training and employment enhancing program directed at young workers (CFL, Contratti di Formazione e Lavoro). In particular, the analysis highlights the fact that the welfare effect of a targeted wage subsidy – in the form of a payroll tax rebate for firms employing youth labor – crucially depends on whether the labor market is affected by previous fiscal distortions generated either by the absence of linkage between payroll tax revenues and workers’ benefit, or by the presence of a wage floor. Based on reasonable estimates of youth labor demand and labor supply elasticities, it turns out that, in the absence of linkage between payroll tax revenues and benefits to young workers, the introduction of a 15% wage subsidy can be expected to generate a small employment gain (1 to 3 percentage points), and a net welfare gain – measured by the Marshallian approximation of employers’ and workers’ surplus – of less than €30 million (around 5% of the total cost of the welfare programme, amounting to almost €600 million), that could well be offset when the general equilibrium consequences of the selective wage subsidy are allowed for (substitution of non-eligible workers). On the other hand, in the presence of a wage floor that equals the current wage of young CFL workers, and a status quo youth involuntary unemployment rate of 18%, it is estimated that the 15% wage subsidy can generate a youth employment rise of up to 15 percentage points, and a net welfare gain of over €300 million – almost 50% of the total cost of the welfare programme.payroll tax; wage subsidy; minimum wage; cost-benefit analysis.