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By Rosangela Bando, Economist, Inter-American Development Bank



In early May I attended a conference on Skills, Education and Labor Market Outcomes at the University of Maryland, which was co-sponsored by the Jobs Knowledge Platform. Five papers were presented discussing investments in human capital, its effects and mechanisms through which these investments provide returns later in the labor market. A link to the papers and information on the conference can be found here. This research provides evidence that investment in human capital is multidimensional, malleable and has an effect on future wages. It also shows that investment needs to be done right.

First, human capital is multi-dimensional and malleable by families, schools and firms. Omar Arias presented the paper "Does Perseverance Pay as Much as Being Smart? The Returns to Cognitive and Non-cognitive Skills in Urban Peru". The authors use data from a random sample of the working-age (14-50) urban population in Peru. They use scholastic achievement, effort exerted at school and time to get to school as instrumental variables for acquired years of schooling. They find that both socio emotional and cognitive skills are equally valued in the labor market in Peru. One standard deviation change in cognitive skills or in perseverance results in a 9% increase in average earnings, conditional on schooling. They find that the return to 3 years of education is 15% conditional on skills. The returns to other socio-emotional skills vary across dimensions of personality.

Second, acquired human capital does matter. The signaling theory of education states that education works only as a way to screen people with a lower cost to perform a set of desirable tasks but does not have an effect on productivity. Paola Bordón asks whether firms use university diplomas to infer productivity regardless of actual productivity in the paper "Statistical Discrimination, Employer Learning and College Quality in the Chilean Labor Market". In this case, you would be more likely to get a good job if you graduate from an elite university regardless of how productive you are. After employment, employers observe productivity better with time and wages adjust accordingly. Bordón finds that graduates from the best ranked universities in Chile get jobs with higher wages upon graduation, implying employers use diplomas to infer productivity. For the rest of graduates ability is revealed gradually. By analyzing the predictions of the model by Altonji and Pierret (2001), she analyzes correlations and concludes that employers take 3 years to decrease 50% the weight they place on university ranking when determining wages.

Third, human capital is malleable early in life. Florencia López-Boo presented the paper "Richer but More Unequal? Nutrition and Caste Groups". In this study, she explores the relationship between nutrition and cognitive ability using nutrition at age 1 as an instrument for nutrition at age 5. Using three rounds of data and a value added model, they find that a 1 standard deviation increase in height-for-age at the age of 5 leads to an increase on cognitive test scores of 0.16 standard deviations at age 8. They also find that upper caste children perform better than lower caste children in vocabulary tests but upper caste children also show a higher gender inequality. Upper castes discriminate more against girls.

Fourth, investment in human capital only matters if done right. Raquel Bernal presented the paper "The Impact of a Professional-Technical Training Program for Childcare Providers on Children's Well-being". She looks at a program that aims at improving the training for mothers that provide community childcare for low income children in Colombia under age 6. In previous studies they found that poor training of service providers led to activities in daycare aimed to free play and personal care routines. As a result, the program showed negative effects on children’s cognitive development with respect to eligible children that did not participate in similar socioeconomic conditions. Bernal found that training service providers improved the pedagogical process and techniques implemented in the classroom as well as interaction with parents. These changes resulted on improved health and cognitive and non-cognitive development for children, especially for those younger than 3.

In Mexico, Graciela Teruel found that Oportunidades had a positive effect on the probability of working among non-migrants but not on wages or health. The lack of impacts on other outcomes may be attributed to the low quality of education in rural areas or lack of employment opportunities in the areas of residence. In the paper "Do Conditional Cash Transfer Programs Improve Work and Earnings among its Youth Beneficiaries? Evidence after a Decade of a Mexican Cash Transfer Program" she and coauthors use differences in differences matching to estimate the impact of Oportunidades on schooling, labor force participation and hours worked. They also use matching estimators for health benefits and labor income per hour worked. They observe a rural sample of young aged 10 to 14 in 1997 to 1998 observed later in three rounds of data in 2002, 2005 and 2009 providing information in their early to mid-twenties.

Fifth, the environment matters for the effect of education later in life. Miguel Sarzosa presented the paper "Bullying, Cybercrime and Happiness. The role of Cognitive and Non-cognitive Skills". Bullying decreases test score performance, height, weight, and make girls more likely to become pregnant when teens. Victims have less friends and are afraid to attend school. The study focuses on students 10 to 19 in South Korea because the suicide rate (13 per 100,000 people) is the highest in the world. One kid 10 to 19 commits suicide every day. He uses a structural model (Roy model) and uses test scores as proxies of ability. Ability influences the likelihood of being a bully or bullied. He finds bullies are more likely to be depressed, smoke and stress. The victims are more likely to have mental health issues and stress.

To conclude, López-Boo study on the positive effects of early investment on skill formation, Arias' study on the effects of cognitive and non-cognitive skills on wages and Bordón’s study on employer´s capacity to observe skills in a short period of time score the importance of investments early in life on later economic well-being. But these investments need to focus on those aspects that lead to skill development. If not, there will be no benefits and even worse outcomes can happen. Bernal's study shows the importance of training for childcare service providers to avoid deterrence of cognitive development early in life. Teruel's study shows that Oportunidades did not lead to improvements in labor outcomes and low quality of education provision may be to blame. Sarzosa shows that bullying in schools leads to mental health issues, stress, depression and increased likelihood of smoking.

It is not possible to generalize, but if I was you, I would be careful when choosing my education and that of my children because it will likely matter if and how I get it.

This post is cross-posted from Inter-American Development Bank's "Development that works. Effectiveness Blog."
By Claudia Sepulveda, Lead Economist, Office of the Chief Economist, the World Bank

It's tough enough finding a job these days without worrying about whether you're sufficiently beautiful — or at least better looking than the other applicants. But new research in this area, presented at the November 2012 Latin American and Caribbean Economic Association (LACEA) — Latin American Meeting of the Econometric Society (LAMES) in Peru, suggests that beauty does pay and it pays well.


A girl looking at a round mirror. Photo credit: Oleg Prikhodko


The growing interest in this area is motivated by a deep concern about job discrimination against certain groups and initiatives being weighed by several European countries to implement compulsory anonymous resumes that forbid candidates from including information (such as photographs, name, age, gender, or nationality) that could trigger discrimination hiring practices.

Work on labor discrimination

Ever since the seminal contribution made by Gary Becker in "The Economics of Discrimination" (1957), the economics profession has generated a lot of empirical research on discrimination in the labor market. Most of this research has focused on how ascriptive characteristics like gender, race, ethnicity, and religion affect outcomes like earnings, employability, hours worked, and occupations. But since 1994, with the pioneering work by Daniel Hamermesh and Jeff Biddle, research on discrimination against the ugly (favoritism for the beautiful) has started to thrive.

However, the task to measure accurately the impact of these ascriptive characteristics is complicated by the need to account for unobservable productivity enhancing characteristics. For example, with survey data, researchers usually measure discrimination by comparing the labor market performance of women and men who report a similar set of skills. But these comparisons can be quite misleading. As a consequence, differences in outcomes can be attributed to these unobserved factors and not to discrimination.

Several approaches have been tried to circumvent this problem. One approach, though not commonly done, is to use pseudo — experiments — which Goldin and Rouse (2000) did when they used the change in the audition procedures to orchestras to test sex-biased hiring. A second approach is the use of audit studies. That is, sending probes (resumes, individual testers) to random samples of decision makers to infer how they react to agents who maybe otherwise identical except for the ascriptive characteristics.

Measuring Argentina's beauty premium

A recent study by Martin Rossi, Florencia López Bóo, and Sergio Urzúa, tries to take this type of research to a new level by combining objective measures of attractiveness and an experimental design to analyze the link between beauty and the labor market. The objective measures that they’ve constructed rely on the "golden ratio" of the distance between the eyes and the mouth. It says that facial attractiveness is optimized when the vertical distance between the eyes and the mouth is about 36 percent of its length, and the horizontal distance between the eyes is about 46 percent of the face's width (see Pallet, Link, and Lee, 2010). The experimental design is a randomized controlled study, which is considered a highly rigorous way of determining whether a cause-effect relationship exists.

How was the study conducted? The authors sent electronically fictitious resumes with photographs of attractive and unattractive faces of women and men between the ages of 20 and 30 to real job openings in Buenos Aires. The applicants' names and surnames were obtained from a list of the most common names and surnames in Argentina. Schooling and addresses were randomly assigned to the resumes. Photographs were constructed using pictures of real people that were transformed into fictitious ones by randomly altering pairs of real pictures to reflect the golden ratio or deviate from it. Between April 21 and June 20, 2010, about 60 fictitious resumes per day were submitted, reaching a total of 2,540 applications.


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So does beauty pay off in Argentina? As Martin Rossi tells us, they find that attractive people receive 36 percent more callbacks than unattractive people — with males and females equally affected. Moreover, given previous experimental research indicating that beauty isn't correlated with labor productivity, the study concludes that there is indeed evidence of labor discrimination against the less attractive.

With that in mind, the authors suggest that attractive candidates should attach a photograph to their resumes if they can, whereas unattractive candidates should not. But with the advent of Facebook, Twitter, etc., not quite sure how this will play out.
By Claudia Sepulveda, Lead Economist, Office of the Chief Economist, The World Bank

If you're hoping to avoid Olympics coverage in the next few weeks, you probably don't need me to tell you that you may be out of luck. However, I hope the papers and posts below give you an alternative to endless TV or even physical exertion.

National Unemployment Clock Unveiling
National Unemployment Clock Unveiling | June 10, 2009 by keepjobsincanada

Keynes labor demand revisited. Despite its importance in business cycles, there have been surprisingly few empirical tests for a Keynesian labor demand – that is, the short-run demand for labor is sensitive to the demand for goods, meaning that firms hire and fire workers rather than adjust prices. Most tests that have occurred have been based on aggregate time series (Gali and Rabanal, 2004, and Basu, Fernand, and Kimball, 2006). In an intriguing new paper Bils, Klenow, and Malin (2012) use U.S. cross-industry data up to the Great Recession to test the sensitivity of the short-run demand for labor to the demand for goods. The majority of the evidence supports a Keynesian labor demand model over flexible prices with constant mark-ups – the policy implication being the use of active monetary policy and fiscal policy that emphasizes spending.

Back to the Phillips curve. Given that U.S. economic output seems to have recovered since the recent financial crisis and subsequent Great Recession, but jobs haven't, many economists worry that the only hope for lowering unemployment is allowing inflation to rise. However Guillermo Calvo, Fabrizio Coricelli, and Pablo Ottonello disagree. In a recent post in VOX, they suggest that the nature of a crisis affects the nature of the recovery. Specifically, they find that advanced economies and low inflation emerging market economies display a degree of joblessness that exceeds the levels reached during non-financial crises. What does this mean for monetary policy? The authors suggest that the U.S. Federal Reserve, in coordination with the European Central Bank, focuses on liquidity and credit to increase the flow and stock of safe assets.

From the trenches of economic policy. On July 13, the Spanish government approved a new labor reform (covering benefits) and an austerity program. In a post, Samuel Bentolila explains (in Spanish) how the reform will affect unemployment, now at 23 percent for the country as a whole, and 50 percent for youth. He argues that even though the reform is motivated by reducing government expenditures, it may help employment in the medium term, although in the short term, jobs may be scarcer. He also laments that the Spanish government hasn’t used the opportunity to comprehensively redesign active and passive labor market policies.

At the global level. On November 8-9, the International Monetary Fund will hold the Thirteenth Jacques Polak Annual Research Conference on a topic related to this blog: “Labor Markets through the Lens of the Great Recession.” The call for papers highlights a range of issues from reforms and jobs to a comparative performance of labor markets to wage distributions and inequality.
By Mary Hallward-Driemeier, Lead Economist, Office of the Chief Economist,
The World Bank


July 11 was the UN’s World Population Day. It seems appropriate to mark it by highlighting new reports and commentary that focus on population trends and their impact on the skills gaps and who is likely to benefit from increased globalization.



The recent McKinsey Global Institute (MGI) report “The world At work: Jobs, pay and skills for 3.5 billion people” provides numbers on the magnitude of the challenge. Based on current trends in population, education, and labor demand, it provides forward-looking scenarios of the likely shortages of highly skilled workers and shortages of low skill jobs. With the global labor force expected to expand from 2.9 billion to 3.5 billion in 2030, it projects a global shortage of 40 million college-educated workers. In developing countries, it projects a shortage of 45 medium-skilled workers but a global excess of 90 million low-skilled workers. Rising dependency ratios from the 360 million additional older people who will need to be supported will put pressure on raising productivity. The report calls on governments and businesses to raise educational attainment, offer job-specific training, and create more jobs for those who are not as highly educated.

The International Labor Organization (ILO) used World Population Day to highlight its study on population trends and the global shortage of skills ("As population grows, so will need for skills"). Some claims are a bit alarmist, “[t]he global “war for talent” is expected to escalate once economies recover.” But it also raises the question of how to address the mismatch of the supply and demand for skills, and to what extent migration can be a solution. The ILO also highlights another study on the share of the population in forced labor (of which 30 percent is associated with sexual trafficking) in developed countries ("Forced labour: an EU problem"). It reinforces the need to broaden protections of vulnerable workers and prosecution of those who exploit them.

Fittingly, the New York Times’ “Room for Debate” this week was on whether a skills gap is contributing to unemployment. The viewpoints range from blame it on a lack of skills to blame it on employers – they want work experience specific to the job but do not want to train workers, plus they are being cheap. How can better job training come about? The views range from business should collaborate with unions, to businesses should focus more on building skills than quarterly earnings, to the government should improve its own job training programs.

Recent work on the benefits of migration ("A Global View of Cross-Border Migration") – for both sending and receiving countries, Duncan Green asks “Why is migration a Cinderella story in Development?"

The debate about who wins from outsourcing and offshoring continues with Gianmarco Ottaviano, Giovanni Peri, and Greg Wright on “Immigration, Offshoring and American Jobs”; Paul Krugman’s critique (“Off And Out with Mitt Romney”) of outsourcing in undermining the implicit social contract to help create a middle class – and the Economist’s rebuttal “Outsourcing: Take this job and ship it”. Migration of jobs, rather than workers, features in a new National Bureau of Economic Research (NBER) working paper ("Selection, Reallocation, and Spillover: Identifying the Sources of Gains from Multinational Production"). Maggie Chen and Laura Alfaro provide evidence that the traditional focus on productivity spillovers from foreign direct investment is only one source of gains – changes in market shares and the increased exit of lower performing domestic firms also serve to raise productivity. Work by Autor, Dorn, and Hanson ("The China Syndrome: Local Labor Market Effects of Import Competition in the United States") looking at the effects of the growth of Chinese imports on U.S. labor markets shows how such exposure explains a quarter of the decline in U.S. manufacturing employment.

David A. Robalino is a Lead Economist and Labor and Youth Team Leader at the World Bank

These last couple of weeks I have been reading about what technology does to jobs and there are a few interesting articles, blogs, and books out there.

Klaus Zimmerman recently had an Op Ed in the Financial Times on robots in China. Apple and Foxconn want to replace workers in Chinese factories – the ones assembling iPads, iPphones, and other products – with 1 million industrial robots over the next three years. You would think that this is going to be a disaster and put workers on the street, but Zimmerman argues that, on the contrary, what is happening is good for workers and China. For workers because the robots will spare them from working on boring, repetitive, and as Carl Marx would say, alienating tasks, and also increase their productivity and wages. For China because workers can then focus on different, higher-value-added tasks, thereby allowing the country to compete in new, more profitable products and markets. 




How will China’s transition to this improved equilibrium occur? Zimmerman says little other than that the government now needs to increase investments in education and training so that workers can acquire the skills needed to perform these other, presumably, more analytical, strategic, or creative tasks.  A key motivating factor is demographics – as the share of elderly people gets larger in the decades ahead and the share of working-age people soon peaks and begins to fall.

But one should not minimize what these transitions mean for affected workers.  David H. Autor and David Dorn in various articles and Erik Brynjolfsson and Andrew McAfee in their book Race Against the Machine write about how automation has undercut the jobs and wages of the middle class in the United States and other high-income countries. Because computers and robots are good at replacing certain manual or repetitive tasks – from the assembly line to accountants, sale clerks, and paralegals – the number of jobs in these occupations and wages have plummeted. 

Laura D’Andrea Tyson also has a recent post that talks about the polarization of jobs into very high and very low productivity occupations.  Computers are replacing the middle class occupations, but to date we don’t have robots cleaning houses, collecting garbage, or working as janitors – it is easier to teach a robot to play chess or jeopardy than wash dishes – and so the number of these low productivity jobs has continued to grow (check-out the computer Watson winning a jeopardy contest). But it seems to me that this is only a question of time.

So, what happens when all these middle and low productivity jobs disappear?  And, not only in developed but also in developing countries – at some point even when you have abundant unskilled, cheap labor, robots might become better and more profitable farmers.  In another book worth reading (The New Geography of Jobs), Enrico Moretti provides some hints. The book is really about the decline of the U.S. manufacturing sector (because of automation and outsourcing) and how the “innovation” sector (such as science and engineering, entertainment, marketing, and finance) is taking over – but it also provides a way to think about the problem. Moretti argues that even new jobs in the “innovation sector” (such as digital artists) will eventually be standardized and automated.  The hope then is that new products, ideas, and jobs will emerge out of human creativity. The assumption is that innovation comes from human beings, not machines.  These jobs will occupy only a minority of the labor force (the average worker today isn’t working at Pixar, Google, or Spotify), but they will be enough to keep other local jobs that are not much affected by innovation (hairdressers, restaurateurs, sommeliers, yoga teachers, and therapists) going. Essentially, the innovation jobs will pay the wages that are needed to buy the goods and services produced by other jobs.

The question that remains is how countries can prepare today's and future workers (our children) to take on the jobs in the innovation sector – whichever shape they might take – and the jobs that follow them. Certainly, better education and vocational training is part of the answer – maybe, even with the help of a friendly robot.

 

Philip Levy is a resident scholar at the American Enterprise Institute’s Program in International Economics. He was interviewed by the JKP on February 27, 2012
 
His work ranges from free trade agreements and trade with China to anti-dumping policy.

 

Here he discusses the potential for a global competition for jobs. Economic analyses can tell you whether a country ‘should’ intervene, international agreements determine what ‘could’ or could not be done – and politics affects whether countries ‘would’ want to risk heightened tensions with trade partners over the issue.

 

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