Author Archives: Miroslav Palanský

Phantoms on the labor market

Having trouble finding a job? Blame the phantoms.

If you ever spent some time looking for a job online, you have most likely stumbled upon a listing for a position that has already been filled, and most people would agree that it is very annoying. In their recent paper, Bruno Decreuse and Arnaud Chéron call these job listings phantoms. It is not hard to imagine how phantoms directly create inefficiency in the labor market. Job seekers who apply to phantom listings lose their time by calling and employers who leave their ads online even after they have filled the advertised position lose their time by responding to job seekers and explaining them that the position has already been filled. Yet, many employers just leave their phantoms out there. The authors estimate that around 37% of job listings on Craigslist (a major job board in the US) advertise for already filled vacancies.

There are several reasons why employers may leave phantom job listings online: keeping active ads is usually free on websites such as Craigslist and deleting ads takes time and is thus costly in itself. Another reason is that some firms and state-run agencies are legally obliged to publish job listings despite already knowing who they will hire. Further, some employers may choose to keep outdated job listings as insurance until the new hire has started working. It is not easy to identify the presence of phantoms, but the authors found a way – the table below shows the average age (in days) of job listings in 23 major US cities. The maximum age of a job posting is 30 days, after which Craigslist automatically deletes it. The authors argue that if outdated ads were destroyed by employers, the density of job listings by age would be decreasing, and the quartiles of the distribution would be separated by an increasing number of days. However, as the table shows, this is not the case.

The authors then develop an extended version of the canonical continuous-time equilibrium search unemployment model by embedding a matching technology that permits the existence of phantom job listings. This model allows them to analyze the consequences of this particular market friction. They conclude that in the long run, there exists a unique steady state ensured by two mechanisms working against each other. When firms expect the matching process to be very efficient, they have strong incentive to post vacancies. This reduces the proportion of phantom job listings. Then this phantom proportion grows, and there is a reversal in the supply of vacancies, which ultimately determines the steady state.

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Cheron, A., & Decreuse, B. (2016). Matching with phantoms. The Review of Economic Studies, rdw032. Available here.

Should tall people pay more taxes?

Do you think that’s absurd? Keep reading.

Tax systems of most developed countries are astonishingly complex. Depending on your country, factors such as your income, consumption, wealth, number of children, charitable contributions, mortgage payments, health insurance expenditures, or whether you donate blood may all influence your tax liability, i.e. the total amount of tax due each year. The ultimate aim of designing a tax system is fairness, although the concept is rather subjective. There are multiple plausible, yet very different views on what is fair. One view (very rare, luckily) is that a flat tax would be the most fair tax, as everybody would just pay the same amount. In practice, two main principles are used to argue which taxes are considered fair – the ability-to-pay principle and the benefits principle. While income tax or wealth tax are prominent examples of taxes we deem fair based on the ability-to-pay principle (you pay as much as your financial situation allows you to), consumption tax or highway tolls are typical taxes based on the idea of the benefits principle (you pay as much as you use a certain good or public service). The framework for optimal taxation which remains a centerpiece in modern public finance was laid out by James A. Mirrlees (of Mirrlees Review) and William Vickrey, for which they jointly received a Nobel Prize in 1996.

As argued by Nicholas Gregory Mankiw and Matthew Weinzierl (both from Harvard), based on this theory, a surprisingly suitable choice could be taxing people’s height, or more precisely, providing a tax credit to short people and imposing a tax surcharge for tall people. Before you discard the idea as nonsense and stop reading this article, think about the reasons not to tax height. In short, the optimal taxation theory as it stands today defines an ideal characteristic based on which to tax as:

  1. exogenous, meaning that the tax does not distort incentives as there is no way to change this characteristic,
  2. easily observable, meaning that it is easy to see what the value of this characteristic is for every person,
  3. positively correlated with ability, so that the ability-to-pay principle is satisfied.

Income, which is currently the most important characteristic of people for tax purposes in most countries, does not do too well in (1) because of deadweight loss and in (2) as documented by relatively high shares of the shadow economy throughout the world. Income does pretty well in (3); in fact, it is probably the best indicator of ability we have at this time.

But how about height? While the first two requirements are clearly met for height, the third one might raise questions. However, previous research (see, for example, here, here or here, and figure below) convincingly shows that taller people make more money – on average by between 1 and 2 percents per additional inch of height – and, assuming correlation between ability and income, a potential height tax would also be correlated with ability. Starting from here, the authors rigorously show in their article that the current theory suggests that we should indeed impose a height tax, and moreover, the optimal level of such tax is substantial. The fact that in practice, we do not impose such a tax and that most people think it absurd suggests that the current optimal taxation theory must in some way fail to capture our intuitive notions of distributive justice.

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Reference: Mankiw, N. G., & Weinzierl, M. (2010). The optimal taxation of height: A case study of utilitarian income redistribution. American Economic Journal: Economic Policy, 2(1), 155-176. Available here, working paper version available here.

Get out of your social bubble

Recently, social media have become the primary source of information for many and thus play an increasingly important role in influencing opinions, and apparently more so for the young generation. The problem is that on social media, opinions you usually get exposed to become less and less diverse as a result of both automatic filtering algorithms (whose goal is to get as many shares as possible) and the fact that you are more likely to follow people with similar views (who are, in turn, likely to share information biased in favor of their opinion). An example is your Facebook feed, which is personalized based on your past clicks and likes, making you less likely to “see the bigger picture”. This phenomenon is called a filter bubble and it concerns both search engine results and social media. However, as some people argue (here or here), social media are a more powerful tool for filter bubbles, and this is a problem. Others think that when it comes to the really important decisions, it might not be that bad just yet, and there are even guidelines on how to get out of your filter bubble.

In a recent working paper, Shane Greenstein, Yuan Gu and Feng Zhu (all from Harvard Business School) analyzed whether Wikipedia, and in particular articles about US politics, are also affected by filter bubbles and thus become more biased over time. They chose politics because it is a good example of the so-called contested knowledge, which can be loosely defined as knowledge that answers questions for which there is no single “right answer”. Relying on metrics developed by Gentzkow and Shapiro’s 2010 article in Econometrica, the authors measure empirically whether selected Wikipedia articles become more or less segregated (i.e. slanted towards a certain view) over time.

Their results, somewhat optimistically, show that Wikipedia contributors increasingly offer content to those with different points of view, which reinforces unsegregated conversations at Wikipedia over time. Interestingly enough, the authors additionally estimate that this slant convergence process takes one year longer on average for Republicans than for Democrats. The authors stress the importance of the option to remove previously added material (such as on Wiki-style pages) or using aggregate contributions (such as Yelp or Rotten Tomatoes) over the social media style, where additional material just gets piled up on top of what is already there.

Collective intelligence, of which Wikipedia is perhaps the most astounding source, thus seems to cope fairly well with the filter bubble problem, at least for now. While we can, let’s all try to use that to our advantage and rely more on objective sources when forming opinions, challenge ideas shared by people we follow on social media, verify facts using multiple sources and most importantly, keep an open mind. And share this article with our filter bubbles.

Reference: Greenstein, S., Gu, Y., & Zhu, F. (2016). Ideological Segregation among Online Collaborators: Evidence from Wikipedians (No. w22744). National Bureau of Economic Research. Available here.

Are you struggling to find a job? Maybe it’s time to change your name

Unfortunately, we have not yet arrived to a time when people of all colors have the same opportunities. Numerous studies have shown that in the US, being an African American is strongly correlated with earning less money for the same work, having worse access to education, being more likely to be unemployed and so on. Nonetheless, there are areas in which one would not expect racism – like responding to CV submissions not including pictures of the person. However, as shown by Marianne Bertrand and Sendhil Mullainathan in their field experiment, even your name can affect your chances.

The authors started by choosing typically white and typically African American sounding names, such as Emily Walsh and Jamal Jones, and sent out resumes randomly in response to help-wanted ads in Chicago and Boston. In total, they responded to over 1 300 job offers, sending out more than 5 000 resumes. They randomly assigned previous work experience to these fake resumes and responded to a variety of jobs to get a sample as good as random.

The authors find large differences in callback rates. While applicants with a white-sounding name need to apply for, on average, 10 positions to receive a callback, it is 15 for applicants with an African American-sounding name. Moreover, the researchers also recorded and analyzed the applicants’ addresses and the perceived quality of the resume (in terms of previous work experience relevant to the job, education etc.). The results suggest that living in a wealthier neighborhood helps significantly, and a high quality resume helps more when you have a white-sounding name.

Reference: Bertrand, M., & Mullainathan, S. (2004). Are Emily and Greg more employable than Lakisha and Jamal? A field experiment on labor market discrimination. The American Economic Review, 94(4), 991-1013. Available here. A freely accessible working paper version is available here.

Laissez-faire vs. regulation – which colonial legacy is better?

Since the very beginnings of market economies, there have been two general views of how things should be done; how the governments should behave. Laissez-faire vs. regulation, right vs. left, liberalism vs. social state, republicans vs. democrats, keep-your-money-and-use-it-however-you-want vs. give-us-your-money-and-we-will-redistribute-it. One might think that by now, we should have known for a long time which system works better. We can just compare two nations that each use one of the systems, right? However, comparing two nations with different systems shows to be a very difficult task due to great heterogeneity in virtually all other characteristics that affect the outcome. In the words of the theory of treatment econometrics, constructing a counterfactual is incredibly difficult. In the words of a normal person, we don’t know what economies would look like had they adopted a different system.

Alexander Lee and Kenneth A. Schultz of Stanford have used a unique natural experimental setting in Cameroon in their 2011 paper to shed more light on this agelong discussion. Cameroon was first colonized by the German empire in 1884. After the defeat of Germany in World War I, it became a League of Nations mandate territory and was artificially divided between the French and British colonial powers until Cameroon gained independence in the beginning of the 1960’s. During the more than 40 years of colonial regime, the French and the British took a very different approach as to which institutions to put in place to ensure effective economic development of their part of Cameroon. While the French flooded their part (East) of Cameroon with investment into infrastructure and made the public sector in general very powerful, the British (West Cameroon) preferred letting the economy work largely on its own.

This situation made for a very promising experimental setting, but large regional differences remained an issue. That is why the authors focused on pairs of rural towns that are close to each other geographically, but divided by the French-British border. This method is called local average treatment effect and it is an integral part of regression discontinuity design. To see its fundamental idea on a simpler example, suppose you want to estimate the effect of studying at the best law school on post-university wage as compared to studying at a worse (less challenging) law school. Taking a simple difference in wage between the two groups leads to a huge selection bias, as more skilled people usually get to the best school, because they score better on the entrance exam. Using the local average treatment effect in this example means to compare people who scored close to the cut-off level but below, and those who scored close but above. These two groups are roughly the same (since entrance exams are only rough approximations of your true skills), but one of them got the treatment (i.e. the best law school) and the other did not (i.e. they went to a worse law school). Similarly, in Cameroon, two villages that are close to  the French-British border are roughly the same (in geographical and other characteristics), but they received different treatment (i.e. the French vs. the British colonial legacy).

And the result? As shown in the figure below, the British part appears to have higher levels of economic dynamism, evidenced by greater household wealth, and better functioning local government institutions, evidenced by its higher level of public goods provision. These findings are consistent with the hypothesis that the mix of institutions and practices associated with British colonial rule generated superior outcomes. This does not imply, of course, that British-colonized areas always perform better or that West Cameroon is an elysia of wealth and strong institutions. But for the rural areas in this particular case, it seems that the British way was the better one to go with.

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Reference: Lee, A., & Schultz, K. A. (2012). Comparing British and French Colonial Legacies: A Discontinuity Analysis of Cameroon. Quarterly Journal of Political Science, 7(4), 365-410. Available here.

Letting others do the work will not get you a Nobel

You have probably done this at some point in your life, be it school, work, or organizing a party – you are part of a group assigned to a task, and while working on it, you realize you might as well just let others do the hard part. In the end, you all get the same credit for the final outcome anyway, right? Congratulations, you have just become the so-called free-rider of the group.

The seminal work of one of the two men woken up this morning by a call from the Nobel committee, Bengt Holmstrom, shed more light on this phenomenon. One of his most famous papers, published in 1982, shows that the free-rider problem described above can largely be resolved if ownership and labor are partly separated, which gives capitalistic firms an advantage over partnerships. In other words, if you are in a partnership, it is more likely that there will be a free-rider among your co-workers (partners) than when you own the company yourself and hire workers with assigned jobs. The rather technical paper also discusses some other issues arising due to such moral hazard questions. For example, it assesses the consequences of relative performance evaluation of workers and suggests ways to improve risk-sharing in entrepreneurship in general.

This is is one of the founding works in contracts theory, for which The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded this year to Bengt Holmstrom and Oliver Hart.

Reference: Holmstrom, B. (1982). Moral hazard in teams. The Bell Journal of Economics,13(2), 324-340. Available here.

Why are we still not making 18-cent coins?

In the US, commonly used coins are worth 1, 5, 10 and 25 cents. Have you ever wondered whether the current system of coin denominations is efficient? Well, turns out it’s not. Actually, as Jeffrey Shallit (2003) shows in his short note, the US system could be improved by 17% just by changing the dime to an 18-cent coin!

The author’s aim is to show which denominations are optimal (in that they minimize the number of coins needed in an average change-making) for systems made of different numbers of coins. His results are shown in the figure below. For a 4-coin system, the most efficient combination would be any of the two sets (1,5,18,29) and (1,5,18,25), which would bring about a decrease in the cost of change-making by 17%. If we wanted to add one coin and not take away any of the beloved coins that are currently used, a 32-cent coin is the best option. Well, politicians – the ball’s in your court!

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Reference: Shallit, J., 2003. What this country needs is an 18-cent piece, Math. Intelligencer 25 (2), 20-23. Available here.