How much flexibility do we need?

Transcription

1 How much flexibility do we need? Cristina Tealdi Assistant Professor IMT Lucca April 13, 2012 Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

2 Overview Objectives: Study the effect of short-term contracts on the welfare of different categories of workers Understand whether more flexibility is beneficial in Europe Empirical Contribution: two complementary data sets to analyze Features of workers hired short-term Patterns associated with workers hired short-term Theoretical Contribution: extension of the Mortensen-Pissarides search model Differentiated contracts Heterogeneous workers Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

3 Motivation: EU unemployment rate much higher than US levels U n e m p lo y m e n t R a te E U U S A After 25 years EU unemployment rate much higher than US levels Y e a r Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

4 Motivation: Youth unemployment rate very high in EU Y o u n g U n e m p lo y m e n t R a te 2 6 E U 2 4 U S A EU youth unemployment rate (15-24) very high Introduction of short-term contracts in mid-80s to increase flexibility Y e a r Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

5 Motivation: Share of short-term contracts increased substantially Unemployment Short-Term Rate Contracts Total Youth (Share) France Germany Italy Netherlands Portugal Spain EU Source: OECD (1985)(2006) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

6 Motivation The problem goes far beyond youth unemployment, which is at 40 percent in Spain and 28 percent in Italy. It is also about underemployment. Today, young people in Southern Europe are effectively exploited by the very mechanisms created a decade ago to help make the labor market more flexible, like temporary contracts. New York Times - January 1, Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

7 Motivation Because payroll taxes and firing costs are still so high, businesses across Southern Europe are loath to hire new workers on a full-time basis, so young people increasingly are offered unpaid or low-paying internships, traineeships or temporary contracts that do not offer the same benefits or protections. New York Times - January 1, Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

8 Objectives 1 Who are the workers hired short-term? 2 Which patterns are associated with workers hired short-term? 3 Are workers better off? 4 Do young workers benefit? 5 How flexible should the system be? Without answering these questions we will not be able to Design new labor market policy interventions Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

9 Major Findings 1 Who are the workers hired short-term? Young Female Poorly educated 2 Which patterns are associated with workers hired short-term? 3 Are workers better off? 4 Do young workers benefit? 5 How flexible should the system be? Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

10 Major Findings 1 Who are the workers hired short-term? Young Female Poorly educated 2 Which patterns are associated with workers hired short-term? Lower wages Sequences of short-term employment and unemployment 3 Are workers better off? 4 Do young workers benefit? 5 How flexible should the system be? Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

11 Major Findings 1 Who are the workers hired short-term? Young Female Poorly educated 2 Which patterns are associated with workers hired short-term? Lower wages Sequences of short-term employment and unemployment 3 Are workers better off? More productive better off Less productive worse off 4 Do young workers benefit? 5 How flexible should the system be? Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

12 Major Findings 1 Who are the workers hired short-term? Young Female Poorly educated 2 Which patterns are associated with workers hired short-term? Lower wages Sequences of short-term employment and unemployment 3 Are workers better off? More productive better off Less productive worse off 4 Do young workers benefit? Young workers pay the cost of higher turnover 5 How flexible should the system be? Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

13 Major Findings 1 Who are the workers hired short-term? Young Female Poorly educated 2 Which patterns are associated with workers hired short-term? Lower wages Sequences of short-term employment and unemployment 3 Are workers better off? More productive better off Less productive worse off 4 Do young workers benefit? Young workers pay the cost of higher turnover 5 How flexible should the system be? More flexible, but not too flexible Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

14 Case Study: Italy Data are available for both time periods 1 WHIP (Work Histories Italian Panel) Provided by the National Social Security Institute Individual working histories Sample: 700,000 people Observed period: from 1985 to 2004 Few individual characteristics: age, sex, region 2 SHIW (Survey on Household Income and Wealth) Survey conducted by the Bank of Italy Sample: 8,000 households (24,000 individuals) Observed period: from 1993 to 2006 Information on socio-demographic characteristics, income, savings and wealth Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

15 Outline Empirical evidence regarding short-term contacts Characteristics of workers Earnings Turnover The models Benchmark pre-reforms Post-reforms Calibration of the model Compute the lifetime income Welfare and policy Policy interventions A unique labor contract Conclusions Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

16 Characteristics of workers hired on a short-term basis: Female Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

17 Characteristics of workers hired on a short-term basis: Blue Collars, Not Managers and White Collars Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

18 Characteristics of workers hired on a short-term basis: Young Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

19 Characteristics of workers hired on a short-term basis: Poorly educated Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

20 Characteristics of workers hired on a short-term basis: Recent college graduates Gender Region Occupation Age Education Probit regression Short-term Short-term Short-term Short-term Short-term Female South Manager White Collar Teacher Age Age Group Age Group Master s Bachelor s Year Bachelor s Year Bachelor s Primary/Junior High Primary No Education Bachelor s < Number of observations Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

21 Earnings: Lower income associated with short-term contracts Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

22 Earnings: Earnings are higher among permanent workers Log earnings Log earnings Log earnings Log earnings Log earnings Permanent (0.015) (0.015) (0.015) (0.015) (0.015) Male (0.010) (0.010) (0.010) (0.010) (0.101) South (0.011) (0.011) (0.011) (0.011) (0.011) Manager (0.027) (0.018) (0.018) (0.018) Age (0.000) (0.003) (0.003) Age (0.000) (0.000) Age Group (0.020) (0.020) Age Group (0.012) (0.012) Master s (0.093) Bachelor s (0.014) (0.014) (0.014) (0.014) 5 Year Bachelor s (0.015) 3 Year Bachelor s (0.041) Firm Size (0.011) (0.011) (0.011) Constant (0.023) (0.066) (0.066) (0.017) (0.017) Number of observations R Source: Survey on Household Income and Wealth (SHIW) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

23 Turnover: Sequences of short-term employment and unemployment Percentage of workers hired short-term First job Panel A: Transitions to the short-term contract Non-employment Short-term Short-term Long-term Panel B: Transitions from the short-term contract Non-employment Short-term Short-term (first job) Long-term Non-employment Short-term Short-term (not first job) Long-term Number of observations Source: Work Histories Italian Panel (WHIP). Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

24 Empirical Evidence: Stylized Facts 1 People hired short-term are Less educated Less qualified Junior 2 They face Lower earnings Higher turnover Sequences of short-term employment and unemployment Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

25 The Model Extension of the standard Mortensen-Pissarides search model Differentiated contracts Workers heterogeneity Essential to derive welfare conclusions Counterfactuals To design policy interventions Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

26 The Model: General Features (I) Workers Measure 1 Heterogeneous with respect to productivity: H type productivity y H (with probability p) L type productivity y L < y H (with probability 1 p) Can be: Employed Unemployed Out of the labor force Entry level productivity y0 when they are born y 0 < y L < y H Junior At rate λ productivity shock Senior Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

27 The Search Model: General Features (II) Firms Hire both junior & senior workers When they open a position vacancy cost c When they hire a worker welfare and social security cost τ Matching Workers and firms come together through a matching function q(u, v) Wages set according to a Nash Bargaining mechanism when the contract is signed Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

28 The Search Model: Types 1 Benchmark pre-reforms: ONLY permanent contracts Firing is not allowed Junior and senior workers are hired permanently functions-pre 2 Post-reforms: both permanent AND short-term contracts Firms can offer permanent or short-term contracts every time they open a vacancy Associated with short-term contracts No firing cost at expiration No possibility of renewal Lower costs of : functions-post 1 Vacancies 2 Welfare and social security fees Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

29 The Search Model: Equilibrium Optimal for the firm to Hire junior workers short-term Upgrade senior h-type workers to a permanent contract Offer senior l-type workers a short-term contract This decision is driven by: Lower cost of welfare and social security fees associated with short-term contracts (τo p > τo s ) Lower vacancy cost associated with short-term contracts (c p o > co) s No firing associated with permanent contracts Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

30 The Search Model: Equilibrium Pre-Reforms Pooling of more and less productive workers JUNIOR SENIOR μ ο Unemployed Senior q q Out of the Labor Force Junior m Unemployed Junior μ y Permanent Employed Junior λ Permanent Employed Senior s p Out of the Labor Force Senior Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

31 The Search Model: Equilibrium Post-Reforms JUNIOR SENIOR cc μ h ο Unemployed Senior H-type Out of the Labor Force Junior m Unemployed Junior q μ y t Short-term Employed Junior λ λ Permanent Employed Senior H-type Short-term Employed Senior L-type q s p s s t Out of the Labor Force Senior μ l ο q Unemployed Senior L-type Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

32 The Search Model: Post-Reforms JUNIOR SENIOR cc Out of the Labor Force Junior m Unemployed Junior q μ y t Permanent Employed Junior Short-term Employed Junior λ λ Short-term Employed Senior h-type Permanent Employed Senior H-type Short-term Employed Senior L-type μ h ο q s p s s t Unemployed Senior H-type Out of the Labor Force Senior Permanent Employed Senior l-type μ l ο q Unemployed Senior L-type Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

33 The Search Model: Equilibrium Post-Reforms Separated career paths for different workers JUNIOR SENIOR cc μ h ο Unemployed Senior H-type Out of the Labor Force Junior m Unemployed Junior q μ y t Short-term Employed Junior λ λ Permanent Employed Senior H-type Short-term Employed Senior L-type q s p s s t Out of the Labor Force Senior μ l ο q Unemployed Senior L-type Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

34 Nash Bargaining Wage Determination wages Pre-reforms β[jy E JY V ] = (1 β)[p(wy EH β[jo E JO V ] = (1 β)[p(wo EH WY UH ) + (1 p)(wy EL W UL W UH O ) + (1 p)(w EL O Y )] WO UL )] Post-reforms β[jy ES JY V ] = (1 β)[p(wy EH β[j EPH O β[j ESL O JO VH ] = (1 β)[wo EH JO VL ] = (1 β)[wo EL WY UH ) + (1 p)(wy EL W UL W UH O ] W UL O ] Y )] Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

35 Model Testing: Calibration Parameter values selected 1 According to the literature 2 To match employment, unemployment, labor force participation rates and wages in the data 3 According to Italian regulations calib The model fits well the data For junior workers For senior workers Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

36 Model Testing: data vs model - Junior workers Data Model Pre-reforms Post-reforms Pre-reforms Post-reforms Total employment rate 39.4% 39.0% 39.1% 39.2% Permanent H type 33.3% L type 5.8% Short-term H type 33.3% L type 5.8% Total unemployment rate 18.1% 16.5% 18.2% 16.3% H type 15.4% 13.8% L type 2.7% 2.4% Total out of labor force rate 42.3% 44.5% 42.6% 44.5% Average wage (in e) Source: Survey on Household Income and Wealth (SHIW) and Work History Italian Panel (WHIP) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

37 Model Testing: data vs model - Senior workers Data Model Pre-reforms Post-reforms Pre-reforms Post-reforms Total employment rate 58.2% 65.0% 58.5% 64.8% Permanent H type 50.0% 58.4% L type 8.5% Short-term L type 6.35% Total unemployment rate 4.8% 5.4% 5.5% 5.8% H type 4.7% 5.8% L type 0.8% 0.0% Total out of labor force rate 37.0% 29.6% 35.5% 29.3% Average wage (in e) H type L type Source: Survey on Household Income and Wealth (SHIW) and Work History Italian Panel (WHIP) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

38 Model Testing: Welfare changes by worker s types Junior workers worse off Pre-reforms Post-reforms Average working income while in the labor force (1000 e) Junior Senior H type Senior L type Average time in the labor force (in months) Junior Senior H type Senior L type Present discounted value of total income while in the labor force (1000 e) Junior Senior H type Senior L type Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

39 Model Testing: Lifetime income changes by worker s types More productive workers better off Pre-reforms Post-reforms Average working income while in the labor force (1000 e) H type L type Average time in the labor force (in months) H type L type Present discounted value of total income while in the labor force (1000 e) H type L type Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

40 Policy interventions 1 Changing the length of the short-term contract Longer short-term contracts are beneficial for junior and senior workers 2 Adopting an American-style system Junior workers benefit Senior workers may not be better off Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

41 Changing the length of the contract Longer contracts benefit junior workers S h a r e o f ju n io r p o p u la tio n E m p lo y m e n t U n e m p lo y m e n t R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

42 Changing the length of the contract Minimal effect for senior workers 7 0 E m p lo y m e n t U n e m p lo y m e n t S h a r e o f s e n io r p o p u la tio n R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

43 Changing the length of the contract Junior workers might be as good as before P r e s e n t d is c o u n te d v a lu e o f in c o m e (in th o u s a n d s o f e u r o ) P r e -r e fo r m s P o s t-r e fo r m s R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

44 Changing the length of the contract Senior L-type workers are worse off P r e s e n t d is c o u n te d v a lu e o f in c o m e (in th o u s a n d s o f e u r o ) P r e -r e fo r m s P o s t-r e fo r m s R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

45 Changing the length of the contract Increased inequality P r e s e n t d is c o u n te d v a lu e o f in c o m e (in th o u s a n d s o f e u r o ) P r e -r e fo r m s P o s t-r e fo r m s h -ty p e P o s t-r e fo r m s l-ty p e R a te a t w h ic h th e c o n tr a c t te r m in a te s (t) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

46 Adopting an American-style system JUNIOR SENIOR cc μ h ο δ Unemployed Senior H-type Out of the Labor Force Junior m Unemployed Junior q μ y δ Permanent Employed Junior λ λ Permanent Employed Senior H-type Permanent Employed Senior L-type q s p s s δ Out of the Labor Force Senior μ l ο q Unemployed Senior L-type Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

47 Adopting an American-style system E m p lo y m e n t U n e m p lo y m e n t S h a r e o f ju n io r p o p u la tio n fu tu r e -r e fo r m s fu tu r e -r e fo r m s M a tc h d e s tr u c tio n r a te (d ) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

48 Adopting an American-style system Better outcome for junior workers E m p lo y m e n t U n e m p lo y m e n t fu tu r e -r e fo r m s S h a r e o f ju n io r p o p u la tio n p r e -r e fo r m s p o s t-r e fo r m s p o s t-r e fo r m s p r e -r e fo r m s fu tu r e -r e fo r m s M a tc h d e s tr u c tio n r a te (d ) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

49 Adopting an American-style system 7 0 E m p lo y m e n t U n e m p lo y m e n t 6 5 S h a r e o f s e n io r p o p u la tio n fu tu r e -r e fo r m s fu tu r e -r e fo r m s M a tc h d e s tr u c tio n r a te (d ) x Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

50 Adopting an American-style system Senior workers might be worse off p o s t-r e fo r m s E m p lo y m e n t U n e m p lo y m e n t S h a r e o f s e n io r p o p u la tio n p r e -r e fo r m s fu tu r e -r e fo r m s fu tu r e -r e fo r m s p o s t-r e fo r m s p r e -r e fo r m s x M a tc h d e s tr u c tio n r a te (d ) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

51 Summary Objective: Effect of short-term contracts on the welfare of workers Methods: Empirical analysis of worker characteristics and contract features Theoretical search model with differentiated contracts and workers heterogeneity Calibration to derive welfare implications Analysis of policy interventions Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

52 Conclusions Junior workers are worse off after the reforms More productive workers are better off Less productive workers are worse off Policy for the future: Longer short-term contracts may improve the labor market An American style system may Eliminate the dual market Improve the conditions for junior people Deteriorate the conditions for senior people A compromise between the two systems might be the solution... Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

53 How much flexibility do we need? More than what we have now, but not as much as in America Thank you! Contact: Website: Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

54 The Search Model: Pre-reforms Value functions Vacancies rj V Y = c p y + α p y [J E Y JV Y ] rj V O = cp o + α p o[(pj EH O + (1 p)jel O ) JV O ] Filled positions rj E Y = y 0 w y τ p y + λ[p(j EH O rj EH + δ(j V Y JE Y ) JE Y ) + (1 p)(jel O JE Y )] O = y w o τo p + δ(jo V JEH O ) + sp (JO V JEH O ) rjo EL = y 0 w o τo p + δ(jo V JEL O ) + sp (JO V JEL O ) types Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

55 The Search Model: Post-reforms Value functions Vacancies rj V Y = max{ c s 2y + α s 2y [J ES Y rjo VH = max{ c2o s + α2o[j s Y ESH rjo VL = max{ c2o s + α2o[j s O ESL JV Y ], cp 2y + αp 2y [JEP Y JV Y ]} JO VH ], cp 2o + αp 2o [JEPH O JO VH ] JVL O ], cp 2o + αp 2o [JEPL O JO VL ]} Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

56 The Search Model: Post-reforms Value functions Filled positions rjy EP = y 0 w y τy p + λ[p(jo EPH rj ES J EP Y ) + (1 p)(jepl + δ[jy V JEP Y ] Y = y 0 w y τy s + λ[p(max{jo EPH O } JES Y ) + (1 p)(max{jo EPL O + t[jy V JES Y ] rjo EPH = y wo h τo p + (δ + s p )[JO VH rjo ESH = y wo h τo s + (δ + t + s s )[JO VH rjo EPL = y 0 wo l τo p + (δ + s p )[JO VL rjo ESL = y 0 wo l τo s + (δ + t + s s )[JO VL O } JES Y )] + δ[jv Y JES Y ] JEPH O ] JESH O ] JEPL O ] JESL O ] J EP Y )] types Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

57 Equilibrium Wages wages Pre-reforms ( r + s w o = β[py + (1 p)y 0 τo p p ] + r ( ) u + (1 β)[s p ] r + d w y = β[y 0 τ p y ] + Post-reforms wo h = β[y τo p ] + (r + sp ) r wo l = β[y 0 τo s ] + (r + ss ) r w y = β[y 0 τy s (r + λ) ] + β r c2y s θ2y s λ ] r + (1 p)(1 β)(c2oθ s 2o) s ) ((1 β)b + βc p o θ p o) (r + λ) βcy p θy p λ r r ((1 β)b + βcp o θo) p ( ) ((1 β)b h + βc p u 2o θp 2o ) (1 β)sp r + d ( ) u (βc2oθ s 2o) s (1 β)s s r + d [ p((1 β)b h + βc p 2o θp 2o ) Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,

58 Calibration calibration Parameter Pre reforms Post reforms r β p k y y co p co s 750 cy s 1000 τo p τo s 200 τy p 300 τy s 100 b u m d s p s s q p q s t 0.1 λ µ y µ o 0.18 µ h o µ l o 0.25 α y p 0.06 α y s 0.13 α o p α o s 0.11 Cristina Tealdi (NU / IMT Lucca) How much flexibility do we need? April 13,