Western University EconomicsWestern Social Science

Productivity and Earnings

Productivity and Earnings

1. The Self-Sufficiency Project: Human Capital and Search

The Self-Sufficiency Project (SSP) was a large social experiment in British Columbia and New Brunswick designed to study the effects of providing cash payments for work rather than welfare for individuals on income assistance for an extended period of time. Audra Bowlus, Lance Lochner, Masashi Miyairi, and Chris Robinson use data from the experiment to estimate a lifecycle model in which individuals can improve their wages through human capital accumulation and job search. They then use estimates of their model to explore the effects of changing various parameters of the SSP (e.g. cash payment amount, required period on income assistance to qualify for cash payments).

2. Returns to Schooling

Economists have been estimating the return to human capital in the labor market for decades. James J. Heckman, Lance Lochner, and Petra Todd estimate the internal rate of return to different schooling levels in the U.S. from 1950-2000. Unlike most studies which simply estimate Mincer rates of return, their estimates account for a general relationship between schooling, experience and earnings. They also account for taxes on labor earnings as well as tuition costs associated with post-secondary school.

Related Publications and Working Papers:

Heckman, James J., Lance Lochner and Petra Todd, "Earnings Functions and Rates of Return," Journal of Human Capital, 2(1), Spring 2008: 1-31.

Heckman, James J., Lance Lochner and Petra Todd, "Earnings Functions, Rates of Return, and Treatment Effects: The Mincer Equation and Beyond," in E. Hanushek and F. Welch (eds.), Handbook of the Economics of Education, Vol. 1, Chapter 7, Amsterdam: Elsevier Science, 2006.

Press References:

"Editorial shorts: Midwest needs bigger share of R&D dollars," StarTribune.com, July 7, 2008.

3. Human Capital Prices, Productivity and Growth

This line of research examines the role of human capital accumulation via education and on-the-job training in the determination of a country’s productivity level and growth. It aims to separately identify the prices and quantities of human capital stocks for different education groups over time while allowing for technological innovation in the production of human capital and changes in education choices made by individuals. Audra Bowlus and Chris Robinson study the accumulation of human capital over the life cycle, the role of technological innovation in the determination of the return to post-secondary education, and the importance of the growth in human capital stocks to growth in GDP. They also conduct Canada-U.S. comparisons and find that increased human capital production is an important determinant of growth in both countries and that it more than accounts for the rise in total factor productivity estimates over the period studied. Furthermore, human capital stocks per capita are higher in the U.S. than Canada due to more individuals choosing higher levels of education as well as the U.S. education system generating a higher output of human capital for each education level.

Related Publications and Working Papers:

Audra J. Bowlus and Chris Robinson, "Human Capital Prices, Productivity and Growth" (CIBC Working Paper #2010-4), 2010.

Bowlus, Audra, and Chris Robinson, "Human Capital Prices, Productivity and Growth." Second Revision, American Economic Review (CIBC Working Paper #2008-5), 2005.

Bowlus, Audra, Haoming Liu, and Chris Robinson, "Human Capital, Productivity and Growth" (CIBC Working Paper #2005-2), 2005.

Bowlus, Audra, and Chris Robinson, "The Contribution of Post-Secondary Education to Human Capital Stocks in Canada and the United States" (CIBC Working Paper #2005-1), 2005.

4. Human Capital and Displaced Workers

Modern economies have a substantial amount of labour mobility as industries grow and decline and labour is reallocated across sectors. There is great concern for the consequences of this mobility for displaced workers, especially in terms of wages. This work relates the consequences for displaced workers to the specificity of human capital and how transferable it is across occupations. It develops a method of comparing occupation switches in terms of their closeness with respect to the underlying human capital or skills. It shows that many different occupations are quite close together in terms of the underlying skills and that workers avoid large wage losses by making moves between close occupations.

Related Publications and Working Papers:

Poletaev, Maxim, and Chris Robinson, "Human Capital Specificity: Evidence from the Dictionary of Occupation Titles and Displaced Worker Surveys 1984-2000." (JOLE 2008, Lewis Prize).

Poletaev, Maxim, and Chris Robinson, "Human Capital Specificity: Direct and Indirect Evidence from Canadian and US Panels and Displaced Worker Surveys" (CIBC Working Paper #2004-2), 2004.

Press References:

Interview: Chris Robinson on CBC Radio Canada International, April 18, 2012.

5. Human Capital, Occupation Mobility and Occupation Distance

This work develops further the measures of occupation distance and underlying skill sets used in the earlier work for displaced workers and compares involuntary and voluntary occupational mobility. It shows the usefulness of occupation distance measures and underlying skill portfolios in understanding the differences between involuntary and voluntary mobility. The median distance in voluntary and involuntary mobility is quite similar, but the direction is very different. The involuntary mobility is generally a downward move, while voluntary mobility shows more experimentation in the form of horizontal moves and more career paths in the form of upward moves. These new measures will contribute to a better understanding of earnings over the lifecycle, and why some workers do better than others. The Canada-US comparison will shed light on differences in mobility and labour market adjustment in the two countries.

Related Publications and Working Papers:

Robinson, Chris, "Occupational Mobility, Occupation Distance and Basic Skills: Evidence from Job-based Skill Measures." Working Paper, 2010.

Robinson, Chris, "Voluntary and Involuntary Mobility Across Occupations and Skill Portfolios." Working paper, 2010.

6. Immigration, Human Capital, and Public Policy

Skilled immigrants provide an important source of human capital growth for countries like Canada and the United States. The traditional view of international migration was that it typically represents a permanent decision. More recently there is evidence that international migration is more like internal migration, where moves are not typically considered permanent. Especially for skilled workers, there is increasing global competition in a global labour market. This work provides evidence from immigrants to Canada since the early 1980s that those admitted under the skilled worker or business visa class are highly mobile. The estimates suggest that one third of those that land in Canada will leave again, most within the first five years. This suggests that immigration policy needs to balance priorities between attracting immigrants and retaining them. Retention will become increasingly important if Canada is to get the full benefit of recruiting skilled workers.

Related Publications and Working Papers:

Aydemir, Abdurrahman, and Chris Robinson, "Global Labour Markets, Return and Onward Migration," Canadian Journal of Economics, 41(4), 2008.

Press References:

"Fewer jobs for skilled immigrants, Six out of 10 leave Canada within a year of arriving: federal study," Carmela Fragomeni, The Hamilton Spectator, March 2, 2006.

"Many skilled immigrants aren't staying; Report details newcomer 'brain drain' 1 in 6 males leaves Canada in first year," Nicholas Keung, Toronto Star, March 2, 2006.

7. Lifetime Labor Income Inequality Over Time and Across Countries

Because individuals are subject to shocks that make them change positions within earnings distributions over time, cross-sectional survey data only offers an incomplete picture of earnings inequality across countries or across different groups within the same country. In order to account for such sources of instability as unemployment risk and, more generally, earnings mobility, it is essential to consider long-run measures of earnings inequality. This research develops methodologies that allow for the construction of lifetime labor income values and subsequent lifetime inequality measures using relatively short panel data sets. Using these methodologies the authors show that the large increase in cross-section earnings inequality in the U.S. over the 1980s and 1990s was not offset by an increase in mobility, rather lifetime earnings inequality rose as well. Conducting cross-country comparisons they show that North American style economies (U.S., Canada, and the UK) have relatively similar levels of lifetime inequality as central European economies such as France and Germany despite having much higher cross-section earnings inequality. In essence, the high degree of mobility in the U.S., Canada and the UK helps offset the higher cross-section inequality resulting in reduced levels of lifetime earnings inequality.

Related Publications and Working Papers:

Bowlus, Audra J. and Jean-Marc Robin, "An International Comparison of Lifetime Inequality: How Continental Europe Resembles North America," Journal of the European Economic Association, forthcoming.

Bowlus, Audra J. and Jean-Marc Robin, "Twenty Years of Rising Inequality in U.S. Lifetime Labour Income Values," Review of Economic Studies 71 (3), 2004, 709-742.

8. Uncertainty and the Specificity of Human Capital

Differences in uncertainty faced by workers and firms should affect the demand for general vs. specific human capital. While general human capital may be less productive, it can easily be reallocated across firms. Accordingly, the fraction of individuals with specific human capital will depend on the amount of uncertainty in the economy. Martin Gervais, Igor Livshits, and Cesaire Meh develop a framework for analyzing this issue. Their framework predicts that while economies with more specific human capital tend to be more productive, they also tend to be more vulnerable to turbulence. This helps shed some light on the experience of Japan, where human capital is notoriously specific: while Japan benefited from this predominately specific labor force in tranquil times, this specificity may also have been at the heart of its prolonged stagnation.

Related Publications and Working Papers:

Gervais, Martin, and Igor Livshits, "Uncertainty, Specificity and Institutions," Working Paper, 2010.

Gervais, Martin, Igor Livshits, and Cesaire Meh, "Uncertainty and the Specificity of Human Capital," Journal of Economic Theory, 2008, 143, 469-498.

9. Productivity Co-Movements Across Sectors

Timothy Conley and Bill Dupor develop a spatial econometric method for characterizing productivity co-movement across sectors of the U.S. economy. Input- utput relations provide an economic distance measure that is used to characterize interactions between sectors, as well as conduct estimation and inference. The model implies that covariance in productivity growth across sectors is a function of economic distance. Using two different economic distance measures, Conley and Dupor find that (1) positive cross-sector covariance of productivity growth generates a substantial fraction of the variance in aggregate productivity, (2) cross-sector productivity covariance tends to be greatest between sectors with similar input relations, and (3) there are constant to modest increasing returns to scale. They test and reject the hypothesis that these correlations are due to a common shock.

Related Publications and Working Papers:

Conley, Timothy, and Dupor, Bill D., "A Spatial Analysis of Sectoral Complementarity." Journal of Political Economy, 111(2), 2003: 311-52.

10. Productivity Heterogeneity and its Effects

A large literature has generated several stylized facts about heterogeneity of productivity at the firm level. Among these is the general understanding that even narrowly defined industries exhibit "massive" unexplained productivity dispersion, and that productivity is closely related to other dimensions of firm-level heterogeneity, such as importing, exporting, wages, etc. Most of this evidence is based on value-added models of production. Gandhi, Navarro and Rivers develop a new identification strategy for production functions based on a transformation of the firm's short-run first order condition that solves this problem. This work further shows that the standard use of value-added production functions generally leads to biased measures of productivity. Applying the new approach of Gandhi, Navarro and Rivers to plant-level data from Colombia and Chile produces fundamentally different patterns of productivity heterogeneity when compared with the biased estimates obtained from standard value-added specifications – productivity differences are orders of magnitude smaller and sometimes even change sign when using the new approach. Furthermore, value-added specifications mis-measure in an economically significant way the productivity premium of firms that export, firms that import, firms that advertise, and higher wage firms.

Related Publications and Working Papers:

Gandhi, Amit, Salvador Navarro and David Rivers, "On the Identification of Production Functions: How Heterogeneous is Productivity?" (CIBC Working Paper #2011-9), 2011.

David Rivers, "Are Exporfters More Productive than Non-Exporters? (CIBC Working Paper #2013-2), November 2010.

11. Long-Run Changes in U.S. Hours and the Labor Wedge

The discrepancy measured in the data between the marginal value of time and the marginal product of labor is often referred to as the 'labor wedge'. For many countries, the labor wedge is largely accounted for by taxes; however, the U.S. is an exception. In the U.S. from the early 1960s to 2007, labor income taxes increased, while hours worked increased and the measured labor wedge declined. These observations are puzzling for standard economic models, since higher taxes should increase the labor wedge and reduce work hours. Cociuba and Ueberfeldt examine the trends in hours and the labor wedge in a model with heterogeneous households: married couples, single males and single females. Their quantitative analysis shows that the shrinking gender wage gaps and increasing labor income taxes observed in U.S. data are key determinants of both hours and the labor wedge. Cociuba and Ueberfeldt show that changes in the measured labor wedge are driven by distortionary taxes and non-distortionary factors, namely the cross- ectional differences in households' labor supply and productivity. This illustrates aggregation problems with using a representative household model to measure the labor wedge.

Related Publications and Working Papers:

Cociuba, Simona E. and Alexander Ueberfeldt, "Heterogeneity and Long-Run Changes in U.S. Hours and the Labor Wedge" (CIBC Working Paper #2012-4), 2012.

12. Imported Inputs and the Gains from Trade

One of the most important questions in international economics concerns the effects of international trade on productivity, both of individual firms and of the national economy. An important channel by which international trade can raise productivity is through intermediate goods – inputs to production such as raw materials and manufactured components. Imported intermediate goods may be cheaper than domestically available alternatives, or importing could make it possible to find the best product for a firm’s production process. However, there are also costs of finding and maintaining relationships with foreign suppliers. Ramanarayanan develops a new theoretical model that examines this trade-off at the level of an individual firm, as well as the interaction between heterogeneous firms making different importing decisions in an economy. Using firm-level data from Chile and Colombia (two countries with readily available data that underwent changes in trade policy), the project estimates parameters governing firm-level decisions. Using these estimates, Ramanarayanan quantifies how trade policies such as tariffs affect aggregate productivity and consumer welfare, which is crucial information for evaluating alternative trade policies.

13. Can Underutilization of Human Capital Help to Explain the Rising Canada-U.S. Productivity Gap?

The gap in business sector productivity between Canada and the U.S. has continued to rise over the last decade despite free trade with the U.S. and a combination of falling taxes, good macroeconomic performance, and heavy public investment in both research and post-secondary education in Canada.   On the human capital side, the educational attainment of Canadian workers has continued to rise, and the gap in educational achievement between the Canadian and U.S. labor forces has been reduced.  So why has the productivity gap failed to decline?  Davies investigates one possible explanation.  It may be that human capital is mis-allocated or underutilized due to remaining distortions in the country’s industrial structure.  There is much less employment in high tech industries in Canada than in the U.S., for example.   This, along with other differences in industrial structure, may result from lack of competition in some parts of the Canadian economy and barriers to foreign entry in key sectors like telecommunications and transportation.  This may depress employment in high tech industry and other leading edge areas of the economy, restricting the demand for scientists, engineers, and other high tech workers.  Yet, Canadian universities are producing a continually increasing number of highly skilled workers in science and engineering, many with graduate degrees.   The extent to which these graduates accept jobs that do not make full use of their skills likely depresses aggregate productivity.  Thus, it may be that the productivity problem is more a matter of how Canadian human capital is used, rather than of a lack of human capital.  This project tests that hypothesis by estimating how many Canadians with science and engineering qualifications would be employed more suitably, and how much higher productivity would be, if Canada’s industrial structure were more similar to that of the U.S., accounting for the greater importance of the resource sector in Canada.

14. Longitudinal Job Task Data and Wages

Related Publications and Working Papers:

Agopsowicz, Andrew, Chris Robinson, Ralph Stinebrickner and Todd Stinebrickner, "Careers and Mismatch for College Graduates: College and Non-college Jobs," (CHCP Working Paper #2017-4), 2017.

Stinebrickner, Todd, Ralph Stinebrickner and Paul Sullivan, "Beauty, Job Tasks, and Wages: A New Conclusion About Employer Taste-Based Discrimination," (CHCP Working Paper #2017-5), 2017.

Stinebrickner, Ralph, Todd Stinebrickner and Paul Sullivan, "Job Tasks, Time Allocation, and Wages," (CHCP Working Paper #2017-6), 2017.