The employment effect of reforming a public employment agency

Transcription

1 The employment effect of reforming a public employment agency Andrey Launov and Klaus Wälde (European Economic Review, 2016) Presented by Ismael Gálvez March 15, 2017

2 Motivation Rich literature on the employment effect of labour market institutions: Unemployment benefits Trade unions Taxation However: Little evidence on the role of public employment agency (PEA) Goal of the paper: (1) Estimate the effect of the increase of operating effectiveness on unemployment (2) Compare it with the reduction on unemployment benefit

3 Main Contribution and Results This paper: (1) Use a unique setup: Germany labour market reform ( ). (2) Search and matching model with: Skills and search productivity heterogeneity. Time-dependent unemployment benefits. Search effort choice. (3) Two-stage estimation using Germany PEA reform. Main Contribution: Estimate equilibrium employment effect of a reform of a PEA. Main Results: (1) Unemployment paradox. (2) PEA reform account for 22.5% of unemployment reduction. (3) Higher impact than reducing unemployment benefit. (4) Reform is suboptimal.

4 Stylized facts Steady increase in unemployment until early Hartz reform: Labour market reform ( ). Strong decline in unemployment from March 2005.

5 Institutional framework of the reform The Hartz reform affected nearly all labour market facets: (1) Hartz I: Employment-stimulating programmes and flexibility. (2) Hartz II: Reorganized minjobs. (3) Hartz III: Reorganized PEA. (4) Hartz IV: Reduced unemployment benefit generosity. Implementation of Hartz III did not coincide with other changes of the reform.

6 Matching effectiveness of the agency Mortensen-Pissarides matching model. Duration-contingent effectiveness of a PEA. Duration-dependent unemployment benefits. Workers are risk averse. Workers heterogeneity: Observed skills. Unobserved search productivities. Wages set by collective bargaining. Government runs a balanced budget.

7 Matching effectiveness of the agency Duration dependence in matching effectiveness of the PEA: { Ψ UI for 0 s s Ψ(s) = Ψ UA for s > s Before Hartz III Ψ(s) = 1 irrespective of s. After Hartz III Differential treatment of short and long-term unemployed = Ψ UI Ψ UA. Key problem Estimation of post-reform Ψ(s).

8 Unemployment benefit system Duration-dependent unemployment benefits: b(s) = { bui for 0 s s b UA for s > s where b UI > b UA Before Hartz III b UI and b UA proportional to net wage. After Hartz III b UA replaced by a fixed amount.

9 Workers Skill heterogeneity {π(k)} K k=1. Constant over time. Search productivity heterogeneity χ {1, 0}. Unemployed do not know their χ prior about being high-productive p k (s). Unemployed instantaneous utility function: v ( ) b(s), φ k (s) where φ: search effort. = 1 1 σ [b(s)1 σ 1] φ k (s) Objective contact rate: ) µ k (s, χ) = ((1 χ)η 0,k + χη 1,k Ψ(s) [ ] α, φ k (s)θ k η1,k > η 0,k k

10 Workers Subjective contact rate: µ k (s, p k (s)) = η k (s)ψ(s) [ φ k (s)θ k ] α, where η k (s) = (1 p k (s))η 0,k + p k (s)η 1,k Value of unemployment: { v ρv k (Ψ(s), b(s), s) = max φ k (s) Value of employment: µ k (s, p(s) ( ) b(s), φ k (s) + d ( ) ds V k Ψ(s), b(s), s + )[ ]} V (w k ) V k (Ψ(s), b(s), s) ρv (w k ) = v(w k ) + λ k [V k (Ψ(0), b(0), 0) V (w k )] where λ k : exogenous separation rate.

11 Firms Worker-firm pair produces A k. Firms pay w gross k = w k /(1 κ), κ: tax rate. Value of the producing firm solves: ( ) wk ρj = A k w [ ( ) ] k 1 κ 1 κ λ wk k J J 0k 1 κ where J 0k : value of a vacant firm. Flow cost γ k of opening a vacancy. Vacancies meet unemployed workers at rate µ k /θ k, where: µ k = π χ µ k (s, 1)f k (s, 1)ds + (1 π χ ) 0 0 µ k (s, 0)f k (s, 0)ds, where f k (s, χ): probability density of unemployment duration and π χ : proportion of high-productive workers.

12 Wages Wages are set by collective bargaining. Allows us to abstract from: Time-dependent outside option. Implied within-group distribution of wages. Wage equation: ( ) (1 β)v(w k )+βm wk w k = (1 β)v b UI,k, φ k (0) + [ ] µ k (0, p(0)) β(1 κ)m wk A k + γ k θ k µ k where m wk = v w (w k ) + ( ) λ ρ + µ k (0, p(0)) v w b UI,k, φ k (0)

13 The government Fixed measure of labour force of skill k: N k. Employment of skill k: L k Measures of UI and UA recipients: s k = (N k L k ) [π χ 0 [π χ U UI U UA k = (N k L k ) Budget of the government: b UI K k=1 U UI k s ) ) s ) ] f k (s, 1 ds + (1 π χ f k (s, 1 ds 0 ) ) ) ] f k (s, 1 ds + (1 π χ f k (s, 1 ds + b UA K k=1 U UA k = K k=1 s κ w k 1 κ L k The government chooses κ such that budget is balanced.

14 Optimal search behaviour From FOC, optimal search effort given by: φ k (s) = {αη k (s)ψ(s)θ α k [V (w k ) V k (Ψ(s), b(s), s)]} 1/(1 α) Subjective beliefs update by Bayesian learning: [ ] d ds p k(s) = p k (s)(1 p k (s)) µ k (s, 1) µ k (s, 0) < 0 Longer unemployment spell = harder to keep up the belief that she is high-productive searcher.

15 Equilibrium unemployment Probability of being unemployed at some future moment τ given current duration in unemployment: ) ) Puu k,χ (τ, s(t)) = e τ µ k (s(y),χ dy τ t + t e ν µ k (s(y),χ dy t µ k (s(ν))peu k,χ (τ ν, 0)dν Probability of being unemployed at some future moment τ given current duration in employment: P k,χ eu (τ, s(t)) = τ t e λ k (ν t) λ k Puu k,χ (τ ν, 0)dν Expected number of unemployed at any future time τ: E τ (N k,χ L k,χ (τ)) = (N k,χ L k,χ (t)) Then, unemployment rate: u k,χ = [ Peu k,χ + 0 P k,χ uu 1 0 (τ, s(t))dh k (s(t), χ) + L k,χ (t)peu k,χ (τ), P k,χ eu P k,χ uu ( s ( )] )df k s, χ

16 The intertemporal unemployment paradox Effect of rising effectiveness of the PEA: (1) + Ψ UI = + Ψ UA = Unemployment rate. (2) Ψ UI = 1 and vary Ψ UA = Unemployment paradox. Ψ UA = Two effects: Direct and (+) Exit rate for long-term unemployed. Indirect and (-) Disincentive short-term unemployed search.

17 Econometric specification Two-stage econometric procedure: (1) First stage: estimate parameters of pre-reform steady state. (2) Second stage: given parameters of first stage, estimate Ψ UI and Ψ UA. Fist stage ML using German Socio-Economic Panel. Second stage Indirect inference: Define auxiliary reduced-form econometric model. Model Estimate it with real and model data. Adjust structural parameters so that relevant moment of the auxiliary model estimated on actual data and on model data coincide.

18 Estimation results The reform increased the effectiveness in matching: Short-term unemployed: 7.6%. Long-term unemployed: 23.0%. Results give rise to two questions: (1) What is the impact of such a differential increase in matching effectiveness? (2) How big is the disincentive effort effect?

19 Evaluation of the reform Improvement of the PEA amounts to 22.5% of the observed decline in unemployment. Benefit reform (Hartz IV) Lower impact. PEA reform complements benefit reform.

20 Quantifying the unemployment paradox Direct positive effect > Negative disincentive effect. Hartz III could have been more efficient. How? Increase Ψ UI and Ψ UA equally = No disincentive effect. E.g: Increase by 7.6% = 1.09 pp unemployment reduction.

21 Conclusion Evaluate the impact of a reform of a PEA. Show the presence of an unemployment paradox. PEA reform Substantial unemployment reduction. Suboptimal reform design. Possible extension Endogenous SR, JTJ transitions...

22 Appendix Auxiliary reduced-form econometric model: lnm short it = β 0,s + β 1,s lnu short it + β 2,s lnv it + β 3,s t + β 4,s t 2 + β 5,s d δs I&II HartzI&II + δs III HartzIII + δs IV HartzIV + ι i,s + ε it,s lnm long it δ I&II l = β 0,l + β 1,l lnu long it + β 2,l lnv it + β 3,l t + β 4,l t 2 + β 5,l d HartzI&II + δ III l HartzIII + δl IV HartzIV + ι i,l + ε it,l Back