INEQUALITY IN LABOUR MARKET & ECONOMICS OF CRIME

by Vakhtang Gotsiridze

Analysed Supply-Demand Framework for labour market Assessed changes in relative wages for skilled Vs unskilled

What happened: Sharp rise in relative wages of college graduates

Average wages of older workers increased relative to younger workers (low education level) These two points give an increase in relative wages of young male

college graduates against young males with 12 or less years of schooling Data from 1979 to 1987

Increase by 30%

Differences between earning of women and men decreased Relative wages of women w.r.t. men went up by 8%

Katz & Murphy (1992)

Why it happened?

Technological changes (Krueger, 1991) In 1993 Krueger showed that using computers at work increases your relative wage by 16.2%

when controlling for most variables)

‘Computer revolution’ Raised demand for more educated flexible workers Reduced demand for physical labour

Shifts in product demand largely associated with large trade deficits in

1980s (Murphy & Welch, 1991) Led to decline in manufacturing employment Shift toward sectors with more educated/female intensive labour

Employment between sectors

Changes in wage-setting institutions

Decline in unionization (Thatcher/ Reagan governments) Erosion of real minimum wages in US

Katz & Murphy (1992)

Key results:

Rapid increase in relative demand for skilled workers and supply of graduates are a KEY for explanation of rising inequality and changes in the wage structure over last 25 years

Being a college graduate rather school graduate only increase wage differential by 3.3% a year

Changes in relative demand for skilled workers mainly account for SBTC (between-sector employment)

No major differences in within-sector employment

Do not have major impact on changes in relative demand

Katz & Murphy (1992)

Found same results as Katz and Murphy

BUT:

The trend effect is a bit lower (2.7%)

Acemoglu and Autor (2012)

Analysed 402 British workplaces between 1984-1990

SBTC – Indirect Evidence

Used within/between decomposition

Machin (1996)

SBTC – Indirect Evidence

Within-establishment component had by far larger impact on the changes in employment rates for skilled workers

Machin (1996)

SBTC – Direct Evidence 16 UK manufacturing

industries Industry R&D investment

and increase in capital stock had a big influence on increased employment for non-manuals

Introduction of concept of ‘polarization of labour market’

Analysis based on routine jobs, non-routine jobs, and jobs substituted by technical change.

Goos and Manning (2007)

Key Results: Little doubt that technology has a

powerful impact on the labour market.

The hypothesis of SBTC is only a partial truth and cannot explain all of the important changes in the labour market

SBTC hypothesis seems best able to explain what is happening in the top half of the wage distribution but not its bottom half.

TBTC shows more nuanced view about the impact of technology proposed – underlining the evidence that demand for ‘middling’ jobs has fallen.

Showed UK evidence of increased job polarization that is consistent with the TBTC hypothesis.

UK real wages falling Since 2008 on average by 8% Mainly on younger (under 25 by 15%), but still affected everyone across the

wage distribution

Why? Unemployment exerting a larger downward pressure on wages than in

previous recessions. The extremely poor productivity record through the recession and recovery

has not created room for wage rises Wages of typical British workers are no longer keeping up with productivity

gains made in the economy This stems from a growing contribution of total compensation going toward

supporting pensions and annuities (Eric French )

Highest paid (top 1%) are taking a disproportionate share of the gains from productivity leaving room for few gains by ordinary workers (compensation for investment bankers and senior executives)

Gregg, Machin & Fernández-Salgado (Feb 2014)

Estimated the effect of police on crime rates

Faced Simultaneity Bias because:

Endogeneity of Police with respect to crime rates

Higher crime rates likely to increase the marginal productivity of police

Cities/ districts with high crime rates tend to have larger police forces

Even if police reduces crime

1994: US Congress authorizes Crime Bill

Additional federal funding on further deployment of policemen

Disproportional increase in police concentrated in election year

What Levitt does?

Builds 2SLS framework

In First-stage he uses election cycles as IV for extra police deployment

In Second-stage he recovers impact of increased policing on crime

Levitt (1997)

Levitt (1997)

Election cycles are indicated to be a strong IV for further police deployment

When recovering the impact of an increase in police on crime rates, Levitt clears for simultaneity bias and outlines the causal effect

7/7 terrorist attacks London government/ Scotland Yard deploys extra police forces in Central

London (treatment group), without any increase in police forces in Outer London (control group)

Analysis: Highly robust evidence on the causal effect of police on crime

Strong evidence that more police lead to reductions in susceptible crimes Mainly property crime

Terrorist attacks can induce exogenous variations in the allocation of police resources that can be used to estimate the causal impact of police on crime

Framework: 2 stages: IV + DiD

The scale of the police deployment is much greater than the highly localized responses Allows to provide new, highly robust IV-based estimates of the crime-police elasticity

Ceteris paribus dimension to the London police deployment By temporarily extending its resources (primarily through overtime), the police service was

able to keep their force levels constant in the control group, while simultaneously increasing the police presence in the treatment group

This provides a clean setting to test the relationship between crime and police.

Draca, Matchin and Witt (2011)

Results: Clear evidence that the timing and

location of falls in susceptible crimes closely coincide with the increase in police deployment.

Crime rates quickly returned to pre-attack levels after the six week “policy-on” period

Draca, Matchin and Witt (2011)

Moving on to the Part II…

Here we will be looking at:

1. Explaining the much muted pace of wage inequality observed in

the 1990s in light of Machin 2002

2. And perhaps this may shed some light on how further research

ought to be undertaken

3. Lastly, we lightly touch on a couple of policy implications which

may be of interest.

Our approach in this section is by giving more emphasis on figures and

findings given that our colleague have extensively discussed the

relevant models and papers.

DISCUSSANT SLIDES:

PART II By: Zain Umar & Wafi Ahmad

Skill-biased

technological change

(SBTC) affects the

labour market by:

Benefitting the more-skilled workers

• Increasing productivity

• Raising wages

BUT detrimental to less-skilled workers

• Lowers their wages

• Less of them are employed

OVERALL EFFECT:

Relative wages & relative employment rates

of skilled vs unskilled workers ROSE

The trend of wage inequality over the past three decades reflects

how great the force of ‘skill-biased technological change (SBTC)’ is.

Technological advances create such huge wage disparities during the 1980s.

This is mainly due to the fact that technological advances were either:

A. Complement complex, non-routine tasks

• Outward shift in supply of informational inputs (both in quantity

and quality)

• Increases marginal productivity of workers performing these

tasks

• As a result, workplace computerisation increases the demand

for problem-solving tasks.

WHILE SIMULTANEOUSLY THEY…

B. Substitutes routine tasks

• Replaces routine information processing, communications and

coordinating functions

• Examples: clerks, cashiers, telephone operators and

bookkeepers

• In economic terms: advances in IT have sharply lowered the

price of accomplishing procedural cognitive tasks (i.e. rules-

based reasoning)

BUT in the 1990s, rising inequality seemed to have slowed.

Is this evidence that computers have become so widespread (saturated) that a simple

headcount measure is no longer adequate?

(Machin; 2002)

• By 1997, in some industries, computer usage levels were already at high levels, near saturation and

cannot rise much on the basis of the percent using computers variable (as illustrated above using US

data).

• As such, this might pose a problem to relate skill upgrading to changes in industry computer usage.

RESULTS:

• 1st column showed no relation between 1990s skill upgrading and increased use of computers

in the 1990s (same finding in the US)

• This supports the notion that simple computer measure may not be a good proxy of technology

chance in the 1990s when computer use levels have reached such high levels.

• BUT once the result was broken down by importance of the computer to the job, we do see that

skill upgrading is associated with increased importance of computers

• Strongest positive (and statistically significant) association is in column (4)

• Hence, relative demand is still shifting in favour of skilled workers in industries where computers

are becoming more important, even in the 90s.

Policy Implications

What sort of policies could be implemented to reverse this trend in

inequality from persisting over time?

• Short –term solution is to carry out reform of labour market

institutions:

i. Minimum wage [issue: real value of minimum wage is falling

over time]

ii. Trade unions

• Meanwhile, in the long-term the best response is for

governments to build up its human capital

This suggests that Germany’s wages in 2008 would have been higher if union

coverage had remained the same as in 1995 level.

MAIN FOCUS: the difference is particularly large at the lower end of the wage

distribution

From: Christian Dustmann et. al; Germany’s Resurgent Economy (2014)