DID Strategy for Job Training Program Evaluation

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Questions and Answers

In the context of a difference-in-differences strategy for evaluating a job training program, how would you define the treatment group, given that eligibility requires being at least 40 years old and unemployed for at least 20 weeks, and training participation is widespread but not directly observed?

The treatment group consists of residents who are at least 40 years old and have been unemployed for at least 20 weeks, acknowledging that while actual training receipt isn't observed, it's known to be prevalent within this group.

When using a difference-in-differences (DID) approach to analyze a job training program's impact on work hours, how does the DID method address pre-existing differences in average work hours between the treatment and control groups?

DID eliminates time-invariant pre-existing differences by assuming that the effect of these differences remains constant over time. The first difference removes this constant effect, preventing it from contaminating the comparison in the second difference.

Describe the four regression equations used in a difference-in-differences (DID) strategy to analyze the impact of a job training program on work hours, noting the role of the 'growth' variable.

The four equations regress hours of work on a dummy variable for the job training program, both before and after the program for both the treatment and control groups. The 'growth' variable captures the change in work hours after the program implementation.

Explain three societal benefits derived from studying labor supply behavior, providing a specific example for each.

<ol> <li>Supports individuals in job attainment (e.g., during unemployment), 2. informs government revenue strategies (e.g., income tax policies for public goods), and 3. enhances macroeconomic modeling (e.g., understanding economic downturns).</li> </ol> Signup and view all the answers

Using the concepts of substitution and income effects, explain why average weekly hours of work declined throughout the 20th century, assuming wages increased.

<p>As wages rise, the substitution effect encourages more work (less leisure), but the income effect allows individuals to 'afford' more leisure (less work). The decline suggests the income effect outweighed the substitution effect.</p> Signup and view all the answers

Define a 'backward-bending' labor supply curve, and explain the opposing 'effects' that cause it to bend backward at higher wage levels.

<p>A backward-bending labor supply curve occurs when, beyond a certain wage level, individuals supply less labor as wages increase. This results from the income effect (desire for more leisure) outweighing the substitution effect (incentive to work more).</p> Signup and view all the answers

Explain why a market labor supply curve is not backward bending.

<p>The market labor supply represents all individuals, and most workers don't reach an income where they reduce hours, such that new market entrants would offset those decreasing hours when prevailing wages rise.</p> Signup and view all the answers

Contrast the predictions of 'behavioral' versus 'neoclassical' economic theories regarding the relationship between transitory, unanticipated changes in hourly wages and daily hours of labor supplied, particularly among taxi drivers.

<p>Neoclassical theory predicts a positive relationship (more wage, more work), while behavioral theory (loss aversion) predicts a negative relationship (meeting income targets by working less when wages are unexpectedly high).</p> Signup and view all the answers

Why are taxi drivers considered a good population to study labor supply behavior? List three main lessons about labor supply behavior that come from Farber's empirical evidence?

<p>They have control over their hours. 1. Neoclassical model is more relevant, 2. measurement error is a big problem and can cause erroneous conclusions, 3. individuals dictate own labor supply elasticity with the majority being positive.</p> Signup and view all the answers

What is 'division bias' in the context of estimating the elasticity of hours of labor supplied with respect to hourly wage rate? How can instrumental variables be used to address this issue?

<p>Division bias arises from measurement error in the denominator (hours) leading to biased elasticity estimates. Instrumental variables (IV) estimation uses instruments correlated with wages but uncorrelated with measurement error in hours to infer the effect on hours.</p> Signup and view all the answers

Explain how raising a proportional wage tax could either increase or decrease an individual's work hours, detailing both the income and substitution effects.

<p>A tax increase induces workers to work less through the substitution effect, but also induces more income effect from the higher opportunity cost of leisure, leading to a decrease in labor supply.</p> Signup and view all the answers

Illustrate the static labor supply choice on a graph with a Social Security tax and explain the costs and benefits of a proposed benefit to erase a taxable earning cap.

<p>With no limit, the distribution fo income will be more high income people pay their share. The cost is a potential reduction of earnings.</p> Signup and view all the answers

Illustrate on a basic labor supply model how a guaranteed income floor would change someone's behaviors.

<p>It makes sure people can make a earning even if they aren't. There is a disincentive to work since after a certain point of hours you earn the same no matter how many hours you work.</p> Signup and view all the answers

What is the main hypothesis in Hoynes (2019) regarding the effect of the Earned Income Tax Credit (EITC) on labor supply? What empirical strategy does Hoynes use to test this hypothesis?

<p>The main hypothesis: EITC increases employment, especially for single mothers. The analysis uses DiD methods. By comparing changes in employment rates between groups before and after the EITC expansion, it will see the policy.</p> Signup and view all the answers

Describe at least three potential reforms for the EITC suggested by Hoynes (2019), including details about the reform idea, potential costs, as well as potential benefits of the reform.

<ol> <li>expansion for childless, 2. regulate paid tax, 3. convert lump-sum payments to periodic disbursements. The first would increase government expenditure, the second has increased regulatory. The first has reduction increases.</li> </ol> Signup and view all the answers

In the context of optimal income taxation, explain the relationship between each parameter (g, a, and e) with the optimal top marginal income tax rate in the Diamond and Saez (2011) model.

<ol> <li>a lower tax rate for the value on income of highest earners is higher, 2. decreased e for elasticity, 3. higher tax if tails are thick.</li> </ol> Signup and view all the answers

Why is the labor demand curve negatively sloped?

<p>Firms pay workers according to the of the MP of labor and t his declines.</p> Signup and view all the answers

Define the elasticity of labor demand with respect to the wage, and provide one example when it would be a helpful number to know.

<p>The elasticity of labor demand measures the responsiveness of the firms. It is helpful to know when setting minimum wage.</p> Signup and view all the answers

Explain Marshall’s rules of derived demand.

<p>Cov/ elasticity of labor is &gt; 0 more responsive when wages increase and have to start firing more. 2. Cov&gt; 0 employment responsive to wages when big cut.</p> Signup and view all the answers

What is the value of the marginal product of labor?

<p>It is the value in the output with the increased labor. The property marginal.</p> Signup and view all the answers

How does a monopsony differ from labor market?

<p>The employer is no longer a wage taker. Demands less labor and workers.</p> Signup and view all the answers

Describe how you can use workplace data to estimate the value of a statistical life.

<p>You can use hedonic to estimate wage premiums workers demand. The CV is the Positive relation between salaries. This affects workers implicate view.</p> Signup and view all the answers

What are some reasons for criticism of the Value of Statistical Life?

<p>Endogenous and measurement, workers selected into risk due to untruths, IV like OSHTA.</p> Signup and view all the answers

Compare and contrast the government providing services through mandates or taxes.

<p>Taxes increase cost for firms and the less people. MB- employ lose . State tax distortions.</p> Signup and view all the answers

Explain the differing impact on wages and employments impacts of policymakers when considering taxes versus mandates.

<p>MB that works care- employ increase. It is good to have a everyone.</p> Signup and view all the answers

Flashcards

What is the treatment group?

Residents at least 40 years old and unemployed for at least 20 weeks in a job training program.

What is the control group?

Residents unemployed for 20 weeks and not in the eligible age group, used for comparison.

What does difference-in-differences do?

A strategy that eliminates pre-existing differences by looking at changes in outcomes over time for both a treatment and control group.

What is an assumption of DID?

Effect of a pre-existing difference is assumed constant over time.

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DID Strategies

4 regression equations: hours of work as dependent variable, post will have 'Growth' variable

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Subtract how?

Subtract first two, the second two, and subtract the results of each to create differences in differences

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What is a marginal product of labor?

The marginal product of labor is the additional output associated with the employment of one additional person, with other production factors held constant.

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Regression equations

Hours of work as a dependent variable, post will have 'Growth' variable

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Worker selection

Workers may self-select into risky jobs due to unobserved trait

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Define the elasticity of labor demand

The elasticity of labor demand measures the responsiveness of firms to the amount of employment they demand when there is a change in the market wage

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Intertemporal substitution

The process of maximizing utility by allocating resources across time

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Define 'e'

elasticity of reported income with respect to the wage

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Perfectly competitive markets

The price of something is determined by supply and demand

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Cov strategy

Cov(elasticity of labor demand with respect to wage, labor's share in costs) > 0

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Revenue source

Government revenue comes largely from income taxes

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Behavioral

Cov(wage, hours) < 0

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Taxi drivers

Loss aversion and reference dependence

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Transcribed

data imperfectly transcribed from potentially erroneous hand recordings

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No longer

high income ppl are no longer disproportionately penalized

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Periods

distributing EITC payments periodically over the year rather than as annual lump sums, as this is commonly raised as an impediment to assisting families throughout the year

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Employment increases

EITC increases employment, particularly for single mothers

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Income effect

In labor, people reduce labor because they are wealthier

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Leisure effects

Leisure hours or work hour

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incentivizing

The EITC helps incentivize work

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Wages diminish

Wage premiums may diminish at very high risk levels

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Study Notes

Job Training Program and Difference-in-Differences (DID) Strategy

  • A city introduces a job training program for residents aged 40+ who have been unemployed for at least 20 weeks.
  • The aim is to evaluate the program's impact on future employability using a DID strategy.
  • Available data includes employment information from the city, with varying ages and unemployment statuses.
  • Actual training participation is unobserved, but program access was widespread among eligible residents.

Defining Treatment and Control Groups

  • Treatment group: Residents 40+ unemployed for 20+ weeks, with widespread, unverified training access.
  • Control group: Residents unemployed for 20 weeks but not in the 40+ age group.
    • This includes those below 40 unemployed for 20+ weeks. , below 40 for less than 20 weeks
    • It also includes those above 40 for less than 20 weeks

Conceptual Framework Equations

  • 'h' represents work hours, and the policy aims to increase 'h'.
  • T stands for treatment group, and C stands for the control group
  • Estimation equations:
    • hiTpre = alphaT + B1(age) + B2(weeks unemployment) + error (T, i, pre)
    • hiTpost = alphaT + Growth + B1(age) + B2(weeks unemployment) + error (T, i, post)
    • hiCpre = alphaC + B1(age) + B2(weeks unemployment) + error hi (C, i, pre)
    • hiCpost = alphaC + B1(age) + Growth + B2(weeks unemployment) + error (C, i, pre)

Addressing Pre-Existing Differences

  • DID eliminates pre-existing differences between groups.
  • DID compares groups with pre-existing differences plus treatment, assuming the difference's effect remains constant over time.
  • First difference: taking the first difference of the outcome for each group over time removes all time-invariant effects
  • Treatment and comparison groups may have different levels of the outcome but pre-treatment trends should be the same
  • Without treatment, outcomes for treatment and comparison groups should change at the same rate

DID Strategies

  • Four regression equations use hours of work as the dependent variable; the "post" variable includes "Growth".
  • Subtract "pre" from "post" for both groups, then subtract the control group's result from the treatment group's result to find the difference.
  • Positive difference shows program efficacy if hours worked after the program are higher in treated groups.
  • Assume other things equal so errors = 0 (differences-in-differences).
  • Data includes unemployment rates before/after the training program in the city and in a similar control city.
  • Economic growth dummy variable: 1=training occurred, 0=no training
  • Synthetic control can show city similarity
  • A support factor to account for any other influences besides the growth: account for other factors by using a similar city
  • Alternate support is another regression for similar people in the same city in different locations or boarders
  • Measure rates for same individuals over 2 years to account for lag

Benefits of Studying Labor Supply Behavior

  • It is a major part of most people's lives that helps people learn how to get jobs.
    • An example of this is when people are unemployed or when trying to create more jobs.
  • Government revenue is derived largely from income taxes, used for public goods like defense and education.
    • Optimal taxation based on labor supply behavior will maximize these
  • Macroeconomic models use people renting labor.
    • Better macroeconomic models with labor supply as a variable explain economic downturns/disasters and monetary policy's impact.

Declining Work Hours and Consumption/Leisure Choices

  • Average weekly work hours declined in the 20th century due to rising wages.
  • Wage changes have a net effect on labor supply behavior in the neoclassical frame. (A to C).
  • Substitution effect (A to B): increased wages make leisure more expensive so people consume more in work
  • Income effect (B to C): people work less because they are wealthier overall and can "afford" more leisure
  • As people's work hours decline, the income effect outweighs the substitution effect

Backward-Bending Labor Supply Curve

  • Backward-bending supply curve: individuals supply more labor as wages increase, but eventually supply less to enjoy more leisure

Behavioral vs. Neoclassical Theories and Taxi Drivers

  • Neoclassical: Cov (wage, hours) > 0 meaning taxi drivers work more with transitory wage increase due to intertemporal substitution.
  • Behavioral: Cov(wage, hours) < 0 due to loss aversion/reference dependence. -Taxi drivers make daily income expectations including reference points
    • Unanticipated increases supply less hours, negative elasticity, individual are loss averse
    • There is a kink in the utility function and reference income level.
  • Taxi drivers studied to see they have lots of control over hours
  • Drivers tend to respond positively to earnings opportunities.
  • Neoclassical model is better explanation for behavior of taxi drivers
  • Systematic measurement error is a big problem and can cause bias

Division Bias in Elasticity Estimation

  • Division bias: happens in wage per hour (too low/high)
  • Denominator is systematically underestimated & the numerator is systematically overestimated due to measurement error. (Ex. tips unreported)
  • Farber: used instrumental variable (IV) estimation with hours of other workers with no correlation to individual worker's wages to infer hi
  • Study found the hours were actually much higher

Proportional Wage Tax: Increasing/Decreasing Work Hours

  • Effect depends on the strength of income vs. substitution effects

Social Security Payroll Tax Cap

  • Tax applies only to earning up to a cap.
  • Erasing taxable earning can provide benefits such as: Redistribution of income meaning high income people pay their share
  • Some costs would be high income people are not sensitive to the wage changes, lower revenue

Income Support Programs

  • Government benefit B to people not working: will encourage people to enjoy a higher level of consumption
  • Guaranteed income floor F: below the floor people who are work supply the same amount of hours
  • Wage subsidy : decrease work hours above second kink point, consumption increases

Earned Income Tax Credit (EITC)

  • Hoynes: Includes effects of labor supply
  • EITC increase employment, especially for single mothers
  • Distribute EITC payments periodically over the year rather than as annual lump sums, can improve financial stability.

Optimal Income Taxation

  • Relates to the top marginal income tax rate (Ï„ * ). g = marginal social value of consumption for the highest income group a = thickness of the top income distribution e = sensitivity of reported income to the tax

Value of Variables as follow: dz/dg < 0 Lower tax rate if value on income of highest earners is higher. The tax rate lower if high perceived consumptions higher.

dt/do <0 Lower tax rate if Elasticity is very high high earners reduce effect in labor

dt/da < 0

Labor Demand

  • The labor demand curve would have a negative slope in a competitive market.
  • Value declines as more workers are hired
  • Cov (Elasticity of labor demand with respect to wage, Elasticity of demand for output) > 0
  • Employment is more responsive to wages when consumers are more responsive to prices

Value of Marginal Product of Labor

  • It is the additional output associated with the employment of one additional person.

Labor Market with Monopsony

  • :It has a single employer, as opposed to perfectly competitive markets -MC of hiring one worker raises costs for all workers, MC line higher than supply.

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