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Culture and the Labor Market Author(s): Siobhan Austen Source: Review of Social Economy, Vol. 58, No. 4 (DECEMBER 2000), pp. 505-521 Published by: Taylor & Francis, Ltd. Stable URL: https://www.jstor.org/stable/29770084 Accessed: 02-12-2019 04:15 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Taylor & Francis, Ltd. is collaborating with JSTOR to digitize, preserve and extend access to Review of Social Economy This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY, VOL. LVIII, NO. 4, DECEMBER 2000 Culture and the Labor Market Siobhan Austen Curtin University of Technology aus tens @ clos. curtin. edu. au Abstract This paper explores the relationship between culture and labor market behavior. An attempt is made to clarify, from an economic perspective, the meaning of culture; to discuss the importance of cultural studies in the economic analysis of the labor market; and to outline the major theoretical issues that are associated with adopting a cultural perspective on economic behavior in the labor market. Keywords: Culture, labor market, labor economics, social norms Culture is a hermeneutic system, that is, "an interpretative integration of material objects, behavior, and their meanings" (Jennings and Waller 1994: 1000). Culture encompasses language, norms, customs, morals, beliefs and conventions, and it serves to establish a shared understanding among a group of people of the external world and each individual's relationship to this world. An understanding of culture should be an integral part of any economic analysis of the labor market. Culture determines, in large part, the value and significance that individuals attach to alternative labor market actions and outcomes. Particular aspects of culture, such as social norms, also help to define the boundaries to the pursuit by individuals of their culturally defined objectives in the labor market. The economic analysis of Veblen and Commons embraced a cultural per? spective on economic life (Jackson 1996). Veblen described individuals as the sometimes comic creations of their inherited cultures and, following in his foot? steps, "old-instutiutionalists" have continued to interpret patterns of economic behavior as being the product of cultural environments that are specific to par? ticular times and places (Mayhew 1987: 590, 596 and Woodbury 1979). "Old-institutionalists" have also identified aspects of culture, such as customs, conventions and norms as legitimate and distinct topics of economic analysis. Rather than interpreting these aspects of culture as the products of self-interested individual action, the "old-institutionalists" have sought to describe social norms, Review of Social Economy ISSN 0034-6764 print/ISSN 1470-1162 online ? 2000 The Association for Social Economics http ://w w w. tandf. co. uk/j ournal s This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY customs, conventions and beliefs as autonomous parts of the environment in which economic action takes place (see Hillard and Mclntyre 1994: 620-621 and Gimble 1991). However, the neo-classical (and "new-institutionalist") analysis of the labor market has attacked the notion of culture as a core process (Mayhew 1987). In neo-classical analysis, human action is typically defined by objectives that are treated as independent from the culture of the individual. Rather than viewing human action as the product of culture, aspects of culture (such as language, norms and morals) are interpreted as the product of an independent set of indi? vidual interests. As Julie Nelson (1993: 292) explains, Homo economicus "springs up fully formed, with preferences fully developed, and is fully active and self contained. . .The [social and economic] environment has no effect on him but rather is merely the passive material, presented as constraints, over which his rationality has play. He interacts with society without being influenced by society." The dominance of neo-classical model in labor economics over recent decades has meant that, despite the richness of the "old-institutionalist" heritage, the important relationship between culture and labor market behavior has been a relatively neglected field. An important gap now exists in the labor economics literature. This paper aims to help fill this gap in the literature by describing and dis? cussing in broad terms the concept of culture as it relates to some important labor market issues. The paper also sets out to describe the theoretical controversies that are associated with adopting a cultural perspective on labor market issues and to highlight the potential scope of cultural studies of these issues. The structure of the paper reflects these aims. Section I utilises the classi? fication of cultural effects provided by Di Maggio (1994) to identify, in very broad terms, the nature of the relationship between culture and human action. Then, in sections II and III, two major types of cultural effects are described and discussed in greater detail, with reference to particular labor market issues. Several funda? mental theoretical questions emerge from this analysis, especially concerning the relationship between culture and instrumental reasoning, and these are discussed in section IV. Section V concludes with a general discussion of the agenda for further studies of the effects of culture in the labor market. I. CULTURE AND ECONOMIC BEHAVIOR IN THE LABOR MARKET The cultural perspective on labor market issues features an understanding that the behavior of individuals in the labor market is shaped by their culture. It features, in particular, an understanding that the language, categories, customs, norms and 506 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET other aspects of culture shape an individual's valuation of alternative means and ends, as well as his or her perception of legitimate and feasible action. Di Maggio (1994) provides a taxonomy of cultural effects that can be used to describe the general relationships between culture and economic behavior and to highlight the difference between a cultural and neo-classical perspective of the labor market. Di Maggio, first, describes the constitutive effects of culture. These effects refer to the way in which the economic behavior of individuals is shaped by the categories, understandings and differential valuations provided by culture. One clear example of these effects is the influence of culture on an individuals' perceptions of their self-regarding interest, and, thus, their "preferences" for alternative labor market activities or outcomes. Di Maggio also identifies the regulatory effects of culture, whereby aspects of culture, such as social norms, morals, laws and conventions, impose boundaries to the pursuit by individuals of their culturally defined objectives. In the context of conventional models of economic behavior, these effects of culture can be under? stood especially in terms of their regulation of the individual's pursuit of his or her self-regarding interest. This taxonomy of cultural effects has the advantage of simplicity and, thus, it is a useful starting point for the task of describing and analyzing the relationship between culture and economic behavior. However, it must be recognised that this categorisation does not capture the richness and complexity of culture. For example, it does not reflect the important differences in the concept of class, organisational and national culture. Furthermore, the taxonomy suggests that there are distinct elements of the cultural system, whereas White and Dillingham (1973: 12-13) emphasise that "Culture is a whole. Everything is related to every? thing else in a cultural system." Thus, although the notions of constitutive and regulatory effects are discussed separately in the following sections, this is purely for expository purposes. The two "effects" should not be construed as being separate entities. II. THE CONSTITUTIVE EFFECTS OF CULTURE According to a cultural perspective on economic behavior, individuals' interests (or their "preferences") are not a priori theirs. Rather, the value and significance that individuals attach to material objects and different types of behavior have their origins in the cultural environment, and these are transmitted to individuals through a process of social learning. Thus, the choices made by individuals, even those choices that have the objective of maximising their self-interest, are seen to be shaped by (and can only be properly understood in the context of) the cultural environment. 507 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY The labor market is replete with examples that demonstrate these points about the cultural specificity of economic behavior. An individual's evaluation of occu? pational "attributes", such as income, responsibility, caring and creativity, and, in turn, his or her occupational "choice" clearly reflects prevailing cultural values, as passed on by schools families and peers (see Dugger 1981: 400 and Chapman 1981). The relationship between cultural values relating to work, leisure, income and household production, and the formation of "individual preferences" for labor market participation and hours of work also illustrate the way in which culture constitutes economic action (see Brown 1985 and Golden 1996). These constitutive effects of culture are not recognised in the neo-classical analysis of the labor market. Orthodox economic models typically incorporate an assumption that preferences are exogenous to the cultural environment of the choice-maker. For example, Stigler and Becker (1977: 76) argue that preferences are the same for all individuals and that any observed differences in behavior between individuals or groups across time or space can always be explained by an analysis of price and income factors. According to their view, if individuals from different societies do engage in different types of activities and/or create and maintain different institutions this is because they associate different costs and benefits with similar actions (for example, because they have acquired different types of skills). In contrast, a hallmark of a cultural (and "old-institutionalist") perspective is an assumption that individual preferences are endogenous. For example, an important link is recognised between the culture of an organisation, its organis? ational structure and workers' perceptions of their own self-interest. The insti tutionalist analysis of internal labor markets features an argument that the structure of such markets promotes the internalisation of the norms of the organisation by its employees, (see Golden 1996: 13) Piore's (1979) work on migrant labor is also distinguished by an assumption that workers' preferences and, thus, their willing? ness to accept job offers, are molded by the characteristics of their social and economic environment. However, despite the efforts of institutionalist scholars to advance an under? standing of these constitutive effects of culture, the dominance of the neo? classical paradigm in labor economics has meant that this important issue has been relatively neglected in recent decades. The analysis of patterns and changes in the "choice" of occupation, labor force participation and hours of work has suffered as a result. The blindness of orthodox economics to the constitutive effects of culture has also had implications for the type policy recommendations made for the labor market. The assumption of exogenous preferences has caused many economists to measure economic welfare in terms of the satisfaction of the supposedly constant 508 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET preferences that are revealed by the choices made by economic actors. As a result, policy recommendations have emphasised the importance of minimising any con? straints on individual choice making, and the role for government intervention has often been restricted to those cases where it is perceived that individual choice making has been constrained or has been ill-informed. In turn, these recom? mendations have typically resulted in sets of policy action that have had the effect of preserving the status quo. Jennings and Waller (1994) argue that, by ignoring the possibility that other sets of cultural arrangements may create different preferences, this approach has been blind to the possibility that cultural change may be an avenue to real welfare improvement. It has also been blind to the possibility that, viewed from another cultural perspective, current patterns of choice making may not be in any sense optimal (see also Bowles 1985: 32). The importance of these points about the cultural blindness of the neo-classical analysis of the labor market can be seen in George's (1997) analysis of approaches to the issue of revealed working hours preferences. He notes that an assumption of exogenous preferences has led neo-classical economists to adopt an ambivalent position on the apparent change in individual preferences towards longer working hours. However, this assumption and the policy ambivalence may not be justified and there may be a role for the government in the regulation of working hours. For example, the change in preferences may have been caused by employers man? dating the working of overtime which, in turn, created high levels of permanent consumption. Thus, the longer working hours may represent a sacrifice of indi? vidual welfare even though individuals are declaring a preference for extended hours.1 The neglect of the constitutive effects of culture by mainstream economists has also had important implications for the analysis of the evolution of labor market institutions. The neo-classical view of labor market institutions emphasises that there are given conditions that characterise, for example, the natural environment. Furthermore, because individual preferences are assumed to be exogenous, the ways that individuals respond to these conditions are perceived to not vary over time or space. In contrast, a cultural perspective emphasises that the problems that labor market institutions are designed to resolve, and the characteristics of the insti? tutions themselves, will be specific to the cultural environment. Thus, the cultural perspective on labor market institutions emphasises the need to understand insti? tutions as constantly evolving and "path-dependent" features of particular labor 1 Gintis (1972) also discusses this issue in the context of the economic analysis of education. 509 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY markets, whereas the neo-classical perspective interprets all labor market insti? tutions according to the single (and constant) calculus of maximisation of indi? vidual interest. The relevance of this cultural perspective has also been highlighted by some recent work on the labor market. Grief (1994) related the differences in the cultural values of two trading societies of the late medieval period?the Genoese (who were highly individualistic) and the Maghribis (who had a collectivist culture)? to the different nature of principal agent problems that were encountered in each labor market. Using game theoretic techniques, he demonstrated how the cultural differences between the two communities influenced the propensity of traders to share information, as well as their expectations about the behavior of agents. He went on to identify how these culturally determined patterns of behavior resulted in the evolution and survival of different wage structures and patterns of wealth distribution in the two societies, despite the similarity of their material situations. In summary, culture constitutes economic behavior by providing individuals with categories of understandings and patterns of differential valuation. Neo? classical economic models, with their assumption that individual preferences are exogenously determined and constant across time and space, are not suited to the analysis of the constitutive effects of culture. The widespread use of these models has limited the economic analysis of important labor market issues, such as the participation of women in the labor market, occupational choice and working hours. It has also resulted in a failure to appreciate the dynamic and culture specific nature of labor market institutions. III. THE REGULATORY EFFECTS OF CULTURE One aspect of culture that has received attention by both neo-classical and institutional economists is what is known as the regulatory effects of culture. These effects refer to the way in which the values and beliefs embodied in a culture, and reflected in social norms, conventions and customs, enjoin the indi? vidual to regard the interests of others, even if this may involve some sacrifice of self-regarding interest. The emphasis by economists on these aspects of culture reflects the apparent potential to maintain an analytical distinction between norm-guided action and self-interested behavior. As a result, the interpretation that is often given to culture is that of an external constraint on economic action. Furthermore, the economic analysis of culture by neo-classical and institutional economists alike, often focuses on how social norms result in labor market behavior and labor market outcomes (such as patterns of wage payments and unemployment) that cannot be reconciled with the predictions of standard neo-classical models. 510 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET A variety of social norms have been linked to labor market outcomes, the most important of which appear to be the norms of distribution that relate to shared beliefs about the legitimate or fair basis for the allocation of labor market out? comes, such as wages. Norms of reciprocity and co-operation have also been ascribed an important role in the regulation of labor market behavior. The norms of distribution are wide-ranging but include four main categories that relate to the key aspects of the distribution of earnings, namely: The legiti? mate reasons for differences in individual earnings (norms of equity)', the legitimate degree of difference in earnings (norms of equality); the legitimacy of protecting the earnings outcomes for individuals at the lowest end of the distri? bution (norms of need); and the legitimacy of protecting an individual's current position in the distribution of earnings (reference level norms). The norms of distribution all have potentially important consequences for the wage structure. To illustrate, the results of Kelley and Evans's (1993) study of norms of equity indicate that there is a broad consensus in a number of modern industrialised societies that individual contribution should be the primary basis for wage payments. Their findings indicate that people in such societies generally believe that workers should be rewarded for their skill, education, training and effort and be paid a wage that reflects the difficulty, complexity and responsibility associated with their job. These results are significant because they imply that wage changes based on factors other than those listed above (for example, wage changes in response to changes in the level of unemployment) are likely to be judged as unfair or immoral. Thus, the norms challenge market principles and may be an important source of wage stickiness. Kahneman et al. (1986) elaborate on these relationships between norms of equity and labor market behavior. They explain that employers who share such norms are likely to resist cutting nominal wage rates because they perceive this to be unfair or immoral. Employees and third parties, such as customers, are also likely to sanction any firm that violates the fair wage norm. Thus, norms of distri? bution have been seen as placing regulatory pressure on nominal wage rates through a variety of different mechanisms. Norms of reciprocity are a further group of social norms that have been identified in a labor market context. These norms enjoin individuals to return favors done to them by others and gift giving is often regulated by such norms (see Halparin 1988: 37-38 and Polanyi 1957). Norms of reciprocity are reflected in Akerlof's (1982) gift exchange model where workers give a gift to the firm in the form of a level of effort above the firm's work rule. The gift is motivated by the workers' sentiments for each other (their sense of solidarity) and their sentiments for the firm (for example, their sense of loyalty). Importantly, the workers expect that the firm will reciprocate their gift through the payment of fair wages, since the 511 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY giving of gifts is codified in terms of norms of reciprocity. In order to keep morale and productivity high the firm conforms with the norm's requirements. As Akerlof explains, the norms of reciprocity have potentially important impli? cations for the relationship between the level of wages and productivity. Further? more, because such norms promote the payment of high efficiency wages, they may also have consequences for the level of unemployment. Drago and Perlman (1989) also suggest that the gift exchange norms may have an important role to play in explaining the relationship between the level of supervision and the level of productivity in a workplace. In particular, they note that gift exchange requires a high level of trust between the employer and the employees. This trust relation? ship is likely to be undermined by a high level of supervision and, for this reason, high levels of supervision may have negative effects on workgroup productivity. Norms of co-operation have also been identified in a labor market context. These norms enjoin individuals in a group to contribute to a shared objective or to participate in a group action or activity (see Elster 1989b: 101). For example, a firm might feel obliged to participate in an industry-based training scheme, despite the financial incentive that exists for it to free ride, because its managers feel a sense of obligation to co-operate or participate when other firms in the industry are doing so. Firms may also contribute to these collective programs because social pressures (sanctions) are brought to bear on firms to contribute. Similarly, individuals might become union members or make a contribution to a group output, despite the individual costs associated with such actions, because the participation of others creates a moral obligation for them (see Booth 1985). One implication of these norms of co-operation is that they may result in a particular dynamic pattern in the levels of participation in collective programs, such as training and union action. If one individual's participation in a collective activity is dependent on the level of participation by others then, unless a certain level of participation in the activity is reached, the likelihood that new members will join will be low. However, if there is a high level of community participation in an activity, then the obligation that this creates for others to contribute or participate will promote the institution's growth and survival. The norms of co-operation also have potential relevance to levels of per? formance and efficiency in the workplace. As Casson (1991) notes, the ability of a firm's management to establish a culture that is conducive to honesty, initiative and unsupervised performance of tasks can be vital to its economic performance. A workplace environment where individuals commit effort and honesty out of a sense of obligation is likely to be more reliable than any third party enforcement of contracts (see also Bowles and Gintis 1993). Furthermore, these cultural values may deliver the level of work performance required without the cost, risks and inflexibility that can be involved with the design of material incentive structures. 512 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET IV. SOCIAL NORMS AND INSTRUMENTAL REASON The analysis of social norms is also the subject of methodological controversy in labor economics. The cultural (and "old-institutionalist") perspective has two main (interrelated) features that distinguish it from the neo-classical analysis of social norms. First, social norms are treated as "real" features of the economic environ? ment, in the sense that they are autonomous from and cannot be reduced to self interested action. Second, although social norms are viewed as a part of culture, they are seen as being no more (or less) "cultural" than is economic behavior. As was explained in previous sections of this paper, self-interested action is also seen to be constituted by culture. Thus, social norms are simply seen to be a particular aspect of culture that has evolved in response to the inevitable tensions that arise between different, culturally defined values and action, including self-interested action (see Jennings and Waller 1995: 1004). Neo-classical economics (and "new-institutionalism"), on the other hand, denies the reality of social norms. The importance of norms is rejected either by way of an argument that individuals will only be motivated by their self-interest, or by an argument that the norms themselves can be explained by the self-interest of the relevant parties. It is a viewpoint that has been summarised by Sahlins in the following terms: .. .Culture is taken as an environment or means at the disposition of the 'manipu? lating individual,' and also as a sedimented [sic] resultant of his self-interested machinations. The characteristic resolution of culture is thus solipsistic in form. Only the actors (and their interests taken as a priori theirs) are real: culture is the epiphenomenon of their intentions. (Sahlins 1976: 102) Schumpeter (1954: 888) made a similar point when he noted that neo-classical analysis is based on a view that "all social phenomena resolve themselves into decisions and actions of individuals that need not or cannot be analysed in terms of super individual factors." The neo-classical argument against the importance of culture in the labor market proceeds along these general lines. A common theme is that labor market "actors" simply are not motivated by anything other than their self-regarding interests. This is evident in Hicks's (1963: 80) analysis of the use of fairness argu? ments in wage disputes. He alleged that employers' expressed concerns for fair? ness was not the real reason why particular wage rises were paid. He argued that: Demands for a rise in wages come, in the first place, because a rise appears to be 'fair'. And the principle motive in an employer's mind when he concedes such a rise may be a desire that his wage-policy should not appear to be an 'unfair' one. . .But although this appears to be the motive for a very large proportion of wage changes, 513 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY it is not the real reason. These rules of fairness and justice are simply rough-and ready guides whereby the workings of supply and demand are anticipated. (Hicks 1963: 80) Another variation on this theme is the argument that social norms are "merely a cloak" for self-regarding interests. Workers, unions and employers are seen to use norms flexibly and only to invoke those norms that support their particular bar? gaining position. For example, Hyman and Brough (1975: 39) commented that in industrial relations in the UK "the process of comparison [which relates to the use of reference level norms] in many respects is characterised by inconsistency and arbitrariness." The participants in the industrial disputes were often selective in type of norms they utilised and in the types of comparisons that they brought forward to support their arguments about fair wages (see also Wootton 1962). Yet another type of argument that is levied against the importance of social norms is one that attributes an individual's decision to conform with the require? ments of a norm to the nature of his or her self-regarding interest. For example, much of the orthodox analysis of employers' actions in the presence of social norms is based on the assumption that employers do not share the norm in question (they are only concerned with profits). Instead, employers are seen as conforming to the norm's requirements due to a concern for the sanctions (costs) that non-compliance entails. For example, in Akerlof's (1980) model of fair wages firms avoid low or unfair wages only because these would threaten a loss of moti? vation, effort and, thus, profits (see also Brown and Sisson 1975). A more sophisticated, neo-classical argument against the importance of social norms in the labor market posits that the origins of the norms themselves can be explained in terms of the self-regarding interests of the relevant parties. This is the functionalist perspective which sees social norms as little more than tools that have been devised to promote the self-regarding interests of the labor market actors. For example, the use of reference level norms has been linked to the savings in information and bargaining costs for employers, and to the measure of success for union wage negotiators, that such wage comparisons provide (see Ross 1948: 51-52, and Marsden 1986: 136). In a similar vein, Lindlbeck and Snower (1986) explain the existence of norms against the employment of new workers at lower wage rates in terms of the self-regarding interest that workers have in maximising their monopoly power. Another important variation of this argument is that social norms develop because they deliver benefits to individuals in an indirect way. In this case it is accepted that social norms may impose losses on individuals in the immediate term, but the social norms are still interpreted as being the product of an en? lightened form of self-interest. For example, Arrow (1971) linked the existence of 514 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET ethical and moral codes to the mutually beneficially co-operation that such codes support. He argued that market action to ensure the functioning of economic relationships that require trust and/or co-operation among individuals would entail a high level of costs, with the result that "many opportunities for mutually beneficial co-operation would. . .be foregone" (1971: 22). Therefore, as a cost saving alternative to the price system, "society may proceed to the internalisation of norms to the achievement of the desired agreement on an unconscious level." This neo-classical perspective on social norms in the labor market can be challenged on several levels. First, there is the empirical evidence of economic actors behaving in ways that indicates that self-interest is not the primary or singular goal of individuals. Workers who have bargaining strength often do not take advantage of this power to advance their relative wage position (see Hyman and Brough 1975: 8, and Hobsbawm 1964: 351). Evidence of high paid workers or their unions advancing the wage claims of low paid workers also is not generally consistent with interpretations of behavior based solely on self-regarding interests. The survey evidence provided by Reynolds (1951) and Kahneman et al. (1986), that some firms apply fair wage policies even in situations where there is no risk of external sanctions also contributes to the argument that social norms have a separate (non-individualistic) impact on labor market outcomes. There are also several logical flaws with the argument that social norms are reducible to individuals' externally defined self-interest. For example, explan? ations of social norms in terms of their direct or indirect instrumental effects suffer the important deficiency that they offer no reason as to why socially useful norms do not develop. The neo-classical perspective also does not explain why the bene? ficial or optimal nature of particular aspects of social norms is often controversial. Furthermore, as Field (1979: 58) argues, explanations of culture in terms of "enlight? ened self-interest" typically rely at some point on the existence of beliefs that are not related to self-interest. For example, explanations of the willingness of indi? viduals to co-operate rather than free ride depend on the existence of beliefs that other individuals will also co-operate, and these beliefs themselves cannot be accounted for by the self-interest of the relevant parties, (see also Sugden 1998: 76) The argument that, because social norms are sometimes used flexibly or to support bargaining positions based on self-regarding interest, they are, at best, a weak influence on the behavior of labor market actors, can also be countered. As Hyman and Brough (1975: 65) comment, social norms cannot be re-interpreted at will to suit some bargaining claim or other. The ability to make use of a norm depends on the general acceptance of its legitimacy and this legitimacy depends on the sincere use of the norm. Indeed, it can be argued that the fact that it is possible for norms to be used to further an individual's self-regarding interests is evidence of the reality of the norm rather than of its insignificance (Elster 1989a: 128). 515 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY Furthermore, it is a misunderstanding of social norms and other aspects of cul? ture to suggest that they are inflexible and not open to different interpretations. As Jennings and Waller (1995: 1006) note, culture is flexible, in that "individuals with different locations within the [cultural] matrix can experience and interpret even identical processes in different ways without thereby rupturing the cultural web." Culture is also a dynamic system, whereby changes in social norms and other aspects of culture do occur as a result of the introduction of new knowledge, government action, social movements, or the small changes in the routines and habits of a society's members. (Jennings and Waller 1995: 1006, 1009) Thus, the possibility that the content of social norms will be influenced by prevailing social and economic conditions is also not ruled out by a cultural perspective on economic behavior. Indeed, it is widely recognised that the material environment has an important influence on the evolution of culture (see Jackson 1996). Hence, norms of equality are likely to be influenced by changes in the actual pattern of earnings dispersion (Atkinson 1997). At another level, the obligation to recipro? cate the giving of a gift, or to be trustworthy, or to sanction violations of norms of equity or equality, will be bounded, to a significant degree, by the extent of an individual's social network (see Granovetter 1985). Rational behavior is also not ruled out in this cultural analysis. Instrumental reasoning is viewed as a universal but not singular feature of human behavior. Thus, the argument is that it should not be elevated to the status an elemental human strategy, according to which all behavior and institutions can be reduced (Mayhew 1987). Furthermore, although it is accepted that individuals attempt to act rationally, the importance of instrumental reasoning in explaining patterns of production and distribution is seen to be limited. Rather, the cultural perspective emphasises that social institutions are not simply the product of the "the excellency of man's genius", but rather they owe more to "the length of time, and the experience of many generations" Mandeville (1974: 142).2 Traditions and customs, as much as indi? vidual reason, underlie the 'design' of social institutions, and these traditions and customs are grounded in unreflected thought and ideas that are beyond our recall. By denying the reality of social norms and other aspects of culture, neo? classical economics has been blind to the content and internal arrangement of these cultural objects. Customs, norms and beliefs, have been given (to borrow a phrase from Sahlins 1976: 76) a "bath of sulphuric acid" that has stripped them of all their meaning and significance apart from their purported instrumental effect. 2 See also Hayek (1948: 6-7). 516 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET Much more could be gained in terms of understanding these aspects of culture and their role in the labor market if they were referred to as social facts and their relationship to other social and economic structures explored. V. SUMMARY AND CONCLUSION The focus of this paper has been on the idea of culture as an integrative hermeneutic system that encompasses language, custom, norms, moral, laws, values and beliefs. The importance of understanding the way in which culture constitutes economic actors and defines the boundaries to the legitimate pursuit of self-regarding and other interests has been emphasised. An argument has been made that this cultural perspective is relevant to a range of important labor market issues, including the participation of married women in the paid workforce, occu? pational choice, aspects of the wage structure and levels of effort and motivation. This cultural perspective has been identified as a vital component of any under? standing of the way labor markets work, especially the dynamic aspects of the growth and survival of labor market institutions. This paper has focused primarily on describing the meaning of culture and on the identification of the major theoretical controversies that surround the topic. Few comments have been made about how studies of the effects of culture can and should be carried out. However, the discussion in the previous section indicates that the argument that culture is an autonomous source of labor market institutions is likely to be greeted with skepticism by many economists. Alternative (efficiency) explanations for any cultural phenomena are likely to be forth? coming, and it is unlikely that empirical evidence alone will win any argument about the reality of culture. This is not to say that empirical studies of the effects of culture have no value. The opposite is true. For example, there is a pressing need for further analysis of the way in which social norms regulate the pursuit of self-regarding interest by individuals in the labor market. However, the comments made above do imply that many studies of culture in the labor market will feel obliged to address the counter-claim that differences in behavior reflect the material interests of the actors involved. Kelley and Evans's (1993) evidence that significant cross national differences in attitudes to inequality persist after differences in material conditions have been taken into account provides a good example of the type of approach that will be required. Kahneman et a/.'s (1986) use of counter-factual propositions to test whether individual's normative reactions to reductions in nominal wage rates accord with self-interested explanations offers another approach (see also Yaari and Bar-Hillel 1984). However, the idea that aspects of culture, such as social norms, are "social 517 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms REVIEW OF SOCIAL ECONOMY facts" specific to particular times and places implies that the broad scale empirical studies (and the drawing from these of general conclusions about the behavior of populations as a whole) may have limited relevance to cultural studies. Case studies that pay attention to the specifics of the institutional environment and the processes at work in particular labor markets are likely to be more in keeping with the description of culture that has been advanced in this paper. Cultural studies are complex. As Jennings and Waller (1994) explain, human action and the cultural web that relates to it are multifaceted. For example, culture can be described across a number of dimensions, such as at the level of class, organisations and nations. The nature of the social norms that apply to human action in each of these dimensions is likely to differ, and in many cases the norms that apply in one dimension may not apply in another. Indeed, one important form of research question is how the tensions between the social norms that apply to behavior in the various parts of an individual's working life are resolved and how these various norms together constrain the set of feasible choices of action available to an individual. There is a need for further development of models of human action to guide the study of culture in the labor market. Keeping in mind the above comments about the ability to assume a high level of generality in the nature of cultural effects, studies of the constitutive effects of culture may benefit from the development of the analysis of preference formation, especially models that emphasises cognitive limitations and the way in which cognitive development is molded in the social environment (see Manski 1993; Witt 1996; Casson 1993; George 1996 and Jonsson 1994). Studies of the regulatory effects of culture may benefit from the further development of models of human action that depart from the convention of a single utility function. Models, such as those developed by Sen (1977), Margolis (1990), Etzioni (1988), O'Boyle (1994) and Casson (1991), offer the potential to explore at an abstract level the 'trade-off' between their self-regarding and other regarding interests and the possible implications of, for example, social norms on economic behavior. The large number of labor market issues that are potentially within the scope of the regulatory and constitutive aspects of culture suggests that labor economists should pursue the complex and challenging task of pursuing the study of culture. Such studies offer the opportunity to improve our understanding of how the labor market works. They offer the potential to learn from and contribute to research on labor market issues in other disciplines, and they have enormous policy relevance. 518 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms CULTURE AND THE LABOR MARKET REFERENCES Akerlof, G. 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Wootton, B. (1962) The Social Foundations of Wage Policy: A Study of Contemporary British Wage and Salary Structure, 2nd ed. London: Unwin University Books. Yaari, M. and Bar-Hillel, M. (1984) "On Dividing Justly," Social Choice and Welfare 1: 1-24. 521 This content downloaded from 142.105.208.236 on Mon, 02 Dec 2019 04:15:22 UTC All use subject to https://about.jstor.org/terms ECON343_W2020_Assignment 1 Read the research article “Culture and the Labor Market” by Siobhan Austen to answer the following questions: 1. What is the primary argument of the research article? 2. Do you agree/disagree with the arguments of the author? Provide a rationale for your choice. 3. What is the Old-institutionalists’ view about the association between culture and labor market? 4. How is the view of new-institutionalists differ from the perspective of Oldinstitutionalists about the association between culture and labor market? 5. What taxonomy Di Maggio (1994) used to describe the relationships between culture and economic behavior? Explain. 6. What are the limitations of the taxonomy used by Di Maggio (1994)? 7. What are the implications of ignoring the constitutive effects of culture by mainstream economists? 8. In light of the article, explain the following terms: • Norms of equity • Norms of reciprocity • Norms of cooperation • Norms of equality 9. What are the neo-classical arguments against the importance of social norms? 10. How did the author challenge the neo-classical perspective of social norms in the labor market? Journal of Economic Perspectives—Volume 9, Number 4—Fall 1995—Pages 133–154 Human Capital vs. Signalling Explanations of Wages Andrew Weiss W orkers with higher levels of education and more work experience tend to have higher wages. For some years, the most common explanation for these correlations has been that time spent in school or on the job increases wages by directly increasing the worker's productivity. This learning explanation is usually associated with human capital theory. However, it seems unlikely that learning explains all the wage differences associated with schooling and work history. Better-educated workers are not a random sample of workers: they have lower propensities to quit or to be absent, are less likely to smoke, drink or use illicit drugs, and are generally healthier. It is unlikely that employers make full use of differences in propensities to quit or to be absent or sick when hiring workers. These characteristics are often not directly observed, and the Americans with Disabilities Act precludes firms from using either poor health or the likelihood of future sickness as a hiring criterion unless it is directly related to job performance.1 However, if low levels of education are associated with these unfavorable employee characteristics, and employers are allowed to take education into account when hiring workers, we would expect employers to favor better-educated workers as a means of reducing their costs of sickness and job turnover. In turn, students will take these hiring criteria into account when deciding how long to stay in school. Students will choose a length of schooling to "signal" their ability to employers, and employers will demand a minimum level of schooling 1 The American Lung Association has found that a smoker costs his employer up to $5000 more in annual health insurance costs. However, in 29 states it is illegal to refuse to hire smokers (New York Times, May 8, 1994, p. E5). • Andrew Weiss is Professor of Economics, Boston University, Boston, Massachusetts. 134 Journal of Economic Perspectives from applicants in order to "screen" their workers. Both signalling and screening serve to "sort" workers according to their unobserved abilities. This paper will use the term "sorting" to refer to both signalling and screening of workers.2 We shall focus on the way in which individuals are sorted according to a measure of ability that improves productivity across all jobs. "Sorting models" of education can best be viewed as extensions of human capital models. However, while human capital theory is concerned with the role of learning in determining the return to schooling, sorting models, while allowing for learning, focus on the ways in which schooling serves as either a signal or filter for productivity differences that firms cannot reward directly. Sorting models extend human capital theory models by allowing for some productivity differences that firms do not observe to be correlated with the costs or benefits of schooling.3 (Sorting models can also include ability differences that are observed by firms but which the firms cannot use in making employment decisions. Both these extensions of human capital theory have the same qualitative implications.) In sorting models, schooling is correlated with differences among workers that were present before the schooling choices were made; firms make inferences about these productivity differences from schooling choices, and students respond to this inference process by going to school longer. If the sorting extensions of human capital theory are important, the marginal benefits from schooling or work experience for an individual could greatly exceed the expected value of the effects of those activities on productivity, even ignoring taxes, subsidies and externalities. An accurate measure of the change in wages for a person who goes to school for 12 years instead of 11 would not measure the effect of that year of education on his productivity, but rather the combined effect of one additional year of learning and the effect of being identified as the type of person who has 12 rather than 11 years of schooling. Because individuals will react to their private wage gains, rather than to the social gains from greater productivity, schooling and employment decisions will be distorted. The remainder of this paper discusses whether various empirical regularities are better explained by learning or sorting considerations. It first examines the positive correlation between wages and education and then turns to the relationship between wages and job tenure. The bottom line is that labor economists should take into account the distortions induced by signalling or screening when estimating social rates of return to schooling and job experience. Meanwhile, policymakers 2 In signalling models the informed (students) move first In screening models the uninformed (firms) move first. Signalling models often have multiple equilibria; screening models suffer from the opposite problem of nonexistence of equilibrium. Realistic dynamic models combining signalling and screening have not been well studied. 3 The relationship between wages and education could be the outcome of either students choosing an education program to signal their ability, or students choosing education levels in response to the relative wage offers of firms, in which case wages would serve to screen workers. Andrew Weiss 135 should be cautious about using "consensus" estimates of rates of return to schooling in considering policies designed to reduce dropout rates or when allocating resources across primary, secondary, and postsecondary schools. Explaining the Connection Between Education and Wages Interpreting the Coefficient on Education in a Wage Equation There have been literally thousands of published estimates of rates of return to education. The estimates are generally derived using least squares regression, where the dependent variable is the logarithm of wages or earnings, and the independent explanatory variables include a constant, observed demographic characteristics such as schooling, race, sex, and experience, and other observed variables that are deemed relevant by the researcher. This method of explaining wages is often known as a Mincerian earnings equation, after Jacob Mincer. Since the coefficient that appears in front of the schooling term describes the percentage change in wages associated with each additional year of schooling, it has been interpreted as the private rate of return to schooling. This interpretation is accurate as long as there are no ability differences that are not included in the wage equation, but that are observed by the firm. If such ability differences did exist, an individual who graduated from high school but who did not look like a typical high school graduate would not get the wages of a high school graduate, and so that individual's return to schooling would differ from the estimated regression coefficient. With less justification, the coefficient on education in the log wage regression has also been interpreted as an estimate of the productivity-enhancing effects of education. The assumptions needed for that interpretation are far stronger. Not only must wages be proportionate to productivity, but also all attributes that are not observed by firms and that affect productivity must be uncorrelated with schooling, or else firms must be irrational. One frequent test of the extent to which education is directly affecting individual productivity is to measure the effect on the education coefficient when additional right-hand variables intended to capture ability differences—such as IQ— are included in the wage equation. The usual finding is that the coefficient on education is not strongly affected by the inclusion of additional right-hand variables. These results have been (mis) interpreted as suggesting that unobserved ability differences do not have important effects on productivity. However, in sorting models, firms do not directly observe the attributes that are omitted from a standard wage equation and that affect worker productivity. Rather, firms use education choices to draw inferences about unobserved attributes. The coefficient on education is fully capturing the effects of that inference process and would not be affected by the inclusion of additional explanatory variables that are not observed by the firm. Even if the researcher knows the results of accurate tests of attributes like intelligence, perseverance or a taste for additional learning, if the firm does not have that direct information available, then the sorting model 136 Journal of Economic Perspectives predicts that including these variables in the wage equation will not affect the coefficient on schooling. Because there has been some misunderstanding of the differences between human capital and sorting interpretations, it is worth reemphasizing the point that sorting models subsume all the features of human capital models. In particular, both approaches allow for learning in school (and human capital models require it). In both approaches, profit-maximizing firms compete for utility-maximizing workers, and the expected lifetime compensation of a worker with a given set of observed characteristics is equal to the expected lifetime productivity of a randomly selected worker with those characteristics. Both human capital and sorting models assume that individuals choose a length of schooling that equates their marginal return from schooling to their cost of schooling. The models differ in that sorting models allow for attributes that are not observed by the firm to be correlated with schooling. Much policy-oriented research has been devoted to calculating returns to education, by adjusting for all traits that are observed by firms. This is often done by expanding the set of attributes that are observed by the researcher and assuming that everything the researcher observes is observed by the firm. When policy is being formulated, these estimates of private returns are frequently used as estimates of the social return. From a policy viewpoint, the key difference between human capital and sorting is that in sorting models, even after correcting for all traits that are observed by the firm, the coefficient on education may be a very biased measure of the effects of either schooling or experience on productivity. If sorting considerations matter, the coefficient on education offers a good estimate only of the private return to education, not the social return to education. If the sorting approach is correct, the outcome of the market is inefficient, since the private and social returns differ. However, it is not clear whether there will be too much or too little education. On one side, individuals may pursue too much education as a means of signalling their love of learning, or firms may demand more education than is required for a job to deter applications from people who have difficulty succeeding in school. In these cases, the private return to education would exceed the social return. On the other side, as Stiglitz (1975) pointed out, an indirect effect of sorting may be to improve the match between workers and jobs, in which case the social return from schooling may exceed the private return. For instance, suppose people for whom schooling is unpleasant have an absolute advantage in unskilled jobs, and people for whom schooling is relatively pleasant have an absolute advantage in skilled jobs, and employers cannot directly observe the productivity of workers nor identify the different types. Then, when workers for whom education is relatively pleasant choose more education to separate themselves, average productivity and wages at the low-skill job rises. The resulting increase in wages of people with low levels of education leads to an underestimate of the social return to education. (Note that the Stiglitz argument departs from the usual assumption made in sorting and human capital models: that abilities that are correlated with schooling positively affect productivity on all jobs.) Human Capital vs. Signalling Explanations of Wages 137 Ability Differences and Educational Choices People choose different levels of schooling. One reason for their different choices might be that some receive a higher benefit from a given amount of schooling, perhaps because they learn more readily than others, or because they value future earnings more highly, or because they enjoy learning. Human capital models do not naturally generate a positive correlation between ability differences and education (Weiss, 1971). If higher-ability people are more productive at every schooling level, they will have a higher opportunity cost of schooling, which would lead them to leave school sooner. They would, however, stay in school longer if they cared more about the future, or enjoyed school more than the average student, or learned more rapidly. These preferences make workers desirable employees: they would be less likely to quit or be absent (both quits and absenteeism involve short-term benefits and long-term costs) and more likely to participate successfully in training programs. Of course, if people with desirable preferences go to school longer, firms would use education in their hiring criteria as a means of selecting workers with these desirable traits. Leaving aside differences in preferences, more able people may go to school longer because they derive greater benefits from schooling. The positive correlation between the ability to learn and the length of schooling chosen is central to sorting models such as Weiss (1983) and Cho and Kreps (1987). The available evidence suggests that the benefit to schooling is greater for more able individuals, so that we would expect education to sort by ability. In the Netherlands and Singapore, for example, outcomes on a certification exam have large effects on the earnings of school-leavers (Liu and Wong, 1982; Hartog, 1983). Altonji (1995) has shown that in the United States, a composite measure of aptitude— based on grades in secondary school, scores on standardized tests, and the student's own self-appraisal of ability—is correlated with returns to postsecondary education. High-ability men have more than twice the return to postsecondary education as do low-ability men.4 The effect of this composite measure on rates of return to postsecondary education appears to be due to high-ability people being more likely to complete a course of study. The aspects of ability included by Altonji are not usually directly observed by firms (or researchers) and are likely to be correlated with other unobserved attributes such as perseverance. Altonji (1995) also finds that students who take more courses in high school have more years of postsecondary schooling. This relationship holds both within and across high schools. However, when the high school a student attended is used as an instrument to predict courses taken then this instrument is uncorrelated with postsecondary schooling. These instrumental variable results suggest that the relationship between high school courses and postsecondary schooling is not due to learning in school, but is rather a consequence of the same unobserved attributes that lead some people to take more courses, also leading them to stay in school longer. 4 High-ability students have scores that are one standard deviation above the mean for this composite measure, while low-ability students have scores that are one standard deviation below the mean. 138 Journal of Economic Perspectives One indirect implication of sorting models is that the ratio of the wage paid to people who succeed in school to the wage paid to workers who failed in school will increase with schooling (Weiss, 1983). In the Netherlands this effect is quite pronounced at high education levels (Hartog, 1984) and could be causing the positive correlation between years of schooling and the variance of earnings (Mincer, 1974). Direct Evidence of the Effects of Learning on Earnings If the positive relationship between wages and years of secondary schooling is due to learning in secondary school, then the higher wages of better-educated people should be due to skills that were learned during those years of additional education. Altonji (1995) examines the effect of course work in school on earnings using data from the National Longitudinal Survey of the High School Class of 1972 and various follow-ups, including earnings in 1986. Everyone in the sample graduated from high school. However, not everyone took the same number of courses, making it possible to estimate the effects on future earnings of taking an additional course. Altonji estimates the increase in earnings associated with particular courses, holding years of education fixed.5 If the return to education is due to learning in secondary school, and learning in one course does not decrease learning in other courses, and course selection is uncorrelated with the error term of the wage equation, then the sum of the individual effects on earnings of each course in the standard curriculum should equal the usual estimates of the effect of a year of schooling on earnings—that is, 7 to 10 percent. Altonji addresses the following question: if an individual was to take seven periods of lunch and recess instead of a standard curriculum, what would be the effect on his earnings? He finds that taking the average high school course load, rather than registering and getting a "social promotion," either has no effect on wages or actually decreases wages. Course work fails to have a significantly positive effect on wages even 13-years after individuals have graduated from high school. By that time employers would have had considerable opportunity to observe the productivity of workers. On the other hand, course work (and ability) does affect returns to postsecondary education. Thus while secondary schoolwork may not directly affect productivity, it may be complementary to learning in postsecondary school. In an earlier paper, using a different data set, different estimate techniques, and only sampling high school graduates who did not continue their education, Rang and Bishop (1986) also found that academic courses had insignificant effects on wages. Their estimates imply that a year of a full academic curriculum of mathematics, English, foreign language, social sciences and science is, holding all other courses fixed, associated with $.11 lower hourly wages. The only academic courses 5 Altonji's (1995) results are robust to the inclusion of controls for measures of family background and scores on aptitude and achievement tests. Andrew Weiss 139 that had a statistically significant effect on hourly wages were social science courses, which were associated with $.12 lower hourly wages. Altonji's (1995) results (and to a lesser extent the results in Kang and Bishop, 1986) provide a serious challenge to explanations of the relationship between secondary schooling and wages that are based on learning in secondary school. The small or negative returns to course work are especially striking, since they include both the learning and signalling effects of those courses. These results are a strong refutation of the huge literature that interprets the correlation between wages and secondary schooling as due to learning in secondary school. Of course, there are ad hoc explanations of these results that are consistent with learning in secondary school generating the relationship between wages and schooling, although these explanations are far from compelling. First, perhaps adding courses subtracts from the effort in other courses. If the courses from which effort is being drained are the ones with the high returns for the individual, then adding courses could decrease earnings. Under this scenario, the value of what is learned in a year of schooling could rise or fall with the number of courses. For instance, taking a foreign language could decrease the amount of time a student spent on vocational subjects and thus might decrease wages. We don't know if students who are induced to take additional courses spend significantly less time on courses in which the marginal units of effort are having large effects on personal productivity, but such behavior would surely seem irrational if productivity was observed by firms. In addition, students report spending on average less than one hour per day on homework, suggesting that for most students crowding out effects are not very important—most of their learning is taking place in school. A second objection to the Altonji-Kang-Bishop results is that students who took different courses in school, even if they had the same number of total years of schooling, are likely to differ in other ways. Since returns to postsecondary schooling are higher for people who took more courses in high school, the cost of quitting school is higher for those students. Thus, we might expect students who took more courses in high school to have higher reservation wages and thus higher wages conditional on leaving school. This effect would cause an upward bias in the measured effect of secondary school courses on wages. On the other hand, a student who is guaranteed a highly paid job upon completion of high school (perhaps with a parent's union?) may take few courses, introducing a downward bias in estimates of returns to courses. These biases offset one another, and I would expect their net effect to be small. A third possibility is that the curriculum results are due to omitting high school dropouts from the samples. However, this sample bias would only explain the results if people who complete high school derived less benefit from their course work than do high school dropouts. This seems unlikely. A fourth possibility is that less able students take more courses because they must repeat those courses. However, Altonji (1995) found a positive correlation 140 Journal of Economic Perspectives between hours of science, foreign language, English, and math and both grades and achievement test scores. While the previous four explanations seem implausible, if one is willing to give up on the estimated coefficient on secondary schooling as a reasonable estimate of returns to that schooling, there is a reasonable way to resurrect learning as the cause of the relationship between secondary schooling and wages. It is implausible that learning in secondary school is generating the relationship—since courses are not affecting wages even 13 years after graduation, by which time the learned skills will presumably have been observed by employers. However, learning in primary school may be generating the positive correlation between secondary schooling and wages. In primary school children are taught to cooperate, to persevere, to delay gratification. Children who learn these affective skills are likely to stay in school longer. So the positive correlation between schooling and wages could be due to the correlation between schooling and the earlier acquisition of affective skills in primary school. If employers do not observe what workers have learned in primary grades, schooling decisions later on will be distorted in the ways implied by sorting models.6 Consider the types of jobs taken by people with no more than 12 years of schooling. Few of those jobs require a knowledge of chemistry, algebra or trigonometry, or history or geography. On the other hand, punctuality, perseverance, self-discipline, good manners, literacy, and the ability to perform simple calculations accurately are all valuable for a wide range of jobs—and all are skills that are primarily taught in the early years of school. Schooling also affects preferences, including the preference for present versus future rewards. To sum up: the most plausible explanation for the Altonji-Kang-Bishop results is that employers do not observe transcripts and thus do not use course work as a signal. They do observe years of secondary schooling, which is an unbiased predictor of productivity. Courses taken in school do not significantly improve the predictive value of merely persevering through four years of high school. Grades, Test Scores and Earnings If the focus shifts from curriculum to measures of schooling like test scores, there still seems to be little connection between these measures of education and the earnings of high school graduates. There is a long history of researchers failing to find an economically significant relationship between scores on achievement tests and wages. Altonji (1995, Table A-2) finds that while vocabulary, reading ability, and basic competence in math are positively correlated with log wages, the correlations are neither economically nor statistically significant. Kang and Bishop (1986) found 6 If, on the other hand, the productivity differences associated with different levels of secondary schooling are due to learning in primary school that is directly observed by employers, standard estimates of rates of return to secondary education would bear little relationship to the productivity-enhancing effects of learning in secondary school. Human Capital vs. Signalling Explanations of Wages 141 that a one standard deviation increase in math, reading, and vocabulary test scores was associated with a $.003 fall in hourly wages, a $.001 rise in hourly wages, and a $.002 increase in hourly wages, respectively—and none of these changes was statistically significant. (A one standard deviation differences in achievement test scores is usually associated with three years of schooling, so these effects are trivial compared with the usual estimates of the effects of three years of schooling on wages.) Meyer (1982) reports that a shift of one standard deviation in a variable he labels as "test" (a composite of various test scores) increases earnings by up to 4 percent— again this finding is not statistically significant. Bishop (1990b) finds similar results. All of these studies reject the hypothesis that cognitive learning in secondary school classrooms is making a substantial contribution to the positive relationship between schooling and earnings at the individual level. Researchers have also looked at possible effects of secondary school grades and class rank on wages (Kang and Bishop, 1986; Meyer, 1982). In some regressions, small results are found some of the time. But the main message from studies on course work, test scores, and grades is that learning in high school does not seem to be a significant factor in explaining the correlation between secondary schooling and wages. These small or statistically insignificant results are especially striking since these estimates are almost certainly upwardly biased estimates of the effects of test scores on wages. Individuals with high test scores and good grades are likely to have some other traits that are observed by employers and are directly rewarded in the labor market. Taken together, these estimates suggest that courses, test scores, and measurable learning in secondary school can explain at most one-quarter of the increased earning associated with completion of high school, and probably substantially less. A Sorting Explanation If less than one-quarter of the higher earnings of high school graduates is due to learning in secondary school, what accounts for the other three-quarters of their higher earnings? One possible explanation is that some individuals have (unobserved) traits that make schooling less costly to them. We can call these traits various aspects of perseverance. Individuals with more perseverance are likely to have lower quit rates and rates of absenteeism after leaving high school, as well as being more likely to graduate high school. Along these lines, Klein et al. (1991) found that individuals who had more education than would be expected from their observed demographic characteristics were likely to have unexpectedly low propensities to quit a job. Along similar lines, Weiss (1988) presents evidence and a simulation study suggesting that substantially all of the relationship between high school graduation and earnings can be explained by the lower quit propensities and lower rates of absenteeism of high school graduates. If perseverance is not directly observable by firms, then high 142 Journal of Economic Perspectives school graduation will be rewarded because of the lower rates of absenteeism and lower quit behavior of high school graduates. Students need not be consciously "signalling" these traits. The sorting explanation only requires that some students have unobserved traits that lower their cost of schooling and that these traits are valued by firms. An important empirical study that bears on the relative usefulness of the sorting and learning approaches for understanding wage determination is Card and Krueger (1992). That study finds that individuals who were born in states with small class sizes and high relative teacher salaries had higher rates of rate of return to education as well as more schooling. They also found that increases in those school inputs were associated with lower wages for students who fail to complete high school and higher wages for students with more than 12 years of schooling. The increase in schooling associated with small class sizes and high relative teacher wages generated higher wages at every percentile of the population. Card and Krueger (1992) present their findings as evidence that learning in school is generating the correlation between schooling and wages, but there are several problems with this interpretation. First, it is hard to see why better instruction in primary and secondary school would cause a fall in wages for people with no postsecondary schooling. (The schooling inputs they measure are inputs into primary and secondary education.) At the education levels chosen by most of their sample, increased school inputs either had no effect or a negative effect on wages. Second, if increased learning is causing the wage-education locus to become steeper (pivoting roughly around its midpoint), it is surprising that length of school term has no effect on this slope when they control for other characteristics of the state-cohort. Third, relative teacher wage is likely to be highly correlated with the ratio of college wages to the wages of high school graduates—and thus with returns to education in the state of birth. Card and Krueger (1992) attempt to control for that problem by using differences in the returns to education of a state's emigrants and the residents of the state in which they reside to estimate returns to school inputs. However, since the change of wages conditional on emigrating affects the probability of migration, we would expect that the rates of return to education for migrants to be highly correlated with the return in the state from which they migrated.7 Thus, the Card and Krueger focus on migrants does not avoid the problem that relative teacher salaries are highly correlated with returns to education in the state of birth. Fourth, the teacher/pupil ratio may also be correlated with the relative demand for skilled workers in the state, which may in turn be correlated with per capita income. To test this hypothesis I added the natural log of per capita income in the worker's state of birth when the average worker in a cohort was 23, as an additional explanatory variable in the Card and Krueger regressions estimating 7 Speakman and Welsh (1994) treat this issue at some length. Andrew Weiss 143 effects of school inputs on rates of return. With that specification, the coefficient on the teacher/pupil ratio becomes insignificant while the coefficient on per capita income is both economically and statistically significant.8 A sorting explanation for the Card and Krueger (1992) results is that states with high per capita income will tend to spend more on instruction and also build more schools and provide better transportation, which would reduce differences in access to schools. Those expenditures would reduce the noise in the relationship between unobserved ability and schooling. In addition, in more prosperous states fewer students are likely to leave school because of family financial pressures— further reducing the noise in the relationship between ability and schooling. To the extent that schooling decisions are governed by random factors rather than observed ability differences, the coefficient on schooling in a wage equation will be biased toward zero—reflecting the zero correlation between those random factors and productivity. This is the usual problem of measurement error of a right-hand variable. As the noise in the relationship between unobserved ability and schooling is decreased, this bias will also decrease, and the estimated coefficient on schooling in the wage equation will rise, reflecting the true relationship between unobserved ability differences and wages. Thus the sorting model predicts that controlling for per capita income reduces the effect of school expenditures on rates of return to schooling.9 The actual results are quite striking. The effects of every schooling input is eliminated once we control for per capita income at the time the students were in school. The t–statistics for pupil/teacher ratio and term length are both near zero. The t–statistic for relative teacher wage is 1.40, and thus the borderline significance; but, as we've argued, that variable is capturing the relative demand for educated workers. (These calculations are available from the author.)10 Many other studies purport to measure the relative importance of sorting and learning for explaining returns to education. Typically these studies can only do so if they make strong auxiliary assumptions. Space limitations preclude a discussion of all these studies. Instead, we shall discuss three of the most influential approaches—the Angrist and Krueger (1990) study of the effect of birthdate on returns to schooling, studies of the relationship between wages and schooling for identical twins, and studies of returns to schooling in different occupations. Angrist and Krueger find that those people who are forced to continue in school because of the interaction between their date of birth and the school attendance law in thenstate get the same increase in wages from that education as do people who voluntarily continue their education. It might seem that this result supports a learning 8 The coefficient on In (per capita income) is 1.94, with a t–statistic of 4.78. Prediction of novel facts is perhaps the most widely accepted criterion for evaluating competing scientific research programs. This criterion has been used, for example, to explain the success of Copernican astronomy, of the Newtonian theory of gravity and its replacement by Einstein's theory, and the supplanting of classical physics by quantum mechanics. See Lakatos (1978). 10 The per capita income measure may, however, be measuring the effects of school inputs, rather than differences in demand conditions; that is, if the model is misspecified the income measure could be a better measure of school inputs than are the inputs themselves. 9 144 Journal of Economic Perspectives explanation for returns to schooling. However, sorting also generates that result if employers are paying workers according to their observed characteristics and level of schooling, without adjusting for the effects of school attendance laws on individual education choices.11 The human capital model, on the other hand, can only generate that result if there are no aspects of individual productivity that are omitted from the wage equation and that are correlated with schooling. However, as we've discussed, postsecondary schooling is correlated with courses taken in high school, with grades on those courses, and with scores on both achievement and intelligence tests, thus it seems unlikely that schooling would be uncorrelated with all other unobserved variables. In addition, in the absence of unobserved ability differences, it is difficult to explain the discontinuous changes in earnings associated with completion of high school and college.12 Twin studies use the relationship between wages and education levels across identical twins to isolate the effect of education on earnings, holding ability differences constant. The most recent and sophisticated study of twins, by Ashenfelter and Krueger (1992), finds that returns to education across twins may be as large as that across the population as a whole. However, even leaving aside the issue of why identical twins would choose different levels of schooling, it is clear that a sorting model would generate that result, as long as employers did not observe the education choices of both twins. The reasoning is the same as for the birthdate problem. In a sorting model, if employers don't know the education level of the worker's twin, they infer a worker's unobserved ability from the education choices of the individual worker: recall that in the sorting model employers are using schooling as a proxy for unobserved characteristics, so that the twin with more schooling would receive the wage associated with his level of schooling—not with his unobserved abilities. Thus for the Ashenfelter and Krueger results to confirm sorting models, it is only necessary that employers do not know the education choices of a worker's twin. One check of whether the twin studies are confirming the sorting models is to see if wage differences of twins with different education levels decline over time. If the sorting model is correct we would expect the return to schooling across twins would decline over time compared to the return for the population as a whole. Using the Ashenfelter and Krueger data we found some evidence of this decline, but the data were not sufficient to measure it accurately. Finally, if screening is important, then workers who look the same to the researcher should look the same to the firm, and hence get the wages predicted by a correctly specified model in which the right-hand variables only include observed 11 This lack of adjustment is perhaps not surprising given that labor economists studied rates of return to education for almost half a century before Angrist and Krueger (1990) thought of using school attendance laws as an exogenous instrument. 12 Hungerford and Solon (1987) found the following percentage changes in wages were associated with completion of different grades: 11th grade +0.7%, 12th grade +8.6%, 15th grade –4.9%, 16th grade + 17.6%. Heckman et al. (1994) also found discontinuous changes in wages associated with completion of grades 12 and 16. Jaeger and Page (1994) find that returns to the 12th and 16th years of schooling more than double when those years are associated with graduation from high school or college. Human Capital vs. Signalling Explanations of Wages 145 characteristics such as education. Testing this implication, Riley (1979) finds that a standard wage equation fits much better for people who are in occupations in which screening seems to be important. Riley also finds that rates of return to education are higher in the unscreened occupations (see his Figure 3). This second result is also a consequence of the distortion of schooling decisions in sorting equilibria. Since almost every type of worker in the screened occupations is increasing schooling to separate itself from lower-ability types, ability will increase more slowly with schooling in occupations in which screening is important. Given some reasonable assumptions about the production technology and preferences, wages will also increase more slowly with schooling in those occupations. Answering Objections to the Sorting Approach The evidence presented thus far seems to support the idea that sorting considerations are playing an important role in school choices. However, there are several objections to this point of view. Why Not Other Sorting Mechanisms? The most strongly voiced objection to the sorting approach is: "There must be cheaper ways to learn about workers!" The implicit complaint is that if unobserved differences were important, firms would test for them directly, or workers would test themselves. Such a solution poses several difficulties. For starters, it is hard to think of costeffective tests of affective traits. For instance, a high score on a test of perseverance, given to those who have dropped out of school to take the test, might suggest a particularly low level of perseverance, since this individual performs well on tests and yet wishes to quit school. Moreover, if those tests have disparate impact by race or sex, the firms would have to prove that the tests are valid and that there is no other equally valid test which would have less of an adverse impact on minority groups or women. It is also difficult to see how such a test would be introduced. The first firm that substituted tests for education as a hiring criterion would have monopsony power over its workers; that is, workers who quit school to take the test would be bearing the risk that their employer would fire them because of a fall in demand, and no other firm would recognize the test score. In addition, firms might well have unfavorable expectations about the first worker who appears at its door with high test scores and a low level of education and even doubt the integrity of that particular test score. In general, testing by either a worker or a firm is an out-ofequilibrium move, and assumptions of rationality are not sufficient to predict responses to such moves. The Cross-Country Correlation Between Education and Productivity A second general objection to the sorting explanation of the relationship between wages and education is that countries with high levels of education tend to 146 Journal of Economic Perspectives have both high levels of per capita GDP and high growth rates. The magnitude of these cross-country relationships suggest that education is directly affecting productivity. However, such correlations can be interpreted in many ways. For example, wealth may be affecting schooling, and the same factors that affect growth may affect schooling. Wealthier countries tend to supply better access to schooling and to enforce child labor laws more strictly. Thus, the cost of schooling would tend to be lower in those countries, leading to more schooling. In addition, if education is a normal good, richer people will consume more of it. Finally, in more highly developed societies, a greater proportion of jobs seems to be in occupations in which productivity is not directly observed. As we noted, the sorting model predicts that those occupations will be associated with higher levels of education. Turning to the relationship between schooling and future growth in productivity, people with low rates of time preference will have more schooling. Low time discount rates will also lead to more savings and investment, and thus greater future growth. Even in agrarian societies, many components of private investment, such as whether to plant crops that often do not generate positive cash flow for many years (like citrus or olives), are strongly affected by rates of time preference. Thus, looking across countries, the choice of high-return, long-term investments may be highly correlated with schooling choices. Despite these caveats, I find the relationship between literacy and growth to be the strongest evidence of a close relationship between learning (or at least primary schooling) and productivity. Finally, even if school learning is the cause of the wealth of nations, sorting models may still provide the best explanations of the relationship between wages and education within countries. If the ability to learn is correlated with the nonpecuniary costs of education, the length of schooling could serve as a signal of how much was learned per year of school, and schooling choices would be distorted in the ways predicted by sorting models. Job Tenure and Wages Labor market economists distinguish between experience, which represents overall time in the labor market, and tenure, which represents the time on a particular job. Along with the relationship between education and wages, the second major set of facts that human capital theory and sorting models have attempted to explain is why wages rise with tenure at a particular job, holding the effect of experience on wages fixed. Many explanations of the wage-tenure relationship have been proposed, including the idea that longer tenures represent better "job matching," agency models in which rising wage-tenure profiles are intended to induce more effort or reduce the probability of an individual worker quitting, and psychological models in which people prefer steep wage-tenure profiles. All of these approaches have considerable validity. However, the discussion here will focus on human capital theory Andrew Weiss 147 and sorting models, because the human capital model is most commonly used, and because one purpose of this paper is to show how sorting models can be extended to situations other than education choices. In the particular sorting models discussed here, firms offer wages that are conditional on observed performance or test results. These conditional wages are designed to deter applications from workers who have bad private information about their own ability. The Human Capital Explanation for Wages and Tenure In standard human capital models, wages rise with the length of time spent on a job because workers learn on the job. Learning occurs either through on-the-job training or learning-by-doing. These models commonly divide human capital into two categories: general and firm-specific. General human capital includes skills that are valued by many firms. In an economy with perfect information, it has the same effect on a worker's wage whether or not that worker continues to be employed at the firm where those skills were acquired. Thus, general human capital affects returns to experience, regardless of whether that experience happens at one job or many. However, human capital that is applicable only at a worker's current employer—that is, firm-specific human capital—affects the correlation be...
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econ 343 assignment 1
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econ 343 assignment 1
ORIGINALITY REPORT

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Siobhan Austen. "Culture and the Labor
Market", Review of Social Economy, 12/1/2000

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Submitted to University of Maryland, University
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ECON 343 ASSIGNMENT 1
Running Head: ECON 343 ASSIGNMENT 1 1

Econ 343
Name
Date
Econ343 W2020 assignment 1
Question 1 what is the primary argument of the research article?
The research article focused on the relationship between culture and the
different factors associated with cultural practices and the impact that they
have on economic growth. According to this article, the cultural perspective
that comprises of morals, values, language, as well as beliefs, has a positive
contribution towards the change that may occur in the labour market thus
creating an effect on the economic stability.
2 Do you agree/disagree with the arguments of the author? Provide a rationale
for your
Choice.

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The author argues that the available information regarding the cultural impact
on the labor market offers insight regarding the effects that artistic practice
has. In that case, the authors suggest about the development of new models
regarding human action to assist in the assessment of culture and its impact
on the labor market. One may argue in support of this argument because, with
this improvement, the involved stakeholders will have the ability to develop
measures that will assist in managing some of the problems that may link with
the cultural practices and the labor market.
3 What is the Old-institutionalism' view about the association between culture
and labor
Market?
Old intuitionists offer an insight regarding the relationship existing between
culture and the labor market in that the cultural practices and beliefs, such as
the conventions, norms as well as norms to offer a legitimate area where one
can analyze the economy and how the labor market affects it (Austen, 2000).
The social rules, customs and conventions in a given culture have the
responsibility of either creating or negatively affecting the labor market as a
result of the practices that the community may undertake.
4 How is the view of new-institutionalism differ from the perspective of OldInstitutionalism about the association between culture and labor market?
The new institutio...


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