NBER Reporter: Winter 2000/2001

Labor Studies

The NBER's Program on Labor Studies met in Cambridge on November 3. Program Director Richard B. Freeman and NBER Research Associate Lawrence F. Katz, both of Harvard University, chose these papers for discussion:

Aaron Yelowitz, NBER and University of California, Los Angeles, "Public Housing and Labor Supply"

Joshua D. Angrist, NBER and MIT, "Economic and Social Consequences of Imbalanced Sex Ratios: Evidence from America's Second Generation"

Charles C. Brown, NBER and University of Michigan, "Relatively Equal Opportunity in the Armed Forces: Impacts on Children of Military Families"

Orley C. Ashenfelter, NBER and Princeton University, and David Card, NBER and University of California, Berkeley, "How Did the Elimination of Mandatory Retirement Affect Faculty Retirement?"

Steven J. Davis, NBER and University of Chicago, and Paul Willen, University of Chicago, "Occupation-Level Income Shocks and Asset Returns: Their Covariance and Implications for Portfolio Choice" (NBER Working Paper No. 7905)

Brian J. Hall, NBER and Harvard University, and Kevin J. Murphy, University of Southern California, "Stock Options for Undiversified Executives"

Yelowitz uses data from the Survey of Income and Program Participation (SIPP) and the Current Population Survey (CPS) to explore how rules governing public housing affect the work behavior of female-headed households. The generosity of the public housing program varies according to: 1) metropolitan area; 2) time, because of year-to-year changes in the subsidy and income eligibility limit; and 3) sex composition of the household's children (for example, a family with one boy and one girl gets a three-bedroom apartment or voucher, while a family with two boys or two girls gets a two-bedroom apartment or voucher). Yelowitz concludes that the public housing rules do induce labor supply distortions. Among female-headed households, a single standard deviation increase in the subsidy reduces labor force participation by 3.6 to 4.2 percentage points from a baseline participation rate of 70 to 75 percent.

A combination of changing migration patterns and U.S. immigration restrictions resulted in a shift in the male-female balance in many ethnic groups in the early twentieth century. Angrist asks how this change in sex ratios affected the children of immigrants. He finds that higher sex ratios, defined as the number of men per woman, had a large positive impact on the likelihood of marriage for females. More surprising, perhaps, marriage rates among second-generation males were also an increasing function of immigrant sex ratios. This suggests that higher sex ratios also raised male earnings and the incomes of parents with young children. Changes in extended family structure associated with changing sex ratios complicate the interpretation of these findings. On balance, though, the results are consistent with theories in which higher sex ratios increase male competition in the marriage market.

Equal opportunity policy and market forces have made the military a distinctive institution in U.S. society. Blacks are well represented in the military, compared to the civilian sector. Integration of both work groups and housing started earlier and proceded more rapidly in the military. And, unlike many civilian jobs, the military provides medical care for both soldiers and dependents. While one might look for impacts of such relatively equal opportunities on a number of child outcomes, Brown focuses on the test scores of children in eighth grade. Data from the National Assessment of Educational Progress suggests that, while white children from military families score slightly higher than do their civilian counterparts, black children from military families do significantly better than their counterparts. The test score gap is about 40 percent smaller in the military than in civilian schools. Moreover, a variety of evidence suggests that this is not primarily attributable to enlistment policies that determine who is able to enter the armed forces.

Using information on retirement flows between 1986 and 1996 among older faculty at a large sample of four-year colleges and universities, Ashenfelter and Card attempt to measure the effect of the elimination of mandatory retirement. Comparisons of retirement rates before and after 1994, the year most institutions were forced to eliminate mandatory retirement, suggest that the abolition of compulsory retirement led to a dramatic drop in retirement rates for faculty aged 70 and 71. Comparisons of retirement rates in the early 1990s between schools that were still enforcing mandatory retirement and those that were forced to stop by state laws lead to the same conclusion. In the era of mandatory retirement, fewer than 10 percent of 70-year-old faculty were still teaching two years later. After the elimination of mandatory retirement, this fraction has risen to 50 percent. These findings suggest that most U.S. colleges and universities will experience a significant rise in the fraction of older faculty in the coming years.

Davis and Willen develop and apply a simple graphical approach to portfolio selection that accounts for covariance between asset returns and an investor's labor income. The authors apply the approach to occupation-level components of innovations in individual income estimated from the CPS and characterize several properties of these innovations, including their covariance with aggregate equity returns, long-term bond returns, and returns on several other assets. They find that aggregate equity returns are not correlated with the occupation-level income innovations. A portfolio based on firm size is significantly correlated with income innovations for several occupations, though, as are selected industry-level equity portfolios. Applying their theory to the empirical results yields large predicted levels of risky asset holdings compared to observed levels, considerable variation in optimal portfolio allocations over the life cycle, and large departures from the two-fund separation principle.

Hall and Murphy use a certainty-equivalence framework to analyze the cost and value of, and pay/performance incentives provided by, nontradable options held by undiversified, risk-averse executives. They derive "Executive Value" lines -- the risk-adjusted analogues to Black-Scholes lines -- and distinguish between "executive value" and "company cost." Their findings suggest that the divergence between the value and cost of options explains or provides insight into virtually every major issue regarding stock option practice, including: executive views about Black-Scholes measures of options; tradeoffs between options, stock, and cash; exercise price policies; connections between the paysetting process and exercise price policies; institutional investor views regarding options and restricted stock; option repricings; early exercise policies and decisions; and the length of vesting periods.


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