40472526

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Private Returns to Public Investments in Job Search Assistance Author(s): Jerry L. Kingston and Paul L. Burgess Source: Nebraska Journal of Economics and Business, Vol. 14, No. 2 (Spring, 1975), pp. 45-55Published by: University of Nebraska-Lincoln College of Business AdministrationStable URL: http://www.jstor.org/stable/40472526Accessed: 13-05-2015 09:29 UTC

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PRIVATE RETURNS TO PUBLIC INVESTMENTS IN JOB SEARCH ASSISTANCE*

Jerry L. Kingston Paul L. Burgess

Associate Professors of Economics Arizona State University

Investments in information about labor market opportunities constitute an important addition to the human capital stocks of unemployed workers. The complementary nature of these investments with other types of human capital stocks (for example, training and education) is such that increased knowledge of and perception of labor market opportunities and conditions may significantly raise the rate of return on the total human capital stock possessed by the unemployed job seeker. Indeed, in the absence of any job search activities, the labor market return to existing human capital stocks of the unemployed would be very low.

The returns to informational investments may take several forms. Re- duced unemployment duration, for a given reemployment wage rate, less- ens the total amount of earnings forgone during the period of job search. Alternatively, for a given period of job search, total reemployment earnings may be increased because of a higher reemployment wage rate obtained through a more informed and comprehensive job search.

Although a number of significant contributions to the theory of optimal job search have appeared in recent years,1 surprisingly little empirical evidence on the returns to investments in labor market information has been presented. As Alchian has noted, however, the dissemination and acquisition (that is, the production) of labor market information conforms to the conventional laws of production costs so that individual purchases

*Work on this paper was supported by the U.S. Department of Labor, Manpower Administration, Unemployment Insurance Service, under contracts UIS-72-4 and UIS-72-10. The statements and interpretations contained in this paper, however, are solely those of the authors and do not necessarily represent the official positions of the U.S. Department of Labor or the State Unemployment Insurance Agencies from which the data were obtained.

See, for example, A. A. Alchian, "Information Costs, Pricing and Resource Un- employment," Western Economic Journal 7, No. 2 (June, 1969), pp. 109-128; and R. Gronau, "Information and Frictional Unemployment," American Economic Re- view 61, No. 3 (June, 1971), pp. 290-301.

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of (investments in) such information normally offer declining marginal returns as the stock of informational human capital increases.2

Investments in labor market information offer social as well as private returns. In fact, as Stigler has noted:

The social capital is not necessarily equal to the sum of the private capitals. If most workers search intensively, employers who offer low wage rates will be unable to fill their jobs and will be forced either to close down or to raise wage rates- so if I enter the labor market and do not search, I nevertheless profit from others' knowledge of the market.3

Furthermore, the social returns to public informational investments may take the form of improved efficiency in the allocation of human capital resources and reduced social discontent. Hence, public investments of this

type are characterized by certain externalities which provide a meaningful basis for the production and dissemination of information about labor market opportunities and conditions by public agencies. In addition, because the dissemination of labor market information most likely is subject to decreasing marginal costs throughout the relevant range, private incentives would result in an inefficiently small level of production from a social

viewpoint, and this strengthens the justification for public provision of information. Another potential basis for justifying public provision of information is somewhat interrelated with the above justifications. The

appropriate risk and uncertainty premiums for society may well be smaller than the corresponding premiums for an individual because of the law of

large numbers. This would be the case because the likelihood that a par- ticular piece of labor market information will benefit a given individual is much smaller than the likelihood that it will benefit someone in the labor market as a whole.4

The impact of such publicly supported investments, however, is likely dependent upon the private stocks of informational human capital pro- duced by the unemployed or by private firms. As will be explained in

greater detail below, it is hypothesized that the labor market return (in terms of reduced unemployment duration) associated with public informational investments is likely to be much higher in labor markets in which the private incentives for such investments are low (and hence the private

2 See Alchian, op. cit., pp. 110-111.

3G. Stigler, "Information in the Labor Market," Journal of Political Economy 70 (October, 1962, Supplement), p. 104.

See L. Thurow, Investment in Human Capital (Belmont, California: Wadsworth Publishing Co., 1970), pp. 30-35.

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stocks of informational human capital are low) than in labor markets in which the private incentives for such investments are high (and hence the private stocks of informational human capital are high). Furthermore, the motivation for private investments in information about labor market conditions and opportunities is importantly related to aggregate supply- demand conditions within individual labor markets.

The main purpose of this paper is to estimate one aspect of the labor market return experienced by the unemployed as a result of a publicly sponsored program designed to provide market information and job- finding assistance to the unemployed. A related objective is to identify the pattern of response to such assistance by alternative subsets of the unemployed, classified on the basis of the following factors: (1) sex, (2) age, (3) ethnic group, (4) educational attainment, (5) length of residence in the local labor market area, and (6) occupational category. The impact of the publicly provided job search assistance is assessed by comparing the number of weeks of unemployment experienced by unemployment insurance (UI) claimants who did or did not receive the specialized assistance provided by an experimental program- the Service-to-Claimants (STC) project- that was conducted during 1969-1970 in Boston, Phoenix, and San Francisco- Oakland. The project was undertaken by local UI offices in these cities at the request of the U.S. Department of Labor, Manpower Administration, Unemployment Insurance Service. The data from this experimental program provide a useful basis for this analysis because, although the same specialized assistance was provided to claimants in each city, aggregate labor market conditions- and hence, as hypothesized, the private incentives for investments in labor market information- differed considerably in the three metropolitan areas.5

As background for the analysis, it is useful to describe briefly the objectives of this experimental program and the nature of the informational and job-finding assistance provided. The principle underlying the

For a description and evaluation of these experimental programs, see Paul L. Burgess and Jerry L. Kingston, The Phoenix Service-to-Claimants Project, and The San Francisco -Oakland Service-to-Claimants Project, and Jerry L. Kingston and Paul L. Burgess, The Boston Service-to-Claimants Project, U.S. Department of Labor, Man- power Administration, Unemployment Insurance Service, Office of Actuarial and Research Services, December, 1972. It is important to emphasize that the objective in this paper is not to conduct a benefit/cost analysis of the STC project in terms of the financial implications of reduced insured unemployment relative to the costs of providing the labor market information and the specialized job search assistance. Rather, the emphasis is on the relative impact of essentially identical public investments in the production and dissemination of labor market information to different types of persons (classified by age, sex, and the like) and under different aggregate labor market conditions.

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STC project was the belief that much of the information about each claimant obtained in the traditional Ul claims process could be used to render additional assistance not normally provided to the claimant in his search for new employment. The project emphasized the provision of labor market information, particularly information on how and where to seek employment. A realistic job search plan was developed for each claimant on the basis of the following factors: (1) supply-demand conditions in his occupational and/or industrial category, (2) his apparent inter- est in obtaining new employment, (3) his education and skill level, (4) his physical condition and limitations, and (5) other relevant claimant characteristics (such as his socioeconomic background). To implement this program, a random sample of UI claimants who were not "job-attached" but who were believed to be "job-ready" was selected for participation in each city.6 These persons were then randomly divided into test and control groups, and only the former received the job search assistance.7 The personal and labor market characteristics of the ] 3,619 test and control group claimants analyzed are presented in Table 1. Even though there were differences in the aggregate labor market conditions in the three metropolitan areas, the personal and labor market characteristics of the groups selected in each city were roughly similar.

The impact of the specialized assistance provided to those in the test group is assessed by comparing the mean UI claim series duration of test vs. control group persons in each city.8 The level of statistical significance associated with test vs. control group differences in these means is

Claimants believed to need retraining or intensive counseling were excluded from the project. Also excluded were those who were expected to return to work in a short time without job search assistance from either the Unemployment Insurance or Employment Services (for example, those expecting recall within 30 days).

Although each of the claimants included in this program was required to register with the Employment Service as a part of the traditional process of UI claims filing, persons in the test group received considerably more extensive and individualized assistance. In addition to the provision of information about the number and types of firms currently seeking employees within the claimant's industrial and/or occupational category, emphasis was placed on the development of a realistic perception of the labor market opportunities available to the claimant and on the formulation of an efficient job search plan.

It should be emphasized that unemployment insurance claim series duration, the variable analyzed in this article, is not identical to unemployment duration for many claimants. The recorded claim series duration figure would not be greater but could be less than actual unemployment duration. For a discussion of the distinction between the two concepts, see Jerry L. Kingston and Paul L. Burgess, "Unemployment Insurance, Job Search, and the Demand for Leisure: Comment," Western Economic Review 9, No. 4 (December, 1971), pp. 447-448.

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determined by conventional t tests for the differences between two sample means.

EMPIRICAL RESULTS

The results for the total test and control groups indicate that the job- finding assistance provided to test group claimants significantly reduced their claim series duration, compared with the duration of their control group counterparts, in two of the three cities (see Table 2). In Boston, mean claim series duration for test group claimants was 16.8 weeks vs. 18.2 weeks for control group claimants; the difference of 1.4 weeks is statistically significant at the .01 level. Similarly, in San Francisco-Oakland, the difference between the total test and control group means of 15.5 weeks and 16.4 weeks is statistically significant at the .05 level. In contrast with this evidence of positive project effectiveness, mean duration for the Phoenix test and control groups was nearly identical (8.4 weeks vs. 8.5 weeks, respectively).

Interpretation of these results is facilitated by consideration of the aggregate labor market conditions in these cities during the project period. The average unemployment rate during the project period was only 2.8 percent in Phoenix, compared with 4.1 percent in Boston and 4.6 percent in San Francisco-Oakland.9 Although the unemployment rates in the latter two cities were not high by historical standards, it is important to emphasize that these rates were actually 46 percent and 64 percent higher, respectively, than the comparable unemployment rate in Phoenix.

Only in Boston and San Francisco-Oakland is the intercity pattern of project effectiveness in reducing claim series duration for the total test vs. control groups consistent with theoretical expectations. These theoretical considerations suggest that individual decisions, based upon the private benefits and costs of investment in labor market information, tend to result in less investment in information and increased job search duration in "loose" (and deteriorating) than in "tight" labor markets. Accordingly, the public provision of labor market information would tend to have a greater marginal impact in reducing job search duration in labor markets in which the incentives for private investment, and hence the private stocks of information, are lower than in labor markets in which the private incentives, and hence the private stocks of information, are higher.

The average, seasonally unadjusted unemployment rate was computed for each claimant's period of unemployment; the rate for each city reported in the text represents the mean of these individual unemployment rates for the group of claimants analyzed.

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There are at least three separate but related reasons for expecting this differential in the private stocks of information in loose rather than in tight labor markets. First, the probability that labor market information ac- quired will actually produce a suitable job offer within a given period is less in loose labor markets; this reduces the rate of return to investment in labor market information and will thus tend to result in a smaller private stock of information and increased job search duration in such markets, ceteris paribus.10 A second reason for reduced private incentive to invest in labor market information in loose (and deteriorating) labor markets is that the value of such information depreciates more quickly under these conditions; thus less private investment in information, a lower stock of information, and longer job search duration tend to result. The third reason relates to the differential extent of employer investment in search activity in loose vs. tight labor markets, and the consequent impact on the total private stock of information. In the former, employers will undertake less investment in searching for employees because, ceteris paribus, the marginal benefits of search are lower; hence, the total private stock of information will be less on this account in loose labor markets.1 1

The three reasons discussed above suggest that the total stock of labor market information would be lower in loose (and deteriorating) labor markets than in tight ones. These theoretical considerations likely account for the reduced claim series duration reported for the recipients of publicly provided job search assistance (test group persons), compared with their control group counterparts, in Boston and San Francisco-Oakland. These same factors are consistent with the nearly identical mean duration values reported for the Phoenix test and control groups since the private

10 It is important to emphasize that a deterioration in labor market conditions will tend to result in increased unemployment duration, even though such conditions also tend to result in decreased reservation wages; ceteris paribus, the latter would decrease unemployment duration. Nevertheless, as Gronau notes [op. ciu> p. 295], "... the decline in wage demands does not offset completely the slower rate of job offers, . . . and as a result a decline inp [the rate of arrival of job offers] becomes a major factor in the prolongation of search." In a related context, Alchian [op. cit., p. 120] notes that unemployed workers only reluctantly reduce their reservation wages during a period of deteriorating labor market conditions.

1 1 J. Ullman ["Interfirm Differences in the Cost of Search for Clerical Workers,"

Journal of Business of the University of Chicago 41, No. 2 (April, 1968), p. 154] notes that there is a substantial body of empirical evidence to support this hypothesized relationship between the unemployment rate and employer search activity.

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incentives for investment- and hence the private stocks of information- were likely high in this tight labor market.12

The analysis of alternative subsets of the total test and control groups in Boston and San Francisco-Oakland reveals that the benefits of project assistance were not uniformly distributed among the claimants served. For example, project assistance did not significantly reduce claim series dura- ti m in either city for females, workers aged 25-34 and 45 years or older, and workers in four of the occupational categories. In contrast, an inter- esting pattern of differential project impact is that the assistance was effective in reducing duration for whites in both cities, but not for nonwhites.13 For the former, the difference between the test and control means- 16.8 vs. 18.2 weeks in Boston, and 15.3 vs. 16.4 weeks in San Francisco-Oakland- is statistically significant at the .01 level in each case. In contrast, the difference between the test and control group means for nonwhites is not statistically significant in either city. This differential impact could indicate that: (1) the services provided were not well suited for nonwhites, (2) nonwhites did not or could not utilize the information and assistance provided as effectively as whites, perhaps because of job market discrimination, and/or (3) the actual services provided to whites and nonwhites differed. Based upon the available information, it is unlikely that factor (3) was of any importance; it is not possible, however, to determine the relative importance of the other two factors.

CONCLUSIONS The primary findings of this paper are :

(1) Public investments in the production and dissemination of labor market information and other aspects of job search assistance may offer

12 It should be noted that the generally reduced unemployment duration of test vs. control group persons is likely due, at least in part, to the rearrangement of test and control group persons within the overall labor market queue. If the shorter mean unemployment duration of test group persons resulted merely from the more im- mediate access to existing job vacancies by test group persons who received the supplementary labor market information, the benefit of the specialized assistance would be that existing job vacancies are filled more quickly. Other things equal, this would result in a reduction in the overall unemployment rate because of a reduction in the average duration of job search by the frictionally unemployed. Such an effect is likely to result from any manpower program in the absence of adequate job vacancies for all unemployed workers.

Another pattern of consistent project impact in these two cities was found for those in the 35-44 age category: persons of this age in the test group had significantly reduced claim series duration, compared with their control group counterparts. The reasons for this pattern of project impact, however, are not apparent from the data available for this analysis.

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important labor market returns, in terms of reduced unemployment duration, but the magnitude of such returns may depend importantly on the existing private stocks of informational human capital procured by the unemployed.

(2) If aggregate labor market conditions affect the incentives for private informational investments and hence the total human capital stocks of such information, the marginal returns to publicly provided labor market information and job-finding assistance are likely to be greater in "loose" and deteriorating labor markets than in "tight" and stable ones. The authors' empirical results are consistent with this hypothesis.

(3) In "loose" labor markets, in which publicly supported informational investments are expected to produce higher marginal returns, different subsets of the unemployed experienced dissimilar benefits from these investments. For example, unemployment duration was significantly reduced for white, but not for nonwhite, job seekers. The specific reasons for such differences are not apparent from the data available for this analysis.

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