Student Faculty Macro Lunch - "Testing for Labor Rationing: Revealed Preference Estimates from Hiring Shocks"

Presentation | March 19 | 12-1 p.m. | 639 Evans Hall

 Supreet Kaur, Assistant Professor of Economics, UC Berkeley

 Clausen Center

Abstract:Rural workers in poor countries often exhibit low employment rates. Assessing whether this reflects high involuntary unemployment levels, and consequently labor market malaise, has proven empirically challenging. To measure unemployment, economists currently rely on survey self-reports, whose reliability is unknown. In this paper, we develop an approach to obtain the first revealed preference estimates of labor rationing. We generate large transitory hiring shocks in Indian local labor markets—hiring up to 30% of the male labor force for month-long work in external job sites. We examine the impact of these transitory shocks on the local labor market to diagnose the extent of rationing. We find evidence for severe labor rationing during lean seasons, which account for 6 months of the year. Specifically, “removing” a large portion of workers leads to (i) no change in the local (i.e. village) wage, and (ii) no change in the aggregate agricultural employment level within the village—due to one-for-one positive employment spillovers on the remaining workers. We further decompose rationing into involuntary unemployment and disguised unemployment (self-employed workers who would prefer wage labor). In contrast, we detect limited evidence for labor rationing during peak employment seasons: in these months, transitory external hiring shocks increase local wages and reduce local village employment. In addition, we show that traditional government surveys substantively underestimate unemployment in this setting. This approach can be extended to obtain revealed preference bounds on involuntary unemployment in diverse settings.

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