Time Preferences and Job Search: Evidence from France

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1 Tme Preferences and Job Search: Evdence from France Bassem Ben Halma, Mohamed Ben Halma To cte ths verson: Bassem Ben Halma, Mohamed Ben Halma. Tme Preferences and Job Search: Evdence from France. LABOUR, Wley, 2009, 23 (3), pp <halshs > HAL Id: halshs Submtted on 15 Feb 2011 HAL s a mult-dscplnary open access archve for the depost and dssemnaton of scentfc research documents, whether they are publshed or not. The documents may come from teachng and research nsttutons n France or abroad, or from publc or prvate research centers. L archve ouverte plurdscplnare HAL, est destnée au dépôt et à la dffuson de documents scentfques de nveau recherche, publés ou non, émanant des établssements d ensegnement et de recherche franças ou étrangers, des laboratores publcs ou prvés.

2 Tme Preferences and Job Search: Evdence from France Bassem BEN HALIMA - Mohamed Al BEN HALIMA Abstract. Increasng mpatence reduces search efforts of unemployed job seekers and therefore decreases the ext rate from unemployment. Also, mpatence reduces reservaton wage and ncreases the ext rate. To determne the overall effect of mpatence on the ext rate from unemployment, we dstngush between exponental and hyperbolc tme preferences. Search effort domnates the reservaton wage and decreases the ext rate from unemployment f ndvduals have hyperbolc, rather than exponental, preferences. Usng the French sample of the European Household Panel Survey, we found that search effort has a strong effect on the duraton of unemployment, whereas the reservaton wage s not sgnfcant. Ths result shows that the job seekers have hyperbolc preferences. Hyperbolc preferences affect problems assocated wth job search and polces amed at reducng unemployment. Keywords : Tme preference, Hyperbolc dscountng, job search. Classfcaton JEL : D90, J64, C41 Bassem BEN HALIMA, Unversté Lumère Lyon 2, Groupe d Analyse et de Théore Economque, CNRS, UMR 5824, 93 Chemn des Moulles - BP Ecully France. E-mal: Mohamed Al BEN HALIMA, Centre d Etudes de l Emplo, Nosy-le-Grand, F93166 and Groupe d Analyse et de Théore Economque, CNRS, UMR 5824, Ecully, F-69130, France. E-mal: We would lke to thank Jean-Yves LESUEUR and an anonymous referee for ther helpful comments. 1

3 1. Introducton Sequental models of job search make t possble to make predctons about the equlbrum of the nfluence of observable and unobservable ndvdual characterstcs on the ext rate from unemployment. In ths lterature, tme preference s a sgnfcant factor, because t defnes the level of the reservaton wage as well as the ntensty of the job search. We are nterested n the observaton, reported n many studes, of a great acceleraton of the ext rate from unemployment near the completon date of unemployment benefts. Ths phenomenon may be taken an ndcaton that unemployed workers have modfed the condtons of ther ntertemporal trade-offs. However, n the lterature on the modellng of tme preference (Becker and Mullgan, 1997; Harrs and Labson, 2001), the effect of mpatence on job seekng has attracted lttle attenton n recent years, even though t s closely related to the theory of job search. The nvestgaton of the nfluence of tme dscountng on the equlbrum propertes of models of job search, whch vew search effort as endogenous (Mortensen, 1986), generally does not reveal a determnate effect on the ext rate from unemployment. On the one hand, ncreased tme dscountng (mpatence) 1 leads an unemployed worker to attach lttle mportance to the advantages of job search. Thus, the unemployed worker exerts lttle effort on job search. Ths behavour tends to result n fewer job offers beng receved and to ncrease the duraton of unemployment. On the other hand, ncreased tme dscountng also leads to a lower reservaton wage and hence shortens the duraton of unemployment. Impatent unemployed worker prefers to accept an offer of employment mmedately, rather than wat for an addtonal perod to receve a better offer. Ths effect tends to reduce the duraton of unemployment and t s opposed to the effect of a fall of the ntensty of search. Ths standard result, often cted n the specfc lterature, s due to the relatvely smple modellng of the tme consstency that s retaned n the majorty of the models. At the same tme, an ncreasng 2

4 number of researchers have been nterested n testng the tme consstency of agents, generally by conductng experments n the laboratory, startng from exponental or hyperbolc dscountng functon (Labson, 1997; O Donoghue and Rabn, 1999; Cox and Oaxaca, 1989, 1992). The Dscounted Utlty (DU) model (Samuelson, 1937), whch s often used by economsts, has receved a modcum of support from emprcal research. Emprcal research on ntertemporal choce has revealed that the DU model s nadequate as a descrptve model of behavour n a number of respects. Ths model shows that an ndvdual who has ntertemporal preferences represented by an exponental dscountng functon makes consstent choces and that hs preferences are never reversed, whch mples a constant dscount rate through tme. However, the studes of Pender (1996) and Chapman (1996) show that dscount rates are not constant over tme, but appear to declne. Ths pattern often referred to as hyperbolc dscountng. The term hyperbolc dscountng s often used to denote a decrease n mpatence over tme, wth a hgh dscount rate n the short run and a low one n the long run. The exstence of ths phenomenon has been confrmed by the studes of Myerson and Green (1995) and Krby (1997) 2. The hyperbolc dscountng functon contradcts the assumpton of the tme consstency of preferences (Fang and Slverman, 2004) and supports the decrease of mpatence over tme. Hyperbolc tme preferences have enormous mplcatons for labour market polces. Hyperbolc worker s partcularly senstve to the mmedate costs of the job search and seeks to reap the benefts of search quckly by acceptng a job offer n the near future. Consequently, job-search programmes can help hyperbolc workers by fndng a way to reduce the short-term costs of job search. It may also be possble to use nteractve kosks, where potental job applcants can submt ther currculum vtae and also schedule an ntervew at low cost to themselves. The nteractve kosks could coordnate between the 3

5 varous actors who help the applcant to gan employment. If costs represent a barrer for the search of hyperbolc job seekers, the avalablty of such nteractve kosks wll encourage them to keep lookng. Ths paper reports on an emprcal study of the effects of mpatence on job search outcomes. The orgnalty of ths paper s to compare our results obtaned from the French data wth the results of Della-Vgna and Paserman (2005) on U.S. data. More mpatent workers search less ntensvely and set a lower reservaton wage. The effect of these tactcs on the ext rate from unemployment s unclear. In ther study, Della Vgna and Paserman (2005) dstngush between dfferent types of tme preference: exponental and hyperbolc. They also dstngush between short-run and long-run mpatence. The search decson nvolves a tradeoff between mmedate search costs and the future benefts of acceptng an offer made wthn a few weeks. Over ths lmted tme frame, varaton n short-run mpatence matters more than varaton n long-run mpatence. In contrast, the decson concernng the reservaton wage nvolves comparng the long-term consequences of obtanng a certan wage or watng to receve an even better offer. In ths case, varaton n long-term dscountng s more sgnfcant than varaton n short-term dscountng. Accordng to the exponental dscountng model, job seekers are concerned more wth long-run mpatence than short-run mpatence. In ths case, the effect of the reservaton wage wll domnate the level of the search effort, because the decson on the reservaton wage depends only on long-run mpatence. Accordngly, job seekers who become more mpatent tend to ext from unemployment more quckly, because they lower ther reservaton wage. On the other hand, accordng to the hyperbolc dscountng model, job seekers are more prone to be mpatent n the short run than n the long run. In ths case, the effect of the search effort wll domnate the level of the reservaton wage, because the search decson depends only on short-run mpatence. 4

6 Therefore, job seekers who become more mpatent tend to ext from unemployment more slowly, because they expend less effort on search. Usng the French sample of the European Household Panel Survey, we test these theoretcal predctons emprcally. We fnd that varous measures of mpatence are correlated negatvely wth search effort and the reservaton wage. Ths result shows that when job seekers become more mpatent, they tend to expend less effort on search and to lower the reservaton wage. We also show that search effort has a strong effect on the ext rate from unemployment, whereas the effect of reservaton wage s not sgnfcant. Ths result shows that ndvduals have hyperbolc preferences. Consequently, when they become more mpatent, they ext from unemployment more slowly because they reduce the amount of effort on job search. The remander of the paper s organzed as follows. Secton 2 outlnes the varous assumptons made by the model of Della Vgna and Paserman (2005). In Secton 3, we provde a descrptve analyss of the data, the choce of the mpatence measures, and a nonparametrc analyss of the effects of these measures on survval functon n unemployment. In Secton 4, we demonstrate the estmaton and prncpal results. Secton 5 concludes by summarzng the man results. 2. The search model of Della Vgna and Paserman (2005) We now examne the varous assumptons made by the model of Della Vgna and Paserman (2005) 3. In ther model, search effort s endogenous 4 and determnes the probablty of recevng a wage offer n any perod. Hence, the job seeker expends search effort s, parameterzed as the probablty of obtanng a job offer. Therefore, s (0,1). The probablty of recevng a job offer durng a sequence of searches s an ncreasng functon of the ntensty of search effort, but an ncrease n the search effort also augments the cost of the search. In 5

7 each perod, the job seeker ncurs a cost of searchng c s wth c' ( s) 0 and c ( 0) 0. The job offer s characterzed by a wage w. The structure of tme preferences of Labson (1997), Strotz (1956), Phelps and Pollak (1968), s used as a smplfcaton of hyperbolc tme preferences. Let u c ) denote the stream of per perod utlty that s derved from ( t consumpton. The present value of a flow of future utltes at tme t s u T t u 0 t t 1. (0,1) s a parameter that reflects short-run patence and s the dscount factor that captures long-run patence. When 1, the rate of tme preferences s constant and preferences are tme-consstent, whch s the standard exponental dscountng case. When (0,1), tme preferences are quas-hyperbolc 5. The dscount factor between the current perod t and the next one t 1 s, whle the dscount factor between any two perods n the future s. Wth the structure of quas-hyperbolc dscountng, suppose that 0. 9 and In the current perod t, a reward of 10 that starts to materalze n perod t 3 preferred to a reward of 9 that starts at perod 2 t ( 10 9 t 2 arrves, ths preference s reversed by the same ndvdual as 9 10 s 3 2 ). When perod. In other words, quas-hyperbolc tme preferences nvolve problems of self control 6. Followng O Donoghue and Rabn (1999), we dstngush between sophstcated and nave ndvduals, where the former are aware of ther self-control problems and the latter are not. A nave hyperbolc ndvdual beleves ncorrectly that n the future she wll behave as an exponental ndvdual wth 1. Sophstcated ndvduals predct the behavour of ther future selves perfectly. The job seeker chooses a level of search effort and a wage acceptance polcy to solve the optmsaton programme: max st [0,1] b E U U c s s E max V w, V 1 s V [1] t t F t 1 t 1 t t 1 6

8 where b : s the benefts of unemployment, c : s the cost of search, : s short-run patence, : s long-run patence, s : s the probablty of recevng an employment offer n t s t perod t, V E w : t 1 s the contnuaton payoff of employment f the job seeker accepts a wage offer, and V U : t 1 s the contnuaton payoff of unemployment f the job seeker rejects a wage offer or does not receve a wage offer. Let us now study the varous assumptons that can be derved from the resoluton of ths model. These assumptons are used to determne the nature of the correlaton between mpatence and the search effort, between mpatence and the reservaton wage, and between mpatence and the ext rate from unemployment. These assumptons wll be tested emprcally usng French data from the European Household Panel Survey. - Hypothess 1. At equlbrum, there s a negatve correlaton between mpatence and the search effort. Search effort s strctly decreasng wth short-run mpatence ( 1 ) and longrun mpatence ( 1 ) for exponental ( 1 ) and hyperbolc job seekers ( 1 ) wth the same long-run dscount factor. - Hypothess 2. For exponental and hyperbolc agent, the reservaton wage s strctly decreasng wth long-run mpatence ( 1 ). The reservaton wage s strctly decreasng wth short-run mpatence ( 1 ) for sophstcated hyperbolc job seekers wth 1 and s ndependent of short-run mpatence ( 1 ) for nave job seekers. - Hypothess 3. The ext rate from unemployment s strctly decreasng wth short-run mpatence for nave job seekers. For sophstcated job seekers, the ext rate s also strctly decreasng wth short-run mpatence f E[ W / W x x] 1 at 1 * x w [2] 7

9 Gven that short-run mpatence affects the search effort drectly, ncreasng 1 tends to decrease the ext rate from unemployment through the decrease n search effort. - Hypothess 4. Takng nto account that there s a probablty that a job seeker who fnds work wll be lad off, the ext rate from unemployment s ncreasng wth long-run mpatence 1 f s qute hgh (close to 1) and for plausble values of the layoff probablty 7. Gven that long-run mpatence affects the reservaton wage drectly, ncreasng 1 tends to ncrease the ext rate from unemployment through the decrease n the reservaton wage. The man objectve of the emprcal study reported n ths paper s to test the predctons of ths model usng French longtudnal data. The results of ths emprcal part wll help us to dentfy the nature of the tme preferences of the job seekers n the sample and to remove the uncertanty of the effect of mpatence on ext rate from unemployment. If job seekers have exponental preferences ( 1) they have hyperbolc preferences ( 1), mpatence ncreases the ext rate from unemployment and f, mpatence decreases the ext rate from unemployment. Knowng the type of tme preferences that job seekers have can help to gude the formulaton of labour market polces to reduce unemployment. 3. Data and non-parametrc analyss The data used comes from the French sample of the European Household Panel Survey conducted by Eurostat, and covers eght waves of study from 1994 to 2001 (Table 1). Ths longtudnal survey can be used to trace the hstory of job seekers on the labour market retrospectvely. It provdes complete nformaton on the characterstcs of ndvdual job seekers and household structures. 8

10 Table 1. Descrptve Statstcs Varables Mean Standard Errors Observatons Age Age Class 1 [<25] Class 2 [25 35] Class 3 [35 45] Class 4 [45 55] Class 5 [55 +] Gender Men Martal Status Marred Skll Level No educaton General educaton Short Techncal educaton Long Techncal educaton Unversty degree Regon Rural Town < 20,000 nhabtants , ,000 nhabtants > 100,000 nhabtants Pars Impatence measures No Bank account No Lfe nsurance Smokng Consumng one s ncome and ncurrng debt No Contrbuton to humantaran assocatons Other varables Reservaton wage Number of search methods Unemployed compensated (unemployment benefts) Log (ncome per household member) The panel montors, for each ndvdual, the tmng of unemployment spells n each wave. It provdes complete nformaton on the characterstcs of ndvdual job seekers and household structures. The ncdence of unemployment spells by ndvduals and by observaton creates a sample of 2161 observatons. The analyss of ndvdual spells of unemployment shows 68.84% complete spells. The number of ndvdual spells of unemployment regstered vares between one and 12; the average s 1.96 wth the average length beng 7.35 months. Job seekers who receved unemployment benefts represent 65% of the sample. Women accounted for 54% of the sample. The average age for the whole sample s 34 years. Whle the share of graduates from hgher educaton s close to 20%, there s stll a hgher proporton of graduates from short-term techncal educaton, such as the Certfcate of Professonal Apttude or the Dploma of Professonal Studes. The average hourly reservaton 9

11 wage s around 6.56 euros. Thrty-one percent of the sample lve n a regon wth more than 100,000 nhabtants. We now explan our choce of mpatence measures. In the past, tme preferences were often measured by expermental studes, n whch people are asked to evaluate stylzed ntertemporal prospects that nvolve choce tasks 8 (Cox and Oaxaca 1989, 1990). Impatent ndvduals prefer to receve mmedate rewards and to avod mmedate costs n a way that our long-run selves do not apprecate (O Donoghue and Rabn, 1999). Conversely, patent ndvduals prefer actvtes that have mmedate costs and delayed benefts. Does behavour that prvleges a present or shorter-term soluton consttute proof that people have a preference for the present (mpatence) or that they smply have an averson to rsk? It may prove dffcult to dfferentate between mpatence and rsk averson completely, because the correlaton between these two factors cannot be dened. Indvduals who are strongly rskaverse are also very mpatent (Anderhub and al., 2001). We collected nformaton on the French data of the European Household Panel Survey n order to construct measures of mpatence. Three assumptons were used n our emprcal study: () mpatence measures do not dstngush between short-run and long-run mpatence; () the dscount rate does not change between the actvtes; and () the level of mpatence does not vary over tme. Our measures may be mperfect proxes for mpatence and they may pck out a number of other ndvdual trats (e.g., tastes for lesure, or rsk preferences) n addton to tme preferences. An explanaton of why ndvduals prefer to consume today rather than tomorrow must appeal to a more specfc phenomenon, one s psychologcal nature. To mprove the qualty of our study, we attempted to control for these varous factors n our choce of mpatence measures. The proxes that we selected are as follows: 10

12 Havng a bank account: A smple model of savng behavour predcts that ndvduals who are more patent delay consumpton and accumulate more wealth. Therefore, they are more lkely to have some type of bank account % of ndvduals n the sample had a bank account. Contrbuton to humantaran assocatons: Ths type of behavour characterzes patent ndvduals. Contrbutng to assocatons for the beneft of socety, rather than for personal gan, ndcates patence. Ths type of ndvdual has long-term vson and seeks to prepare better condtons for future generatons. Indvduals who do not contrbute to humantaran assocatons are strongly represented n the sample (76%). Smokng 9 : Ths actvty s pleasurable at the tme of consumpton but detrmental to health n the long term. An mpatent ndvdual (smoker) wll be satsfed wth the short-term beneft wthout assgnng mportance to the long-term dsadvantage. Daly smokers represent 21.45% of the sample. Consumng one s ncome and ncurrng debt: Havng dffculty n keepng to one s budget and ncurrng debt due to consumpton can be related to mpatence. An mpatent person thnks less at the moment of purchase, and exposes hm- or herself to exceedng the lmts of hs or her budget. Such ndvduals represent only 7% of the sample. Lfe nsurance: The ndvduals who subscrbe to a lfe nsurance polcy have a preference for the long term and show a weak preference for the present. Indvduals who do not have lfe nsurance represent 65% of the sample. In order to homogenze mpatence measures, we transformed them nto reduced centred values. Ths process of standardzng data has the advantage of homogenzng data wthout changng the results of varous statstcal analyses. The analyss of correlaton between the mpatence measures shows that among 10 parwse correlatons, nne have a postve sgn and are statstcally dfferent from zero (Table 2). 11

13 Table 2. Correlaton of mpatence measures No Bank account No Lfe nsurance Smokng Consumng one s ncome and ncurrng debt No Contrbuton to humantaran assocatons No Bank account No Lfe nsurance Smokng Consumng one s ncome and ncurrng debt No Contrbuton to humantaran assocatons (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0001) (0.0015) (0.0000) (0.0001) (0.0541) To measure the qualty of the measure, we used Cronbach s alpha coeffcent. A statstcal ndex vares between 0 and 1, whch s used to evaluate the homogenety or consstency of an nstrument. The value of Cronbach s alpha coeffcent was 0.536, whch reflects an average correlaton between the measures of Both measures are very smlar to those of Drago (2006) and Della Vgna and Paserman (2005) 10. We determned an aggregate measure of mpatence wth factor analyss by usng the fve standardzed proxes descrbe above. Factor analyss ams at reducng a sgnfcant amount of nformaton to a few large dmensons. It s a statstcal method that s used to descrbe varablty among observed varables ( x,...,, x x 1 2 n ) n terms of fewer unobserved varables called factors. The observed varables are modelled as lnear combnatons of a set of common factors ( Y for each varable: P F,..., F 1 Q, wth Q P ) and a unque factor X p a F a F... a F u Y ( n 1,2,..., N ) [3] n1 1 n 2 2 n Q Q n n We estmated a factor model va maxmum lkelhood (Harman 1976, ch.10) usng the measures of mpatence. The results are presented n Table 3. 12

14 Table 3. Factor Analyss, Aggregate Measure of Impatence Impatence measures Factor Loadngs Unqueness Score No Bank account No Lfe nsurance Smokng Consumng one s ncome and ncurrng debt No Contrbuton to humantaran assocatons We retaned only one factor. For ths factor, all factor loadngs have postve sgns. Our conjecture was that ths factor s mpatence. The score coeffcent was used to create the aggregate measure of mpatence, whch s a weghted average of the ndvdual varables. The measures that receved the most weght are consumng one s ncome and ncurrng debt, and lfe nsurance. Gven that the data set does not contan nformaton on search ntensty per se, we used the followng search methods used by the job seeker to defne a measure of search ntensty: (1) regstraton at the publc employment agency, (2) personal steps taken to fnd a job (searchng through newspapers, word of mouth from frends and relatves, drect contact wth possble employers, etc.), and (3) contact wth the publc employment agency and followng a programme of ndvdual support. The average number of methods used by each unemployed person s The reservaton wage s defned as the mnmum wage below whch an unemployed person refuses a job offer. The reservaton wage s an mportant determnant of the probablty that an unemployed person wll ext unemployment. Nevertheless, drect nformaton about the reservaton wage s scarce 11. However, havng the reservaton wage determned by the unemployed person hm- or herself opens other possbltes. The way n whch the French data of the European Household Panel Survey s collected ncludes askng the unemployed about the mnmum hourly wage for whch they would go to work. The unemployed are asked ntally about the number of hours that they would lke to work per week, then about the 13

15 mnmum wages that they would accept for the number of hours that they have just declared. The drect use of the answers to these questons rases dffcultes about the sncerty of the statements (Feldsten and Poterba, 1984). However, a majorty of prevous studes have agreed to consder ths type of response as relevant nformaton on the behavour of labour supply (Rdder and Gorter, 1986; Jones, 1988). Indeed, the dstrbuton of the reservaton wage seems to be consstent wth the mean and varance observed n wages n France (Table 1). To supplement the descrptve analyss of the sample, survval rates n unemployment were estmated by means of a Kaplan-Meer estmaton (Fgure 1). Fgure 1. Kaplan-Meer estmator of the survval functon n unemployment The aggregate mpatence measure s contnuous varable. We dstngushed between job seekers wth low mpatence, characterzed as unemployed patent (1st quartle), and job seekers wth hgh mpatence, characterzed as unemployed mpatent (bottom quartle). The results of ths estmaton enable us to compare the survval functon n unemployment between patent (mpatence =0) and mpatent job seekers (mpatence =1). We show that the survval curve for a patent job seeker s below that of an mpatent job seeker. The non- 14

16 parametrc estmaton (Kaplan-Meer) gves us an dea of the effect of mpatence on survval functon n unemployment: patent job seekers stay less n unemployment than mpatent. 4. Estmaton At each perod, the job seeker chooses hs search effort and hs reservaton wages. These two varables determne the probablty of extng unemployment. As we saw n the theoretcal model of Della Vgna and Paserman (2005), there s a correlaton between job seekers mpatence and (a) ther search effort, and (b) ther reservaton wages. The global effect of mpatence on the ext rate from unemployment s unclear. The estmaton results wll enable us to determne the nature of the correlaton between mpatence and search effort, mpatence and reservaton wages, and mpatence and ext rate from unemployment. 4.1 Impatence and search effort We now determne the nature of the correlaton between mpatence and search ntensty. The equaton for search effort s as follows: Intensty ' ' X ( [4] IMP ) where Intensty s search ntensty, X s the vector of explanatory varables, and IMP s mpatence measures. The econometrc model that best fts ths stuaton s the Posson model as the dependent varable; the number of search methods s a non-negatve nteger 12. For ths estmaton, we use soco-demographc varables: level of educaton, number of nhabtants n the regon, household ncome per person, the recepton of unemployment benefts, and mpatence measures. For the search effort equaton (4), we conduct two separate estmates. In the frst estmaton, we use mpatence measures and n the second we use the aggregate mpatence measure. Both estmates allow us to compare the results of the effect of mpatence. The estmaton results of the equaton of search effort are reported n Table 4 15

17 (columns 1 and 2, for the mpatence measures and the aggregate mpatence measure, respectvely). Not havng a bank account, not havng lfe nsurance, and smokng have a sgnfcant and negatve effect on search effort. Most of the mpatence measures show a strong negatve correlaton between mpatence and search effort. Ths result s confrmed by the second estmaton usng the aggregate mpatence measure. These results confrm theoretcal predctons; there s a negatve correlaton between mpatence and search effort. The US data used by Della Vgna and Paserman (2005) shows that search effort s correlated negatvely wth mpatence. For the other explanatory varables, age has a sgnfcant negatve effect on search effort. Men tend to expend more effort on search than women. Recevng unemployment beneft has a sgnfcant and negatve effect on search effort. Compensated ndvduals expend less effort on search than those who are not. 4.2 Impatence and reservaton wage The determnaton of the reservaton wage requres comparng the long-term consequences of obtanng a certan wage wth the wat to receve a better offer. In ths case, contrary to the decson on the level of search effort, the varaton of long-run mpatence domnates the varaton of short-run mpatence. The equaton for the reservaton wage s as follows: Log ' ' X ( 2 2 2, [5] ( W ) IMP ) where Log ( W ) s the log of reservaton wage, X s the vector of explanatory varables, and IMP s the mpatence measures. Usng the Ordnary Least Square method (OLS), we determne, on the one hand, the effect of mpatence on the reservaton wage and, on the other hand, the effect of other varables on the reservaton wage. The results of ths estmaton (Table 4, columns 3 and 4) help to test the correlaton between mpatence and the reservaton wage 13. The frst estmate (column 3) uses the 16

18 mpatence measures, whle the second estmate (column 4) uses the aggregate mpatence measure. Not havng a bank account, not havng lfe nsurance, or not subscrbng to humantaran assocatons has a sgnfcant and negatve effect on the reservaton wage. Most of the mpatence measures show a strong negatve correlaton between mpatence and the reservaton wage. Ths result s confrmed by the sgn and the sgnfcance of the coeffcent of the aggregate mpatence measure (column 4). Ths confrms prevous results and shows that workers who are more mpatent set a lower reservaton wage. We can now confrm the theoretcal predctons; there s a negatve correlaton between mpatence and the reservaton wage. Data from the US used by Della Vgna and Paserman (2005), n an analyss that does not nclude the control varables (age, educaton, martal status, etc.), shows that the reservaton wage s correlated negatvely wth mpatence. Ths correlaton was not sgnfcant after ncludng the control varables. Our result s dfferent and could be due to the possblty that the measures of mpatence are reflectng other dmensons of unobserved heterogenety (for example, heterogenety n human captal). The ncome per household member and age, ndependently, had a sgnfcant and postve effect on the reservaton wage. The effect on the reservaton wage ncreases as the age of the ndvdual ncreases. Men specfy a hgher reservaton wage than women. When they are marred, both men and women lower ther reservaton wage. It s also noted that the reservaton wage grows steadly wth the level of educaton. Indvduals who had hgher educaton specfed a hgher reservaton wage than ndvduals wth a lower standard of educaton (taken as a reference). Indvduals who lve n rural areas or ctes that have fewer than 100,000 nhabtants tend to specfy a lower reservaton wage than those who lve n the Pars regon. 17

19 4.3 Search effort, reservaton wage, and ext rate from unemployment To determne the nature of the correlaton between (a) search effort and the ext rate from unemployment, and (b) between reservaton wage and the ext rate, a sem-parametrc Cox proportonal hazard model was used (Cox, 1972). Ths type of model allows all the standard determnants to be controlled for. It also allows duraton dependence, whch s the pure effect of the duraton of unemployment on the probablty of movng to employment, to be controlled for. The hazard model utlzes data on the sequence, tmng, and the state that an ndvdual s n; the probablty of the type of ext s a functon of tme. Ths s referred to as the hazard rate or functon. The hazard rate s the dependent varable, and the relatonshp between ths rate and a varety of observed and unobserved varables s modelled. The hazard model has been wdely used n bomedcal and socal scence research, by Cox (1972), Kalbflesh and Prentce (1980), and Heckman and Snger (1984). As before, let T be a nonnegatve random varable that denoted the duraton of unemployment for ndvdual. We now defne h t, the hazard at tme t for ndvdual, as follows: h t lm t 0 Pr t T t t / T t t [6] Thus, ths equaton gves the probablty that a job seeker wll ext from unemployment between t and t t, under the condton that the job seeker had not already ded by tme t. In order to estmate the ext rate from unemployment and the effects of ndependent varables on ths, we need to specfy the functonal form of the hazard model. The most wdely used specfcatons are the accelerated tme model and the Cox proportonal hazard model. Accordng to the Cox proportonal hazard model (Cox, 1972), covarates have a multplcatve relatonshp wth the hazard functon (the proportonalty assumpton), whch causes them to shft the hazard functon up or downward. Therefore, covarates do not affect the duraton of 18

20 an actvty drectly 14. Gven that we are studyng the effect of explanatory varables on the ext from unemployment, a Cox proportonal hazard model s used. It s specfed by h t X h ( t ) exp x [7] 0 where t s the elapsed duraton of unemployment for ndvdual ; h t / X denotes the hazard rate condtonal on a vector of covarates X; h ( ) denotes the baselne hazard functon measurng the effects of the tme that has passed snce becomng unemployed on the 0 t probablty of movng to another state; and x denotes the covarates and parameter estmates for the ext rate. The results of the determnants of the ext rate of unemployment are gven n Table 4 (column 5 and 6). The frst estmate (column 5) presents the correlaton between the reservaton wage and the ext rate, whle the second estmate (column 6) dentfes the correlaton between search effort and the ext rate, usng a Cox proportonal hazard model. The search effort has a sgnfcant effect on the ext rate from unemployment. Indvduals who expend more search effort ext from unemployment after a shorter tme (Result 1). The reservaton wage does not have a sgnfcant effect on the ext rate from unemployment (Result 2). Taken together, Results 1 and 2 show us that the effect of the search effort domnates the effect of the reservaton wage: ths mples that ndvduals who are more mpatent expend less effort on search and so may ext from unemployment more slowly. Gven that the effect of search effort domnates the level of reservaton wage, we may conclude that the job seekers n our sample exhbt hyperbolc, rather than exponental, preferences. Ths last result shows that job seekers are more concerned by short-term mpatence rather than by long-term mpatence. Gven ths result, job-search programmes should reduce the short-term costs of research, whch are mmedately supported. Job seekers who belong to age group 2 [25 35 years] and group 5 [55; +] reman unemployed for longer 19

21 than job seekers who belong to age group 1 [<25 years] (taken as a reference). The probablty of men extng unemployment s hgher than that of women. We also note that job seekers who are marred ext unemployment more slowly. Job seekers who have a unversty degree ext unemployment more quckly than ndvduals who are uneducated (taken as a reference). Job seekers who lve n areas wth a populaton of 20,000 to 100,000 are unemployed for shorter perods than those who lve n the Pars regon. 5. Concluson Ths paper contrbutes to the lterature on hyperbolc dscountng. A second contrbuton of ths paper s to compare our results on French data wth the results of Della Vgna and Paserman on U.S. data. Ths comparson gave us an dea about the tme preferences type of unemployed n both countres and polces that can be appled to reduce unemployment. Wthn a model that vews search effort as endogenous, ncreasng mpatence mples a reducton n search efforts and therefore reduces the ext rate from unemployment. At the same tme, mpatence ncreases the reservaton wage and t reduces the ext rate from unemployment. The overall effect of mpatence on the ext rate s unclear and requres a comparson of the relatve strengths of effects. The effect of search effort domnates the reservaton wage f job seekers have hyperbolc preferences, whle the reservaton wage domnates search effort f job seekers have exponental preferences. Put dfferently, the ext rate ncreases f the job seekers have hyperbolc preferences and decreases f they have exponental preferences. In the emprcal test, we found that mpatence measures are correlated negatvely wth the reservaton wage and search effort. The results of the Cox proportonal hazard model show that search effort has a postve effect on the ext rate from unemployment, whereas the reservaton wage does not have a sgnfcant effect. Ths fnal result nforms us about the nature of job seekers tme preferences. Gven that the effect of 20

22 search effort domnates the effect of reservaton wages, we may conclude that the job seekers exhbt hyperbolc, rather than exponental dscount. The effectveness of polces whose objectve s to reduce unemployment depends on the nature of the tme preferences of the unemployed. Hyperbolc preferences affect problems assocated wth job search and polces amed at reducng unemployment. Hyperbolc agents are partcularly senstve to the mmedate costs of job search (ncludng contactng employers to obtan an ntervew, callng relatves, etc.). To reduce the mmedate costs of the search to the job seeker, publc employment servces n France should follow up the unemployed more effcently so that they may obtan nformaton that wll help them to reduce the costs of job search. France s exceptonal because there are many heterogeneous actors and authortes of dfferent status, whch the job seeker must consult several tmes to stay nformed. The creaton of houses of employment could provde an opportunty to establsh some basc prncples for actve polces to allow fludty between unemployment and reemployment. Ths can be acheved by the effectve reducton of the costs borne by the unemployed. Interactve kosks could also be set up, where job seekers can submt ther currculum vtae and schedule ntervews at low cost. Ths admnstratve smplfcaton for job seekers s now avalable n nearly all Western countres. However, such smplfcaton s exceptonally slow n France. 21

23 Appendx Table 4: Search effort, Reservaton wage, and Ext rate from unemployment Search effort Reservaton wage Ext rate from unemployment Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Reservaton wage (0.0465) Search effort *** - (0.0458) Aggregate mpatence measure * ** *** *** (0.0132) (0.0117) (0.0122) (0.0109) Impatence measures No Bank account *** ** - (0.0114) (0.0219) No Lfe nsurance * (0.0232) (0.0227) Smokng *** (0.0126) (0.0450) Consumng one s ncome and ncurrng debt (0.0750) (0.0420) No contrbuton to humantaran assocatons (0.0447) (0.0249) Log (ncome per household member) (0.0342) (0.0335) *** (0.0180) *** (0.0179) ** (0.0642) * (0.0725) Unemployment benefts ** ** *** *** (0.0435) (0.0434) (0.0224) (0.0235) (0.0121) (0.0119) Age Class 1 [<25] Ref Ref Ref Ref Ref Ref Class 2 [25 35] *** ** ** ** *** (0.0531) (0.0253) (0.0274) (0.0277) (0.0974) (0.0967) Class 3 [35 45] *** *** *** (0.0638) (0.0337) (0.0310) (0.0335) (0.0725) (0.0727) Class 4 [45 55] * *** *** *** Class 5 [55 +] (0.0727) ** (0.1052) (0.0349) *** (0.0948) (0.0339) *** (0.0491) (0.0378) *** (0.0516) (0.1105) *** (0.1206) (0.1075) *** (0.1206) Gender ** *** *** *** *** *** Men (0.0399) (0.0395) (0.0200) (0.0205) (0.1373) (0.1389) Women Ref Ref Ref Ref Ref Ref Martal Status Marred * * ** ** (0.0479) (0.0247) (0.0285) (0.0284) (0.0642) (0.0661) Others Ref Ref Ref Ref Ref Ref Skll Level No educaton Ref Ref Ref Ref Ref Ref General educaton (0.0658) (0.0657) (0.0337) (0.0331) (0.0662) (0.0606) Short Techncal educaton (0.0515) (0.0517) (0.0272) (0.0269) (0.0736) (0.0752) Long Techncal educaton (0.0515) (0.0515) (0.0408) (0.0398) (0.0856) (0.0870) Unversty degree *** *** ** ** (0.0574) (0.0573) (0.0298) (0.0281) (0.0831) (0.0881) Regon Rural Town * ** (0.0565) (0.0566) (0.0242) (0.0363) (0.0705) (0.0739) < 20,000 nhabtants * ** (0.0756) (0.0758) (0.0294) (0.0399) (0.0611) (0.0692) 20, ,000 nhabtants ** ** *** *** (0.0364) (0.0363) (0.0293) (0.0397) (0.0533) (0.0518) > 100,000 nhabtants (0.0668) (0.0671) (0.0296) (0.0349) (0.0790) (0.0785) Pars Ref Ref Ref Ref Ref Ref Constant *** *** *** *** (0.3081) (0.2901) (0.0504) (0.0483) - - Log-Lkelhood Numbers of observaton Note. Standard errors n parentheses, *: sgnfcant at the 0.1 level, **: sgnfcant at the 0.5 level, ***: sgnfcant at the 0.01 level. 22

24 Notes 1 An ndvdual wth hgh tme dscountng s assumed to be mpatent, whle an ndvdual wth low tme dscountng s assumed to be patent. 2 Ths nconsstency s presented by the followng stuaton. When confronted wth the choce between two payments that are close n tme, for example, $10 today or $11 tomorrow, many agents prefer $10 today and thus demonstrate a remarkably hgh dscount rate. However, gven a longer tme scale, most agents choose to take $11 n 101 days nstead of $10 n 100 days, even though the perod between the payments s stll just one day. 3 For more detals, see Della Vgna and Paserman (2005) pp It s common n the lterature to vew search effort as endogenous (Burdett and Mortensen, 1978; Mortensen 1986; Albrecht, Holmlund, and Lang 1991) 5 Quas-hyperbolc dscountng s an approxmaton of hyperbolc tme preferences (Phelps and Pollack, 1968; Labson, 1997). Such preferences mply a lower dscount factor when the delay horzon s short (short-run mpatence) than when the delay horzon s long (long-run mpatence) and generate problems of self-control and tme-nconsstency n a smple fashon. 6 Many emprcal regulartes regardng consumpton (Angeletos and al., 2001; Labson, 1997), drug addcton (Gruber and Koszeg, 2001), and unemployed worker behavour (Paserman, 2004), among others, are explaned better n terms of quas-hyperbolc preferences than n terms of tme-consstent preferences. 7 For more detals, see Della Vgna and Paserman (2005) pp Respondents answers to the queston Whch would you prefer: $100 today or $150 one year from today? 9 An ndvdual was treated as a smoker f he declared hmself to be a daly smoker and not a casual smoker. 10 Glaeser, Labson, Schenkman and Soutter (2000) show that there s a low correlaton between measures of an ndvdual trat. The correlaton can be reduced by a measurement error n the choce of mpatence measures, but ths should not alter the sgn. 11 There s lttle emprcal data to confrm or dsconfrm ths theoretcal concept. In the absence of drect observaton, study that seeks to evaluate the effect of the reservaton wage on the duraton of unemployment supposes that the relaton, predcted by the theory of job search, whch relates t to the level of the unemployment benefts, the arrval rate of offers, and the dstrbuton of the wages offered, s well checked. The reservaton wage can then be estmated by usng nformaton avalable on these varables. 12 We estmated the equaton of search effort usng the bnomal negatve model. Accordng to the coeffcent of sur-dsperson (alpha), we retan the Posson model. 13 We use the same lst of the varables used n the estmaton n the equaton for search effort. 14 In contrast, the accelerated tme model (Cox and Oakes, 1984) assumes that covarates act multplcatvely on tme rather than on the hazard functon. Covarates, therefore, ncrease or decrease the tme spent on an actvty. References Albrecht J.W., Holmlund B., and Lang H. (1991) Comparatve statcs n dynamc programmng models wth an applcaton to job search, Journal of Economc Dynamcs and Control 15(4): Anderhub V., Güth W., Gneezy U., and Sonsno D. (2001) On the Interacton of Rsk and Tme Preferences: An Expermental Study, German Economc Revew 2(3): Angeletos G.M., Labson D., Tobacman J., Repetto A. and Wenberg S. (2001) The Hyperbolc Consumpton Model: Calbraton, Smulaton, and Emprcal Evaluaton, Journal of Economc Perspectves 15(3): Becker Gary S. and Mullgan Casey B. (1997) The endogenous determnaton of tme preference, Quarterly Journal of Economcs 112(3): Burdett K., and Mortensen D.T. (1978) Labor supply under uncertanty, Research n Labor Economcs 2: Burdett K. and Ondrch J.I. (1985) How changes n labour demand affect unemployed workers, Journal of Labour Economcs 3(1): Chapman G.B. (1996) Temporal dscountng and utlty for health and money, Journal of Expermental Psychology: Learnng, Memory, and Cognton 22(3):

25 Cox J.C. and Oaxaca R.L. (1989) Laboratory experments wth a fnte horzon job search model, Journal of Rsk and Uncertanty 2: Cox J.C. and Oaxaca R.L. (1992) Drect Tests of the Reservaton Wage Property, The Economc Journal 102(415): Della Vgna S. and Paserman D. (2005) Job Search and Impatence, Journal of Labour Economcs 23(3): Drago F. (2006) Career Consequences of Hyperbolc Tme Preferences, IZA Dscusson Paper (2113). Fang H. and Slverman D. (2004) Measurng Tme Inconsstency: Evdence from Work-Welfare Decsons n the NLSY, Workng Paper. Department of Economcs, Yale Unversty. Feldsten M. and Poterba J. (1984) Unemployment Insurance and Reservaton Wage, Journal of Publc Economcs, 23(1): Glaeser E.L., Labson D.I., Schenkman J.A., and Soutter C.L. (2000) Measurng Trust, Quarterly Journal of Economcs 115(3): Gruber J. and Koszeg B. (2001) Is Addton Ratonal? Theory and Evdence, Quarterly Journal of Economcs, 116(4): Gorter D. and Gorter C. (1993) The Relaton between Unemployment Benefts, the Reservaton Wage and Search Theory, Oxford Bulletn of Economcs and Statstcs 55(2): Harman, Harry H. (1976) Modern factor analyss, Chcago: Unversty of Chcago Press. Harrs C. and Labson D. (2001) Dynamc Choces of Hyperbolc Consumers, Econometrca 69(4): Heckman J.J. and Robb R.J (1985) Alternatve Methods for Evaluatng the Impact of Interventons : an Overvew, Journal of Econometrcs 30(1): Heckman J.J. and Snger B. (1984) A Method of Mnmzng the Dstrbutonal Impact n Econometrc Models for Duraton Data, Econometrca 52(2): Jones S. (1988) The Relatonshp between Unemployment Spells and Reservaton Wages as a Test of Search Theory, The Quarterly Journal of Economcs 103(4): Kalbflesch J.D., Prentce R.L. (1980) The Statstcal Analyss of Falure Tme Data, Wley Seres n Probablty and Statstcs, New York. Krby K. (1997) Bddng on the future: Evdence aganst normatve dscountng of delayed rewards, Journal of Expermental Psychology : General 126(1): Labson D. (1997) Golden Eggs and Hyperbolc Dscountng, Quarterly Journal of Economcs 112(2): Lancaster T. (1979) Econometrc Methods for the Duraton of Unemployment, Econometrca 47(4): Mschel W., Shoda Y., and Rodrguez M.L. (1989) Delay of gratfcaton n chldren, Scence, 244 (4907): Mortensen, Dale T. (1986) Job Search and Labor Market Analyss, Handbook of Labor Economcs 2: Myerson J. and Green L. (1995) Dscountng of delayed rewards : Models of ndvdual choce, Journal of Expermental Analyss of Behavor 64(3): O Donoghue T. and Rabn M. (1999) Dong t Now or Later, Amercan Economc Revew 89(1): Paserman, D. (2004) Job Search and Hyperbolc Dscountng: Structural Estmaton and Polcy Evaluaton, IZA Dscusson paper (997). Pender J.L. (1996) Dscount rates and credt markets: Theory and evdence from rural Inda, Journal of Development Economcs 50(2): Phelps E.S. and Pollak R. (1968) On Second-Best Natonal Savng and Game-Equlbrum Growth, The Revew of Economc Studes 35(2): Rdder G. and Gorter K. (1986) Unemployment Benefts and Search Behavour: an Emprcal Investgaton, Cornell Unversty, New York, and Unversty of Amsterdam. Samuelson S. (1937) A note on measurement of utlty, The Revew of Economc Studes, 4(2): Strotz, R.H. (1956) Myopa and nconsstency n dynamc utlty maxmzaton, The Revew of Economc Studes 23(3): Cox, D.R. (1972) Regresson models and lfe tables, Journal of Royal Statstcal Socety 34(2): Cox, D.R. and Oakes D. (1988) Analyss of Survval Data, Monographs on Statstcs and Appled Probablty Chapman & Hall, London (201). 24

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