Edward Conard

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Edward Conard

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More Evidence that Incentives Drive Work Effort

Harvard’s Raj Chetty et al just released a new study on the effects of childhood environment on adult employment showing low workforce participation rates for adults who were raised as poor children—even lower for men than women.

My first thought was that, if a parent’s income predicts their children’s earning potential then the graph largely shows that incentives drive employment. The more a person can earn relative to their alternatives—working off the books, homemaking, support from friends and family, depleting savings, welfare, crime, leisure, etc.—the more motivated a person ought to be to work.

I was disappointed the analysis didn’t isolate the effect of growing up poor over and above this incentive.

That analysis might be in the appendices, although I couldn’t find it, but it’s the graph on its own that’s making the rounds on the blogosphere.

As a proxy for parents, I plotted workforce participation rates for prime working age adults 25 to 55 years old by income. With regression to the mean—i.e. the children of high-earning parents are likely to be less skillful and much less lucky than their unusually skillful and lucky high-earning parents and, consequently, be less motivated to work; vice versa for the children of low-earning parent. The workforce participation rates should, therefore, be flatter for children across the income range of their parents than the participation rate of their parents.

And low and behold. That’s exactly what we find.

More evidence that incentives drive work effort.

 

 

 

 

 

 

 

 

 

 

Without more, I’m not sure what Chetty’s graph shows.

Chetty hypothesizes that poor men turn to crime as an alternative to work. The government also pays poor women to raise children and work part-time. Perhaps that accounts for some of the difference in workforce participation rates too.

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