Essays in Applied Microeconomics

Abstract

This dissertation consists of three chapters in the field of applied microeconomics with a focus on labor economics and behavioral economics. It covers various topics and methods. A common theme is the importance of decisions. Our economy is the result of innumerable decisions made by individual and institutional agents. The decisions are constraint by resources and differ in complexity and impact. All three chapters contain empirical analyzes of such decisions reaching from binary decisions in the stylized context of the prisoners dilemma, over individual training and employment choices and consequences in late-careers, to the impact of the political choice of the minimum-wage introduction on income inequality and poverty.

In the first chapter we study how individuals make decisions in the stylized context of the repeated prisoners’ dilemma. In a meta-study we reanalyze 12 experiments on the repeated prisoner’s dilemma (PD) and identify three distinct types of players: defectors, cautious cooperators and strong cooperators. The defectors defect with a high probability in every round. Both cooperating types play semi-grim behavior strategies. This simple three-type mixture fits significantly better than any model consisting of combinations of (generalized) pure strategies from the literature, which we fitted at the treatment level (considering 1051 pure-strategy mixtures), even when we use constant specifications of the three types across all experiments. The three best fitting strategies vary slightly across experiments, however. Structurally analyzing these strategies, we find that subjects have limited foresight and subjectively assign utility values to the four states (cc,cd,dc,dd) of the supergame, which relate to the original stage-game payoffs in a manner compatible with inequity aversion. This subjectively transforms the prisoners dilemma game into a coordination game and can reliably explain the strategies used across all 32 treatments.

In the second chapter I study how individual decisions interplay with institutional factors in the context of late-career choices. I investigate decisions regarding on-the-job training and their impact on the employment outcomes of less-educated men in their late careers. Using survey data from the German National Education Panel Study adult cohort, I estimate a structural dynamic discrete-choice model reflecting the trade-offs of the employees’ training participation decision. The data set enables me to distinguish whether non-participation is due to lack of availability of training or due to individual cost-benefit considerations. As a consequence, I can investigate whether future policy interventions should target the provision of training or the individual participation incentives. I find that on-the-job training has a positive impact on the employees’ employment prospects. Counterfactual simulations show that a reduction of the individual training costs would increase training participation and positively affect the employment rate near retirement. In contrast, an increase in the general availability of training would not be effective.

In the third chapter we study how the decision of the federal government in Germany about the introduction of the minimum wage has affected the disposable income of households. Minimum wages are increasingly discussed as an instrument against (inwork) poverty and income inequality in Europe. Recently, the German government opted for a substantial ad-hoc increase of the minimum-wage level by 22% to 12 Euro per hour citing poverty prevention as an explicit goal. We use the introduction of the federal minimum wage in Germany in 2015 to study its impact on poverty and the disposable household income distribution. Based on the German Socio-Economic Panel we analyze changes in poverty and income inequality, and investigate different mechanisms determining the transmission from individual gross wage-rates to disposable household incomes. We find that the minimum wage is an inadequate tool for income redistribution and poverty reduction because it does not target poor households effectively. Individuals affected by the minimum wage are spread across the entire income distribution and households at the bottom end are hardly affected. Consequently, welfare dependence decreases only marginally. A reduction in transfers or negative employment effects cannot explain the limited effect on poverty. Additional simulations show that a markedly higher level of 12e per hour does not render the minimum wage more effective in reducing poverty.