The Adjustment Effects of a Skilled Labour Supply Shock
Lead Research Organisation:
University College London
Department Name: Economics
Abstract
Over the last decades many countries have seen rapid changes in the returns to skills and in income inequality. Theory predicts that a sudden increase in the supply of skilled workers is likely to reduce skilled wages. In the longer run skills can adjust, increased skills can have spillovers such as on innovation, and the competitiveness of the economy may change as skilled work becomes cheaper. We know little about the size and speed of adjustments of wages and skills to a skilled labour supply shock, and its spillovers and effects on the local economy.
I propose to study these responses by focusing on the labour supply shock induced by the mass migration of relatively skilled East Germans to West Germany after the fall of the Berlin Wall in 1989. The insights from this research have important implications for policies on wages, employment, skills and competitiveness in response to structural economic transformations, not only for Germany but for most other countries. In particular, the project will address the following main questions.
(1) Does a larger number of skilled workers reduce the wages of skilled workers? What are the dynamics of wage and employment adjustments in the short and longer run? For understanding these responses better, I will also examine productivity effects and changes due to differential rent sharing, as the bargaining power of skilled workers changes with their relative supply.
(2) What are the spillovers of increasing the supply of skilled workers in the economy? One effect of price adjustments is that the incentives to acquire skills and to work in specific occupations change. I will document these effects, for example, by using data on the task intensity of specific occupations. By constructing a new dataset on patenting in East and West Germany, I will also examine to what extent larger numbers of skilled workers foster local innovation.
(3) Do changes in the skill composition affect the long-term trajectory of a local economy by changing its comparative advantage? I will assess the creation and growth of firms in response to the skilled labour supply shock, and analyse the difference in responses across firms and industries for tradable and non-tradable goods.
A particular strength of the proposed analysis is its research design, which uses a historic event to generate quasi-experimental variation in the data. After the Berlin Wall fell in November 1989, around two million East Germans moved to West Germany until the early 1990s, increasing the West German labour force by over three percent by 1992. This large-scale immigration provides a particularly useful case study of a large skilled labour supply shock because the migration from East to West Germany after 1989 was sudden and unanticipated, and East and West Germans speak the same language.
Evidence on the causal effects of labour supply shocks is scarce because it is difficult to isolated causal outcomes from confounding endogenous factors such as prevailing local economic conditions. To overcome this difficulty, I propose to construct data on the historical settlement patterns of East Germans in West Germany, which I use to predict the location of newly arriving East Germans after the fall of the Berlin Wall. For implementing this research design, I will extract novel information from two detailed secure-access administrative datasets, which have not been used in this context before.
The scientific output of the proposed research is aimed at publication in top academic journals, and I expect my contributions to advance the academic as well as the policy debate on the evolution of skills, wages, and comparative economic advantage in response to labour market shocks. A thorough understanding of these effects is crucial for workers, firms, governments and international institutions to make informed policy choices.
I propose to study these responses by focusing on the labour supply shock induced by the mass migration of relatively skilled East Germans to West Germany after the fall of the Berlin Wall in 1989. The insights from this research have important implications for policies on wages, employment, skills and competitiveness in response to structural economic transformations, not only for Germany but for most other countries. In particular, the project will address the following main questions.
(1) Does a larger number of skilled workers reduce the wages of skilled workers? What are the dynamics of wage and employment adjustments in the short and longer run? For understanding these responses better, I will also examine productivity effects and changes due to differential rent sharing, as the bargaining power of skilled workers changes with their relative supply.
(2) What are the spillovers of increasing the supply of skilled workers in the economy? One effect of price adjustments is that the incentives to acquire skills and to work in specific occupations change. I will document these effects, for example, by using data on the task intensity of specific occupations. By constructing a new dataset on patenting in East and West Germany, I will also examine to what extent larger numbers of skilled workers foster local innovation.
(3) Do changes in the skill composition affect the long-term trajectory of a local economy by changing its comparative advantage? I will assess the creation and growth of firms in response to the skilled labour supply shock, and analyse the difference in responses across firms and industries for tradable and non-tradable goods.
A particular strength of the proposed analysis is its research design, which uses a historic event to generate quasi-experimental variation in the data. After the Berlin Wall fell in November 1989, around two million East Germans moved to West Germany until the early 1990s, increasing the West German labour force by over three percent by 1992. This large-scale immigration provides a particularly useful case study of a large skilled labour supply shock because the migration from East to West Germany after 1989 was sudden and unanticipated, and East and West Germans speak the same language.
Evidence on the causal effects of labour supply shocks is scarce because it is difficult to isolated causal outcomes from confounding endogenous factors such as prevailing local economic conditions. To overcome this difficulty, I propose to construct data on the historical settlement patterns of East Germans in West Germany, which I use to predict the location of newly arriving East Germans after the fall of the Berlin Wall. For implementing this research design, I will extract novel information from two detailed secure-access administrative datasets, which have not been used in this context before.
The scientific output of the proposed research is aimed at publication in top academic journals, and I expect my contributions to advance the academic as well as the policy debate on the evolution of skills, wages, and comparative economic advantage in response to labour market shocks. A thorough understanding of these effects is crucial for workers, firms, governments and international institutions to make informed policy choices.
Planned Impact
Besides its intellectual merit, the results from the proposed research have immediate policy relevance. Knowledge on how an increase in the number of skilled workers impact on wages, employment, innovation and the productivity of local labour markets is crucial for informed policy making in the UK and elsewhere. From the onset of the project period I aim to maximise impact by building links and contacts with potential beneficiaries and users of the research. Potential beneficiaries include:
1) The academic community: The scientific output of the proposed research is aimed at publication in top academic journals, and I expect the findings of this project to advance significantly the academic debate on the effects of skilled workers on the economy. The results of this research can further serve as an empirical basis for developing theoretical models of the labour supply and firm responses in fields of economics such as labour and public economics, the economics of innovation and productivity, and trade and migration economics.
2) Governments, organisations, the broader policy community and NGOs: Output from the proposed research will be beneficial for policy makers in the UK and abroad. The research questions addressed in this project are particularly timely, with labour markets around the world facing significant structural changes due to import competition, outsourcing, migration or automation. Knowledge about labour supply and demand effects for workers of difference skill groups is crucial for drafting policies in response to such changes. Institutions such as UK government departments, ministries of other countries, the European Commission, the Organisation for Economic Co-operation and Development, the World Bank, the International Monetary Fund, and NGOs and think tanks may employ the findings of the proposed research to make economic predictions, to devise better measures that can ameliorate inequality and skills shortages, and more generally to advise countries on the implementation of labour market policies.
3) The media and the general public: The findings of the proposed research are likely to be of utmost interest to the media, the general public, the business community and worker unions. The results from the proposed research have direct relevance for informing the media and the general public about the effects of structural labour market changes, and thereby will contribute to more informed debates about important policy choices. For economic agents such as workers, entrepreneurs and firms, better understanding and predictions about the consequences of changed numbers of skilled workers in an economy will improve decision making.
1) The academic community: The scientific output of the proposed research is aimed at publication in top academic journals, and I expect the findings of this project to advance significantly the academic debate on the effects of skilled workers on the economy. The results of this research can further serve as an empirical basis for developing theoretical models of the labour supply and firm responses in fields of economics such as labour and public economics, the economics of innovation and productivity, and trade and migration economics.
2) Governments, organisations, the broader policy community and NGOs: Output from the proposed research will be beneficial for policy makers in the UK and abroad. The research questions addressed in this project are particularly timely, with labour markets around the world facing significant structural changes due to import competition, outsourcing, migration or automation. Knowledge about labour supply and demand effects for workers of difference skill groups is crucial for drafting policies in response to such changes. Institutions such as UK government departments, ministries of other countries, the European Commission, the Organisation for Economic Co-operation and Development, the World Bank, the International Monetary Fund, and NGOs and think tanks may employ the findings of the proposed research to make economic predictions, to devise better measures that can ameliorate inequality and skills shortages, and more generally to advise countries on the implementation of labour market policies.
3) The media and the general public: The findings of the proposed research are likely to be of utmost interest to the media, the general public, the business community and worker unions. The results from the proposed research have direct relevance for informing the media and the general public about the effects of structural labour market changes, and thereby will contribute to more informed debates about important policy choices. For economic agents such as workers, entrepreneurs and firms, better understanding and predictions about the consequences of changed numbers of skilled workers in an economy will improve decision making.
People |
ORCID iD |
Alice Kuegler (Principal Investigator) |
Description | The work funded through this award has resulted in three academic papers, with at least two follow-on projects that will also result in academic papers. The papers summarise my efforts to create and analyse novel datasets and merge these with administrative data sources. The papers use this granular data to investigate instances of structural and institutional changes in labour markets and in particular, focus on the wage and employment effects of low-skilled workers. The research findings provide insights into current developments that are relevant for many labour markets, and can help to improve labour market policies. The papers provide building blocks for policy makers and other researchers for further work. I have also presented and discussed the findings of my research in a number of international seminars and conferences, and in meetings with policy makers at central banks and the OECD. These activities helped distribute the findings of my research, build a network with researchers and policy makers, and led to new research collaborations. |
Exploitation Route | The research outcomes improve our understanding of the drivers of income inequality in labour markets and are directly policy relevant. The findings, methodology and datasets used are described in detail in working papers, which will be published as journal articles. I also presented and discussed the findings of my research in a number of international seminars and in meetings with policy makers at central banks and the OECD. These activities helped distribute the findings and insights of my research, and build a network with researchers and policy makers. The outputs of my research serve as building blocks for other researchers working on related questions as well as for policy makers. |
Sectors | Communities and Social Services/Policy Government Democracy and Justice Other |
URL | https://sites.google.com/site/kuegleralice/research |
Description | We published one working paper, which is publicly accessible on my website, and which we have submitted to a top-economics journal for publication. We have produced another working paper with preliminary findings. I have also presented and discussed the findings of my research in a number of international seminars and in meetings with policy makers at central banks and the OECD. These activities helped distribute the findings of my research and build a network also with policy makers. |
First Year Of Impact | 2021 |
Sector | Communities and Social Services/Policy,Government, Democracy and Justice,Other |
Impact Types | Societal Economic Policy & public services |
Description | UCL Strategic Initiatives Seed-Funding |
Amount | £2,000 (GBP) |
Organisation | University College London |
Sector | Academic/University |
Country | United Kingdom |
Start | 02/2020 |
End | 06/2020 |
Description | Displacement Effects in Manufacturing |
Organisation | Stockholm University |
Country | Sweden |
Sector | Academic/University |
PI Contribution | My co-authors Ines Helm (Stockholm University) and Uta Schönberg (University College London) and I have jointly developed the conceptual and methodological approach for this project, and are involved in the data analysis. |
Collaborator Contribution | My co-authors Ines Helm (Stockholm University) and Uta Schönberg (University College London) and I have jointly developed the conceptual and methodological approach for this project, and are involved in the data analysis. |
Impact | We made a working paper for this project publicly available in December 2020. |
Start Year | 2019 |
Description | Displacement Effects in Manufacturing |
Organisation | University College London |
Department | Department of Economics |
Country | United Kingdom |
Sector | Academic/University |
PI Contribution | My co-authors Ines Helm (Stockholm University) and Uta Schönberg (University College London) and I have jointly developed the conceptual and methodological approach for this project, and are involved in the data analysis. |
Collaborator Contribution | My co-authors Ines Helm (Stockholm University) and Uta Schönberg (University College London) and I have jointly developed the conceptual and methodological approach for this project, and are involved in the data analysis. |
Impact | We made a working paper for this project publicly available in December 2020. |
Start Year | 2019 |
Description | The Effects of the Large-Scale Migration of Venezuelans to Colombia |
Organisation | University of California, Berkeley |
Country | United States |
Sector | Academic/University |
PI Contribution | Jointly with my co-author Arlen Guarin I developed the idea and methodology for the analysis, as well as the strategy to collect data for this research project. |
Collaborator Contribution | My co-author Arlen Guarin is a PhD student in Economics at University of California at Berkeley, and as a Colombian national, is leading the efforts to access and collect micro-data on Venezuelan migrants in Colombia. We have brought together a number of administrative datasets on immigrants and the Colombian labour market, which are key ingredients for our analysis. |
Impact | We have collected a number of micro-data sets that serve as crucial inputs for our analysis. So far we have produced a working paper that describes initial results. We continue extending our analysis to sectors and the effects on high- versus low-skilled workers, for which we have compiled additional data. |
Start Year | 2019 |
Description | Wage Inequality in Germany |
Organisation | Hans Böckler Foundation |
Country | Germany |
Sector | Charity/Non Profit |
PI Contribution | We visited the Institute of Economic and Social Research at the Hans-Böckler-Foundation in Duesseldorf in Germany in December 2020. One reason was to take part in a two-day workshop, with the purpose to learn extensively about labour market policies, structural changes as well as related data sources, and establish relevant contacts. Another main reason was to work with their archives to create new labour market data for Germany since the 1980s. |
Collaborator Contribution | Staff at the Institute of Economic and Social Research at the Hans-Böckler-Foundation actively supported our efforts to gather information and create an extensive dataset from the information available in paper format in their archives. |
Impact | The effort to compile various sources of information into a new dataset on German labour markets is ongoing. |
Start Year | 2019 |
Description | Wages, Bargaining and Productivity in Denmark |
Organisation | IAB Nuremburg |
Country | Germany |
Sector | Private |
PI Contribution | Jointly with my co-authors Attila Lindner (University College London) and Simon Janssen (German Institute for Employment Research, IAB) we are developing the idea and methodology for the analysis, as well as the strategy to collect data for this research project. |
Collaborator Contribution | My co-author Simon Janssen has worked in Denmark before and brings extensive knowledge about Danish labour market institutions and experience working with Danish data to the project. My co-author Attila Lindner is an expert on wage setting, and his experience informs our academic approach. |
Impact | We have specified the historical quasi-experiments that we analyse in this project, which has informed our data collection effort. |
Start Year | 2019 |
Description | Wages, Bargaining and Productivity in Denmark |
Organisation | University College London |
Department | Department of Economics |
Country | United Kingdom |
Sector | Academic/University |
PI Contribution | Jointly with my co-authors Attila Lindner (University College London) and Simon Janssen (German Institute for Employment Research, IAB) we are developing the idea and methodology for the analysis, as well as the strategy to collect data for this research project. |
Collaborator Contribution | My co-author Simon Janssen has worked in Denmark before and brings extensive knowledge about Danish labour market institutions and experience working with Danish data to the project. My co-author Attila Lindner is an expert on wage setting, and his experience informs our academic approach. |
Impact | We have specified the historical quasi-experiments that we analyse in this project, which has informed our data collection effort. |
Start Year | 2019 |
Description | Involvement in working group on Populism, Inequality and Institutions |
Form Of Engagement Activity | A formal working group, expert panel or dialogue |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Other audiences |
Results and Impact | I became part of a working group that looks at the link between labour markets, inequality and populism. This group met at the Norface DIAL Workshop in London in January 2019, the Norface DIAL Conference in Turku, Finland, in June 2019 as well as the Norface Populism, Inequality and Institutions Workshop in London in September 2019. I presented my research at each of these events, contributed to discussions and exchange knowledge with researchers and practitioners across disciplines. |
Year(s) Of Engagement Activity | 2019 |
Description | Seminar presentations |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Professional Practitioners |
Results and Impact | I was invited to present my research in virtual seminars at the University of Liverpool, at Notre Dame University and at the Central European University. At these seminars I actively discussed my work, exchanged ideas, and brainstormed about potential future projects with other researchers. I also presented my work in two internal seminars at the Department of Economics of University College London. |
Year(s) Of Engagement Activity | 2021 |
Description | Seminars and engagement with policy makers |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Professional Practitioners |
Results and Impact | I presented my work in virtual seminars at the Bank of Spain, the Bundesbank, the US Federal Reserve Bank and the OECD. There was significant interest by these policy institutions in my research findings. Attendees related my research to their work areas and discussed its practical relevance and implications. |
Year(s) Of Engagement Activity | 2021 |
Description | Workshop and conference presentations, and PhD teaching |
Form Of Engagement Activity | A talk or presentation |
Part Of Official Scheme? | No |
Geographic Reach | International |
Primary Audience | Postgraduate students |
Results and Impact | I presented my research at the Austrian Labor Economics Workshop in Vienna, at the IZA Workshop Heterogeneity and the Labor Market in Bonn, and at the Annual Meeting of the American Economic Association and of the Econometric Society, both in San Diego. At all of these workshops and conferences I actively discussed my work, exchanged ideas, and gauged potential future projects with other researchers. I also gave guest lectures in two UCL PhD courses, in Empirical Methods for the Study of the Labour Market, and in Topics in Labor Economics, in February 2020. In these PhD courses I shared knowledge from my research experience and advised PhD students on ideas for their PhD research. |
Year(s) Of Engagement Activity | 2019,2020 |