How much of FJEs are due to chance vs choice?

In document Essays on Labor and Development Economics (Page 94-98)

4 Empirical Strategy

5.5 How much of FJEs are due to chance vs choice?

In this section, we try to quantify how much of the observed variation in FJEs is due to chance and how much of it is due to preference-driven choice. Throughout, the outcome of interest is doctor salaries ten years after the completion of medical school. We choose this outcome to enable comparisons with other studies on the persistence of labor market shocks.

To capture elements that are attributable to luck, we compare medical graduates that receive "good" lottery draws with those that receive "bad" lottery draws. The former would have had a large number of residency options to choose from, while the latter would have had fewer op- tions. In expectation, the former would be able to choose residencies associated with higher doctor salaries in the long-run (i.e. ten years after medical school). This difference in access to high-return residencies can be attributed to luck, or a bad draw in the labor market.

To capture elements that are driven by resident preferences, we focus on how predicted choices differ from those that would maximize doctor salaries in the long-run. Predicted choices re- flect the maximization of utility, not long-run income. We show that irrespective of the type of choice set that medical graduates are faced with, predicted choices consistently diverge from those that would maximize long-run salary. This suggests that at least some of the persistence that we and others (Oreopoulos et al.,2012;von Wachter & Bender,2006) document can be attributed to worker-driven responses.

Figure5presents these results graphically. Residency salary is placed on the vertical axis and lottery rank is placed on the horizontal axis, with higher ranks indicating worse lottery draws. The 30This is not an extreme assumption to make in the Norwegian context, since doctor salaries are observed publicly.

dashed line displays the residency salary for the hospital that would maximize long-term salary. Consistent with the fact that residency salary lowers long-run salary, the line is sloped upward for the first three quartiles. This indicates that graduates with larger choice sets are able to choose residencies associated with higher long-run salaries.

The red (undashed) line displays the residency salary for the hospital that maximizes worker utility. The fact that this line lies entirely below the dashed line indicates that residents are choosing to forego hospitals that would increase their salaries over the long-term. This is true even for those workers that face negative shocks (small choice sets) in the labor market. This indicates that at least some of the persistence of negative shocks is due to worker-driven preference response, since they could choose to avoid this outcome by gravitating towards hospitals associated with higher earnings in the long run.

6 Conclusion

This paper studies the impact of a graduate’s first job on her career trajectory, and how job-seeking graduates’ respond to these "first job effects" (FJEs). We exploit a natural experiment In Norway, where doctors’ first jobs were allocated through a random serial dictatorship (RSD) mechanism until 2013.

Using administrative data on individual outcomes, we first confirm empirically that the resi- dency allocation mechanism effectively randomized choice sets of hospitals across medical grad- uates. We exploit this variation in individual doctors’ choice sets to estimate each type of job characteristic’s impact on long-run earnings, place of residence, and specialization for each type of individual. We then account for these FJEs when estimating each worker type’s preferences over job characteristics, enabling us to decompose the long-term consequences of a particular choice set into a component that is due to chance and a component that is due to workers’ preference-driven response.

To our knowledge, these findings represent the first causal evidence on the impact of individual level variation in first jobs on individuals’ long-term careers. The results indicate that early career shocks can have very persistent effects, even within highly specialized occupations.

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Graphs

In document Essays on Labor and Development Economics (Page 94-98)