Cyclicality and the labor market for economists.

• Author: Gallet, Craig A.

1. Introduction

   The market for Ph.D. economists has attracted a great deal of attention in the literature. This is not surprising given the personal stake that many economists hold regarding the performance of this market. Yet, another motivation for studying this particular labor market rests on its highly organized structure, characterized by three distinct segments: advertisement of jobs during the few months prior to the Allied Social Science Association (ASSA) meetings, interviewing candidates at the ASSA meetings in late December or early January, and on-site visits and offers during the few months after the ASSA meetings.

   Most studies of this market concentrate on explaining variation in earnings or type of employment, with variables such as gender, age, race, nationality, quality of Ph.D. institution, and number of publications significantly affecting employment or earnings success (see Barbezat 1992; Broder 1993; Formby, Gunther, and Sekano 1993; Singell and Stone 1993; McMillan and Singell 1994; Kahn 1995; Siegfried and Stock 1999; List 2000). Although employment outcomes of new Ph.D. economists have been thoroughly addressed, little attention has been given to how new Ph.D. economists set search strategies. Moreover, as studies tend to examine outcomes in one hiring period, evidence of intertemporal change in search strategies and outcomes is lacking.

   To fill the current gaps in the literature, we address the intertemporal relationship between applicant characteristics, search strategies, and outcomes of new Ph.D. economists. This is accomplished through the use of a survey instrument that documents behavior and outcomes of participants in the Ph.D. labor market in two years--1987 and 1997--that we loosely deem as "boom" and "bust" markets, respectively. (1) We organize the remainder of the paper as follows. Section II discusses the nature of those two markets. Section HI presents a model that illustrates how agents on the supply and demand side will alter search strategies in response to perceived strength of the market. In Section IV, we discuss the survey instrument that was used to gather information on Ph.D. candidate behavior in the 1987 and 1997 markets. As shown in Section V, the survey results indicate that search intensity is naturally tied to the severity of excess labor supply. In Section VI, a model of search outcome is estimated across the two market periods. The results show that the effect of various applicant characteristics on numbers of interviews, visits, and job offers is related to the strength of the market. Concluding remarks are provided in Section VII.

2. The 1987 and 1997 Markets for Ph.D. Economists

   We concentrate on two labor market periods, 1986-1987 and 1996-1997. Serendipitously, the last years coincided exactly with Siegfried and Stock's (1999) survey paper on labor market outcomes for Ph.D. economists. They found that graduates from higher-ranked schools were more likely to have a full-time job, were paid better, and were more likely to agree that their job was commensurate with their education. Graduates from weaker programs were less successful financially, but virtually all were employed. Nevertheless, Siegfried and Stock refer to a substantial number of graduates from all ranks who expressed disappointment in their market outcomes, with typical assessments about the market ranging from the most positive ("I got lucky") to less so ("It sucks!").

   The negative reaction of new Ph.D.s to the 1997 market is understandable in light of data from Job Openings for Economists (JOE)--see Table 1. Although 1997 was unusually bleak, there were substantial differences across sectors. In particular, the academic and government sectors were weaker in 1997, whereas the business sector was the strongest in years. Using the number of advertised jobs per new Ph.D. as a measure of the arrival rate of job offers, arrivals fell 18% over the 10-year period reported in Table 1. The decline was most pronounced in academia (-28%) and government (-32%), whereas arrival rates rose in business. Statistics on the job market for economists reported by Siegfried (2002) indicate that no market since 1996-1997 was worse in terms of the number of new jobs per new Ph.D. recipient, including that of the 2001-2002 recession year. Consequently, the 1996-1997 market seems well-characterized as a "bust" market, whereas the 1986-1987 market can be characterized as a "boom." (2)

   As a discipline, economics is oriented toward optimizing behavior, and so new Ph.D.s should adapt their search strategies to available market information. The economics labor market is structured to make information on market strength easy to obtain. The market is centered on the annual ASSA meetings. (3) Each fall, prospective Ph.D. recipients submit applications to academic institutions, government and international agencies, and private employers. Information on the demand-side of the market is virtually costless to obtain, as most jobs are advertised in the American Economic Association's publication, JOE. Since the number of jobs by field and type of employer are known early in the market cycle, job seekers have unusually good information on which to base expected returns from search. Nonetheless, their search strategies must be set by early December, as the great majority of interviews are conducted at the annual meetings. The opportunities for sequential search are therefore quite limited.

   Submission of applications is not costless. In addition to mailing costs, for example, there are costs associated with the time required to research employer attributes and tailor materials to match different employers. Consequently, it may not be optimal to apply to every job, or even to apply to every job in one's field. Instead, the applicant must decide how many applications to submit and what type of employers to target on the basis of information available about the strength of labor demand. On the other side of the market, employers must decide how many people to interview and what type of applicants to pursue. These strategies are formalized in the next section.

3. Search Intensity in Multiple Markets

   Using a framework that integrates features of Stem (1989) and Fallick (1992), we show how a weakening labor market affects search strategies on the extensive margin (that is, how many markets to sample) and on the intensive margin (that is, how many applications to submit per market). The model's main features are summarized here, and the details of the derivations are included in the Appendix.

   Job Search by Applicants

   Suppose there are J employer submarkets within the market for new Ph.D.s. (4) Submarket j opens in the fall when [v.sub.j] employers each decide to advertise one job vacancy with an attached precommitted compensation level, w. Using the announcements as information on market strength, [n.sub.j] job seekers opt to search in submarket j. Each of the seekers perceives a distribution of compensation packages (w) in each submarket, defined by the cumulative distribution function, [F.sub.j](w). Compensation packages include salary, benefits, and teaching and research support. (5) Seekers also perceive the probability [[delta].sub.j]([v.sub.j],[n.sub.j]) that an application will yield a job offer. The arrival rate of offers, [[delta].sub.j], is treated as a parameter by individual job seekers when they are deciding on applications. It will be larger when seekers perceive that there are more job vacancies, [v.sub.j], and when they perceive that there are fewer seekers, [n.sub.j]. Later in the search process when matching occurs, employers and job seekers may adjust their strategies by entering or withdrawing, and thus the initial decisions regarding [v.sub.j] and [n.sub.j] may not equal their final realizations, [v.sub.j] and [n.sub.j]. We will show the equilibrium conditions that set [v.sub.j] and [n.sub.j] later.

   Letting a rejection be viewed as a zero compensation offer, the compensation outcome from one application in submarket j is distributed according to

   (1) [G.sub.j](w) = (1 - [[delta].sub.j]) + [[delta].sub.j][F.sub.j](w).

   Seekers will submit [A.sub.j] applications in submarket j and then select the best compensation package, w. The probability that [A.sub.j] applications submitted to sector j will generate a maximum offer of w, is [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]. The cumulative distribution function for receiving a best offer of w across J submarkets is designated as [GAMMA](w) with an associated density function, [gamma](w). Their functional forms are given in the Appendix.

   Applications cost [c.sub.j] apiece. Application costs may differ across employer submarkets. For example, application costs at schools with graduate programs may be lower because applicants already have good information on the attributes of those schools.

   Define [xi] as the reservation compensation level, which is the lowest compensation package the applicant would accept. As shown in the Appendix, the optimum strategy is to set the reservation compensation level at

   (2) [xi] = [beta]{[[integral].sup.[infinity].sub.[xi]][1 [GAMMA](w)dw + [xi]} - [J.summation over j=1][c.sub.j][A.sub.j],

   which is the multimarket equivalent of the form derived by Stem (1989). Equation 2 implies that seekers will set a constant reservation compensation level across all submarkets.

   Extensive Search

   Extensive search involves deciding in which of the J employer submarkets to search. The conditions dictating which markets a seeker will target come from the first-order conditions for the optimal number of applications per submarket. Differentiating Equation 2 with respect to [A.sub.j] and setting d[xi]/d[A.sub.j] = 0 for all j, these J first-order conditions for applications in the jth submarket are of the form

   (3) - [beta] [[integral].sup.[infinity].sub.[xi]] [GAMMA](w)ln[G.sub.j](w)dw [greater than or equal to] [c.sub.j]; j = 1,2...