Enterprize zones and the ‘lemons problem’

One of the things George Akerlof was thinking about as he wrote his famous paper on the market for lemons was the market for low skilled labour.  The idea that lemons avoidance is a big part of the story of poor demand for low skilled workers has always struck me as very powerful as I consider my own attempts to avoid lemons in the labour market at all costs.  Still it is not regarded as polite to say these things and as a result it seems to be poorly represented in policy discussion.  It seems easy to say that the low skilled are having a hard time in the labour market, so we should help them out, create jobs and so on. So we should.  But we should also be aware that people with a range of ‘issues’ in the labour market – often relating to basic standards of responsibility – create an environment in which businesses simply won’t bother hiring in that part of the market. 

I don’t know if it’s related to the phenomenon, but I note that in the latest NBER working papers, there’s one which uses some new techniques to assess the success of California’s ‘enterprize zones’ which are a major means of seeking to help develop socially and economically distressed areas. The researchers conclude that they don’t work. 

The evidence indicates that enterprise zones do not increase employment. We also find no shift of employment toward the lower-wage workers or manufacturing sector targeted by enterprise zone incentives. We conclude that the program is ineffective in achieving its primary goals.

9 thoughts on “Enterprize zones and the ‘lemons problem’

  1. Apart from casualisation and lengthy permanency qualifying periods, avoiding lemons has long been the preserve of the labour hire companies who can place workers in various companies, eventually sifting their best workers to the best companies, after they’ve served a suitable apprenticeship of being shunted around. Hurdle that initial entry bar and the road gets much easier from then on for good staff. However many companies still prefer to employ full time with the LH Cos. In a mate’s case he was employed full time for 14 years with the one top paying Co until he moved interstate, all the time employed by the national LH Co. He received all the benefits of permanency including LSL under the LH umbrella. Most of the maintenance fitters were similarly employed like him apart from a shrinking minority of permanent Company fitters who were lazy time servers from the bad old days. No wonder the Co didn’t want a bar of direct employment any longer. Lowest common denominator, unionised time servers, exemplared by the laziest lemon can be a real business killer.

  2. I wonder whether Akerlof’s thoughts were more about uncredentialed labour rather than unskilled labour.

    In the early 1960s economists like Theodore Schultz started to use the concept of human capital to explain economic growth. Akerlof writes:

    I remember in 1964-65 pondering the implications of Schultz’s estimates for growth accounting. I asked myself: how could we know the extent to which returns to schooling reflected increased productivity due to education or the extent to which it merely acted as an “egg-grader” that sorted people into different ability classes. This thought, which I shared with my Prize co-recipient Joseph Stiglitz, was the initial step toward “The Market for ‘Lemons.’”

    Applied to labour, Akerlof’s theory would explain why good workers with no credentials or references fare so poorly in the labour market. Because employers are unable to determine the quality of the worker themselves, they rely on references and educational credentials.

    The disturbing implication of this is that educational institutions with a good reputation could extract high fees without actually providing students with any education or training. All they would need to do was measure ability and award credentials to those above a certain threshold. Heavy workloads over extended periods might measure motivation and persistence and examinations might measure cognitive aptitude.

    As for the unskilled unemployed, it makes me wonder whether there are ways to help job seekers to signal their attributes to employers. Programs like Work for the Dole won’t help job seekers signal motivation because they’re compulsory. And wage subsidies are a signal of low productivity (why else would the government offer them?). Both appear to be stigmatising.

  3. Thanks Don,

    I think Akerlof was concerned with more than credentialling, though I don’t have time to look it up and I may well be wrong. He’s certainly concerned with credentialling as you observe.

    I agree with your other comments but would add that ‘work for the dole’ could be structured (perhaps it is structured) to generate reasonable quality data about how diligently and conscientiously the workers worked. That’s basically what a lot of employers want to know. If they have some level of maturity, decency and commitment they can work with that. Without it you’d run a mile.

    More generally, the lemons problem is more pervasive than just credentials. We have a ‘lemons’ register for credit – people’s credit record. We could have something similar for employees. One of the problems is that the velocity of lemons flying around is quite high – like pickpockets at the races. They waste their employers’ time and money and then move on to the next sucker all the while making life a misery for the non-lemons who end up being discriminated against.

    That’s why people ask for references. Right now, if you can’t provide references (which it’s hard to do if you’re unemployed) it’s presumed that you’re a lemon. I guess it would be nice for the non-lemons to have some way of showing that they were OK – and I can’t think of anything that would do that that wouldn’t function as an implicit lemons register for employees.

    And many, perhaps most people would be aghast at such an idea. Maybe they’d be right to be – I don’t know.

  4. I cant think of anything that would do that that wouldnt function as an implicit lemons register for employees.

    I imagine people would be more aghast if they believed that lemons can’t help being lemons. If you thought it was something job seekers could control then you might think it creates useful incentives.

    In any case, the identification of lemons is a matter of degree. If employers write references and schools award diplomas, don’t both of these have the same effect?

  5. Maybe blogging is another example of Akerlof’s theory.

    Refereed papers or articles in reputable magazines are like new cars while blog posts are like second hand cars sold without warranties.

    And maybe this rubs off on bloggers. If I walk up to someone at an academic conference and tell them I blog at ‘Club Troppo’ maybe this triggers a little ‘lemon-alarm’ in their head — a bit like starting a conversation by talking about black helicopters, Ron Paul or UFOs.

  6. ah but Don – new cars lose at least 20% of their value the minute you driveout of the showroom used cars even sans warranty are worth the same a month after purchase. And good used cars do exactly the same job as new cars. Exactly.

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