Stability of Trust and Fatalism

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Stability of Trust and Fatalism Powered By Docstoc
					Culturally-based believes and
 labour market institutions
  Fabio D’Orlando, Francesco Ferrante and Gabriele Ruiu

            University of Cassino and CREAM

              APESA 2011, KUALA LUMPUR
 It is now a shared view in economics that people’s choices are determined
  by their preferences and believes and that personality traits play a big
  role in this context
 There is strong empirical evidence that both economic preferences (risk
  aversion and time discounting) and personality traits (psychological and
  cultural traits) explain socioeconomic outocomes in different domains of
  human life (education, marriage, occupational choices etc; income, health
  conditions, criminal behavior, job satisfaction, life satisfaction etc.)
 Among culturally-based factors, trust in others has been shown to explain
  many facts: instead, the role of fatalism has been neglected
 It is surprising that a personality trait so important in characterizing
  people’s expectations concerning the link between actions and results
  has received so little attention, particularly in regard to analysis of the
  labor market and its institutions.

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Aims of the paper
• The main aims of the paper are:
• A) to show that the variety in labour market institutions can
  be related also to country-specific cultural factors (not
  new) and, specifically, to fatalism (new);
• B) To show that people’s fatalism plays an important role in
  explaining how protection to workers is provided i.e. the
  extent of EPL (new);
• C) To provide a rationale for this result;
• D) To identify the main subjective traits associated with
• E) To speculate on the role of education policy as an
  effective tool to generate labour market flexibility

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Main connections with previous
contributions/other areas of investigation
• Economics of education and personality traits (Heckman
  2006, Cuhna and Heckman 2010 etc)
• The connections among culture, social preferences and
  institutions (Tabellini 2008, Guiso, Sapienza and Zingales, 2006
• Social preferences and labour market institutions (many)

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Empirical evidence on fatalism
• In the context of the analysis of beliefs, empirical analysis has
  devoted by far the most attention to trust; by contrast,
  fatalism has been treated in the medical and epidemiological
  literature but almost neglected by the economic literature.
• Among the few exeptions, Wu (2005) analyzes the role of
  fatalism in determining household savings behavior, finding
  that people characterized by fatalistic beliefs are less likely to
• There is strong evidence in the medical literature on the role
  of fatalism in health screening behavior (Straughan and Seow
  1998, Nelson et al. 2002, Niederdeppe and Gurmankin Levy
  2007). In particular, Nelson et al. (2002) showed that fatalism,
  is associated with delays in seeking health care.
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Definitions of fatalism

• Although the precise meaning of the word fatalism changes across
  cultures and religions, it can be linked with people’s
  propensity to believe that their destinies are ruled by
  an unseen power – Fate – rather than by their will

• Indeed, the concept of locus of control developed in psychology is
  akin to the concept of fatalism, because moving from an internal to
  an external locus of control inevitably entails an increasingly
  fatalistic view of life Locus of control refers to a person's belief
  about what causes the good or bad results in his or her life, either
  in general or in a specific area (Rotter, 1954; 1990)

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Data Sources

The main source of data is the World Values Survey (WVS). WVS is a
worldwide investigation of the basic values and beliefs of individuals in a
large cross-section of countries (more than 80) conducted by the World
Values Survey Association. It has been carried out in four waves: 1980–1984
(20 independent countries plus Northern Ireland), 1990–1994 (independent
countries plus Northern Ireland), 1994–1999 (independent countries plus
Puerto Rico), 1999–2004 (69 independent countries plus Northern Ireland
and Puerto Rico). The survey contains information about demographics (sex,
age, education, etc.), self-reported economic conditions, political preferences,
attitudes, and religion.

Other sources for the indicators of labour market institutions are Bassanini
and Duval (2006) and Adema and Ladaique (2009). The indicator of the
quality of legal system is from Gwartney and Lawson (2009).
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                             Main variable definitions
•   JobSecurity: is a dummy variable that is equal to one if the respondent answers that
    an important aspect of a job is a “good job security” to the following question:
    “Here are some more aspects of a job that people say are important. Please look at
    them and tell me which ones you personally think are important in a job: good pay;
    not too much pressure; good job security; a job respected by people in general;
    good hours; an opportunity to use initiative; generous holidays; a job in which you
    feel you can achieve something; a responsible job; a job that is interesting; a job
    that meets one’s abilities”.
•   Fatalism: our measure of fatalism is based on answers to the following question:
    “Some people feel they have completely free choice and control over their lives,
    while other people feel that what they do has no real effect on what happens to
    them. Please use this scale (1 means “none at all” and 10 means “a great deal”) to
    indicate how much freedom of choice and control you feel you have over the way
    your life turns out.” Therefore the higher the value of the variable, the lower the
    individual’s fatalistic tendencies.
•   Trust measures the level of trust in other people and is based on answers to the
    following question: “Generally speaking, would you say that most people can be
    trusted or that you need to be very careful in dealing with people?”. The variable is
    equal to one if participants report that most people can be trusted, and zero
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                        Some descriptive statistics
                   (international variety in cultural traits)

European Mediterranean Countries, Eeast European Countries, Islamic Countries (with the
exception of Indonesia) and Asiatic countries exhibit in general lower level of trust in other
                                       APESA 2011, speaking countries and Scandinavian Countries.
people and higher level of fatalism than English KUALA LUMPUR -
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      Preliminary question: are fatalism and trust
     sufficiently stable cultural traits of societies?

The correlation between the index of Fatalism/ Trust calculated for the first wave and the same
index calculated in the fourth wave is 0.70/0.79. To consider the widest time interval available,
we limited our analysis to only 18 countries (Argentina, Belgium, Canada, Denmark, France,
                                       APESA 2011, KUALA
                                                         Korea, -Malta,
Germany, Hungary,Iceland, Ireland, Italy, Japan, SouthLUMPURLABOUR Netherlands, Spain, Sweden, 11
                                  CULTURALLY-BASED BELIEVES AND
Great Britain, USA).                      MARKET INSTITUTIONS
     Measuring workers’ protection (i.e. labour
               market institutions)

•   Workers’ protection package/mix may include:
•   A) EPL (Employment Protection Legislation index )
•   B) UB (Unemployment Benefits coverage)
•   C) SPE (Social Public Expenditure as a percentate of GDP)
Labour market institutions in the OECD (20
           Some preliminary evidence (I)
Fatalism Vs. Labour market institutions (EPL,UB,SPE)

                                EPL and fatalism are more strongly related

Fig. 4a and b shows respectively EPL and RR (1992 and 2002) and SPE (1990 and 2000)
plotted against the index of fatalism calculated for the second and fourth waves for 20
OECD countries.The index of fatalism (2002) is negatively correlated with the stringency of
EPL and with the index of Public Expenditure (however, in the latter case the relation is not
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statistically significant) while is not correlated KUALA the index of generosity of UB.
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           Some preliminary evidence (II)
 Trust Vs. Labour market institutions (EPL,UB,SPE)

The index of Trust is negatively related with the stringency of EPL and with the
index of Public Expenditure (the relations however are not statistically significants)
                                   APESA generosity of the
while it is positively related with the 2011, KUALA LUMPUR - UB.
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Fatalism and job security: testable hypothesis
and expectations

• H1: Job security i.e. demand of secure jobs, is positively
  related to people’s fatalism and negatively related to their
  trust in others
• H2: Controlling for people’s fatalism and trust in others,
  demand of job security is negatively related to the extent of
  employment protection
• We assess statistical associations, not causal relationships

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 Demand for Job security: Fatalism and Trust
(preliminary evidence based on large sample)
                                         Positive sign => Fatalism

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          Job security Vs. Fatalism and Trust

Table 6 set out the results of a preliminary probit regression of
JobSecurity on fatalism and trust, controlling for country and
wave fixed effects, demographic characteristics (gender, age,
education, marital status and health status), economic
characteristics (level of income, employment status) and religion.
Column (a) is relative to the entire sample, while the analysis
reported in column (b) is limited, as usual, to representative
countries. Column (c) reports the results of a Linear Probability
Model on the same sample of column (b).

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    Job security Vs. Fatalism and Trust for 20 Oecd
Table 7 repeats the analysis shown in Table 6 but with attention restricted to
20 OECD countries (Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Great Britain, Japan, Ireland, Italy, Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, USA) and adding
controls for EPL, UB and SPE (Social Public Expenditure as percentage of
GDP), the quality of the legal system (legalprop), the interaction between
stringency of EPL and the quality of the legal system,(legepl), and the
interaction between the quality of the legal system and generosity of SPE and
UB (legspe, legub).

Column (a) shows the results of a probit regression controlling for country
and wave fixed effects. In Column (b) we add controls for EPL and UB and for
legality, while in column (c) we use SPE instead of UB.

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Main points
1) Fatalism and trust in others are strongly statistically significant in all the models;
coefficients take the expected sign; and the coefficients are large
2) The impacts on the demand for job security through labor market institutions are
those expected: an increase in either EPL or UB leads to a decrease in the demand for
job security. This appears to contrast with the results obtained by Clark and Postel-
Vinay (2005), who found a negative impact of EPL on the perception of job security,
and a positive impact of UB.

Minor points
1) The quality of the legal system/expected enforcement of regulation matters: the
higher is the quality of the legal system the lower is the probability that an individual
will demand for job security.
2) The effects of the interactions between labor market institutions and the quality of
legal systems appear quite complex and non linear.

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      Interpretation: fatalism and demand of
              protection (UB vs. EPL)
• Drawing on D’Orlando and Ferrante (2009) and extending their
  analysis on the empirical side, we suggest that the subjective
  cost of unemployment can be divided into a monetary cost
  (the income loss) and a psychological cost (the subjective
  perception of being unable to cope with drastic negative
  changes in life).
• Fatalism increases the non-pecuniary, psychological costs of
  unemployment, i.e. a utility loss that does not disappear even if
  the income loss is entirely off-set by unemployment benefits.

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      Interpretation: fatalism and demand of
              protection (UB vs. EPL)
• The argument runs as follows. International evidence shows
  that more strictly regulated markets have lower inflow rates
  and outflow rates from unemployment.

• And the theoretical literature is unequivocal in arguing that
  regulating a competitive labor market through employment
  protection legislation has no effect on the average level of
  unemployment, although it increases the variability of
  employment (see among others Bertola and Rogerson 1997,
  Garibaldi 1998, Agell 1999, Fitoussi et al. 2000, Blanchard and
  Landier 2001, Freeman 2005, Boeri and Garibaldi 2007).
            The fundamental trade-off
A typical worker (society) should choose Probability of finding a job
    his/her preferred regime by
    comparing the pecuniary and non-
    pecuniary net-benefits of two                  European countries (continental
    alternative states of the world in
    which the average unemployment
    rate is the same: one in which the                      p =f(u, fu )
    labor market is regulated, so that the
    frequency of unemployment
    episodes is lower and their duration
    is longer, and another in which the                               Anglo-saxon countries

    labor market is unregulated, so that
    the frequency is higher but the
    duration shorter
                                                                   Probability of keeping a job
Some empirical evidence about fatalism
                                     Positive sign => Fatalism

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    Some speculations on education and fatalism

• The role of education in compressing the cost of
  unemployment risks emerges clearly from our exercise:
  education seems negatively affect the demand for job
  protection directly and indirectly.

• This result is not surprising, and it confirms that an effective
  (cost-effective?) way to inject flexibility into labor markets is
  to compress workers’ psychological costs of facing
  unemployment risks through the provision of education.

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            Limitatations and conclusions

• Limitations of surveys in revealing beliefs…. but
• In the last 10 years or so economists have been more willing
  to recognize the fundamental role of cultural and
  psychological factors in shaping individual and collective
  preferences and believes
• Indeed, a lot of work needs still to be done to model and
  empirically investigate the generation of personal traits and
  the complex interactions beteween individual traits and
  collective outcomes
• Of course, experimental economics is the main character in
  this play
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