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Migration in an agent-based labour market Can ABM be used to influence policy decisions? Jeremy Franklin and Kate Mieske March 2011 Contents • Motivation and policy context • Developing an agent-based labour market ▫ ▫ ▫ ▫ Empirical regularities Model structure Model validation Policy experiment • Conclusions and limitations The views expressed are of the authors only, and do not represent the views or policy of the Home Office and Migration Advisory Committee! Motivation • Trained economists, employed in the Government Economics Service (GES) • Interested in new modelling techniques • Heard a lot about ABM ▫ Origin of Wealth (Beinhocker) ▫ Work of Sante Fe Institute ▫ Presentations to the GES by Nigel Gilbert and Paul Ormerod • Wanted to find out what it was all about and how it could be applied to public policy • So applied for User Fellowships with SIMIAN Policy context • Formerly employed by the Migration Advisory Committee (MAC) • MAC are a NDPB that provide advice and recommendations to Government on key migration issues (most have previously been accepted) • The MAC is made up of 5 leading academic labour market economists (independent of Government) • The secretariat is staffed by Civil Servants (both policy officials and economists) • Key questions that MAC deal with are: ▫ How to identify shortages in the labour market? ▫ What should be the level of limits for economic migration? ▫ What is the economic/social/public service impact of migration? • Further information and past reports can be found here: www.ukba.homeoffice.gov.uk/mac Why could ABM be useful? • Benefits 1. 2. 3. 4. Useful way of incorporating implications of micro behaviours and aggregating up Can vary underlying assumptions very easily Include more realistic behavioural theories (people aren’t always ‘perfectly rational’) Can introduce geography, look at regional effects • Key challenges 1. 2. 3. Likely to be limited to theory (very difficult to generate calibrated model to aspects of UK economy – too many factors to consider) What are the key macro patterns – are these sufficient? How can conclusions be interpreted both in economics but also agentbased literature ……. plus many more Developing a simple agent-based labour market • Aim: Scope the potential for using ABM to influence policy, by: 1. 2. 3. Designing a model based on both existing economic theory/evidence and latest agent-based studies Validating to key empirical regularities Testing the model implications under different policy situations Past literature • Economics: ▫ Big move towards ‘micro-foundations’ in macro economic models ▫ ‘Search-matching’ (Pissarides and Mortensen) – frictions that affect job search and vacancy creation have real effects on macro-economy ▫ These frictions lead to an ‘aggregate matching function’ – the rate at which unemployed workers are matched to new vacancies ▫ The Beveridge curve (a plot of vacancies against unemployment) can show empirically the scale of mismatch in the economy • Agent-based: ▫ Several studies unpick the ‘aggregate matching function’ and examine its micro-properties (Richiardi (2006), Neugart (2004), Dosi et al (2004) ▫ Undertake basic validation of their models using three empirical regularities… Empirical regularities 370 2.9% 360 2.7% real earnings 2.3% 2.1% 340 330 1.9% 320 1.7% 310 1.5% 4.0% 3) Wage curve 350 2.5% Vacancy rate 1) Beveridge curve 300 5.0% 6.0% 7.0% 8.0% 0% 9.0% 2% 10% % change in earnings % change in GDP 8% 10% 4% 8% 6% 4% 2% 0% -2% -4% 2% (Wage curve in % changes) 0% -2% -4% -6% -6% -8% -40% 6% 6% 12% 2) Okun’s curve 4% unemployment rate Unemployment rate -20% 0% 20% 40% % change in the unemployment rate 60% -8% -20% -10% 0% 10% 20% 30% 40% 50% % change in the unemployment rate … but there are also many others! Model structure • 2 types of agent: firms and workers, who are randomly distributed in an environment Firms: ▫ ▫ ▫ ▫ produce one type of good using only labour (L) and technology (A) labour exhibits diminishing returns, Y = AitLit1/2 maximise profit according to, ∏ = pAitLit1/2 – wL simplify decision making by assuming good traded on global markets (so sell everything produced, at a fixed price) ▫ therefore firms only compete for workers Workers: ▫ want to work and search for jobs ▫ wish to maximise their earnings, whether in employment already or unemployed. ▫ there is a universal reservation wage below which no worker will work Model processes (1) Decide optimal size of workforce. If vacancies, then advertise. If excess staff, then fire workers randomly. Firms (5) Produce goods (6) Count profits and update wage offer. If still have vacancies , then increase the wage (only if profitable to do so) (7) Each firm receives a random productivity shock. (4) Count job offers and accept the one offering the highest effective wage. Workers (3) Count number of applications and issue job offers (2) Search for vacancies. 42% 70 37% 60 32% 50 average wage 1) Beveridge curve? vacancy rate Basic model validation 27% 22% 17% 3) Wage curve? 40 30 20 12% 10 7% 0 2% 4% 14% 24% 34% 44% 0% 54% 10% 20% 8% 2.0% 6% 1.8% % change in average wage % change in total output 2) Okun’s curve? 4% 2% 0% -2% -4% -6% -8% -8% 30% 40% 50% unemployment rate unemployment rate (Wage curve in % changes?) 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% -6% -4% -2% 0% 2% 4% change in the unemployment rate 6% 8% 0.0% -8% -6% -4% -2% 0% 2% 4% change in the unemployment rate 6% 8% Policy experiment: costs to moving • Introduce costs to moving that are proportional to distance between firms and workers (therefore, workers consider cost of moving in decision to accept new job) • Examine prevalence of labour shortages and wage volatility • Firms find it harder to recruit in period. • Wage volatility (relative to productivity) increases (firms need to increase wages by more to expand) Cost = 0 Cost = 5 Conclusions and limitations • No ground-breaking results, but… ▫ Provided Committee with useful introduction to ABM for considering future research possibilities ▫ Highlighted the key benefits and challenges with applying ABM to economic issues ▫ Constructed a basic ABM framework for thinking about labour market issues, that the Home Office/ MAC can develop further ▫ Identified a number of avenues to take research further • Limitations: ▫ Theoretical model only – Government policy places much greater weight on empirical studies ▫ Very simplified – although for ABM to add any value to economic theory, must be able to identify causal links (Haldane and May (2011) and Farmer et al (2009) are great examples!) and not become a ‘black box’ Scope for further developments • Too many to list! ▫ Introduce migration into the economy – need to use evidence on assimilation, but the story is mixed ▫ Introduce capital into the system – allowing firms to choose their production methods ▫ Introduce heterogeneity across agents – such as skill level ▫ Endogenise entrepreneurial activity within the system (unsuccessful firms die and workers can save and become new firms) ▫ Allow firms to compete in prices and quantities produced ▫ Compare traded and non-traded goods • In summary, ABM presents a very exciting methodology for examining economic issues and we look forward to seeing new developments!