Agent-Based Computational Economics (ACE)
Research Area: Labor Markets

Last Updated: 3 June 2007

Site Maintained By: Leigh Tesfatsion Department of Economics Iowa State University Ames, Iowa 50011-1070 http://www.econ.iastate.edu/tesfatsi/ tesfatsi AT iastate.edu Online ACE Course (Self-Study eBook) ACE Website

Table of Contents: Basic Issues Introductory Materials Illustrative Research Software, Toolkits, and Demos Resource Sites, Groups, and Individual Researchers

Basic Issues

• Unraveling the separate implications of labor market structural features, learning effects, and network effects on: (a) job search and matching; (b) worksite behaviors; and (c) market power and efficiency outcomes;
• Sensitivity of labor market outcomes to alternative labor market institutions (e.g., minimum wage laws, unemployment benefit programs, and the degree of centralization of the wage-setting process);
• How do cultural norms affect labor market processes? For example, to what extent are social networks important for job search and matching in different cultures?
• Empirical Conundrums: For example, what explains the large variance in wage earnings and in employment histories across observationally similar workers?

Introductory Materials

• Richard B. Freeman, War of the Models: Which Labour Market Institutions for the 21st Century?, Labour Economics Vol. 5, No. 1, 31 March 1998, 1-24. Full text of article available from science@direct.
  Abstract: This is a highly entertaining and accessible account of key controversies affecting labor market policy in particular and macroeonomics in general. The author discusses new theoretical and empirical tools that seem particularly well suited for the analysis of labor issues, including the building of "artificial agent simulated societies."

  Leigh tesfatsion, "Labor Institutions and Market Performance: An Agent-Based Computational Economics Approach" (pdf,88K)

  Abstract: This presentation discusses the potential usefulness of ACE for exploring the sensitivity of market performance to alternative specifications for labor market institutions. An unemployment benefits study is used for concrete illustration; see the annotated entry for Pingle and Tesfatsion (2003) in the following section.

Illustrative Research

• Truman Bewley, Why Don't Wages Fall During a Recession?, Harvard University Press, Cambridge, MA, 1999.
  Abstract: The author reports on extensive interviews conducted with over 300 business people, labor leaders, counselors of the unemployed, and business consultants in the northeast U.S. during the early 1990s. He finds that social considerations outside of conventional economic theory strongly influence the wage-setting process. Based on these findings, he argues that firms should be viewed (and modeled) as communities, not simply as profit maximizers, because considerations such as trust, enthusiasm, and commitment are needed to make firms function well.

  William Darity, Jr., and Arthur H. Goldsmith, Social Psychology, Unemployment and Macroeconomics, Journal of Economic Perspectives 10:1 (Winter 1996), 121-140.

  Abstract: The author discusses recent developments in the social psychology literature relevant for the modelling of labor markets. He then sketches a behavioral model of the macroeconomy that incorporates some of these insights and uses the model to derive new insights into productivity, job search strategies, and layoff protocols.

  Giorgio Fagiolo, Giovanni Dosi, and Roberto Gabriele, Towards an Evolutionary Intepretation of Aggregate Labor Market Regularities (pdf,35pp,387K), Working Paper, Sant'Anna School of Advanced Studies, Pisa, Italy, January 21, 2004.

  Abstract: The authors study job matching and bargaining, wage and price setting, and output demand and supply formation in the context of an agent-based computational model of a decentralized market economy consisting of a labor and a product market. The objective of the authors is to provide possible "bottom up" micro explanations for well-known macro empirical regularities (e.g., the Beveridge curve, Okun's Law, and wage data patterns).

  Roberto Gabriele, Labor Market Dynamics and Institutions: An Evolutionary Approach, LEM Paper 2002-07, Laboratory of Economics and Management, Sant'Anna School of Advanced Studies, Pisa, downloadable at EconPapers.

  John Haltiwanger, Julia Lane, Jim Spletzer, Jules Theeuwes, and Ken Troske (eds.), The Creation and Analysis of Employer and Employee Matched Data, North Holland, 1999.

  Abstract: Elaborates on essential insights to be gained from combining traditional labor economics with industry studies research. Discusses potential advantages of creating matched employer-employee data sets for facilitating the study and understanding of the interactions of firms and workers.

  Roberto Leombruni and Matteo Richiardi (eds.), Industry and Labor Dynamics: The Agent-Based Computational Economics Approach, World Scientific Publishing Co., 432pp., November 2004, ISBN: 9-812-56101-3.

  Abstract: This book is the published proceedings of the WILD@ACE 2003 Workshop held in Torino, Italy, 3-4 October 2003. The acronym "WILD@ACE" stands for "Workshop on Industrial and Labor Dynamics: The Agent-Based Computational Economics Approach." The workshop focused on the potential use of agent-based simulation for the investigation of labor economics and industrial organization issues. The book includes a selection of contributed papers on methodology, microsimulation of labor dynamics, firm behavior, and industrial clusters and firm interaction. For more information, visit here.

  Barbara Petrongolo and Christopher A. Pissarides, Looking into the Black Box: A Survey of the Matching Function, Journal of Economic Literature, Vol. 39 (June 2001), pp. 390-431.

  Mark Pingle and Leigh Tesfatsion, "Evolution of Worker-Employer Networks and Behaviors Under Alternative Non-Employment Benefits: An Agent-Based Computational Study", pp. 256-285 in Anna Nagurney (ed.), Innovations in Financial and Economic Networks, New Dimensions in Networks Book Series, Edward Elgar Publishers, 2003 (pdf preprint,269K), (pdf presentation,88K).

  Abstract: This study replaces the standard exogenously-given worker-employer matching function with endogenous preferential worker-employer matching based on past work-site experiences. Workers and employers participate in a sequential employment game with adaptive job search and incomplete contracts. Matched workers and employers participate in a work-site game. The study examines the effects of a non-employment payoff (NEP) on network formation and work-site behaviors. Taking both utility benefits and program costs into account, the highest efficiency is achieved with a moderate NEP level. A zero NEP encourages too much shirking on the work-site, while a high NEP results in too high a risk of lost earnings due to coordination failure.

  Richard Rogerson, Theory Ahead of Language in the Theory of Unemployment, Journal of Economic Perspectives 11 (1997), 73-92.

  Troy Tassier and Filippo Menczer, "Emerging Small-World Referral Networks in Evolutionary Labor Markets", IEEE Transactions on Evolutionary Computation, Volume 5, Number 5, October 2001.

  Abstract: The authors construct an ACE labor market model in which potential workers engage in both social network formation and direct job search. They show that the evolved social networks have "small world network" properties in the sense that they are both very clustered (locally structured) and have global reach, and that these two properites enhance the ability of the social networks to perform as job referral networks. Nevertheless, as evolution progresses, agents end up expending more energy on social network formation and/or direct job search than is socially efficient.

  Leigh Tesfatsion, "Structure, Behavior, and Market Power in an Evolutionary Labor Market with Adaptive Search" (pdf,295K), Journal of Economic Dynamics and Control 25 (2001), pp. 419-457. The published article is also available from Science Direct.

  Abstract: This study undertakes a systematic experimental investigation of the relationship between market power and labor market structure (concentration and capacity conditions) when workers and employers preferentially match based on past worksite experiences. For each tested market structure, workers and employers repeatedly seek preferred worksite partners based on continually updated expected utility, engage in efficiency-wage worksite interactions modeled as prisoner's dilemma games, and evolve their worksite behaviors over time. A key finding is the presence of strong learning and network effects. Each tested market structure maps into a "spectral" distribution of observed interaction networks exhibiting one dominant attractor (frequent network pattern) with one or two weaker attractors (less frequent network patterns). Market structure is strongly predictive for the relative market power of workers and employers across all network attractors, but the magnitudes of the market power levels attained by workers and employers vary widely across the network attractors.

  Leigh Tesfatsion, "Hysteresis in an Evolutionary Labor Market with Adaptive Search," pp. 189-210 in S.-H. Chen (ed.), Evolutionary Computation in Economics and Finance, Physica-Verlag Heidelberg, New York, 2002 [ (ps preprint,216K), (pdf preprint,534K)].

  Abstract: This study undertakes a systematic experimental investigation of hysteresis (path dependency) when workers and employers preferentially match based on past worksite experiences. It is shown that two distinct hysteresis effects can arise, network and behavioral, when workers and employers interact strategically and evolve their worksite behaviors over time. These hysteresis effects result in persistent heterogeneity in earnings and employment histories across agents who have no observable structural differences. At a more global level, these hysteresis effects are shown to result in a one-to-many mapping between treatment factors and experimental outcomes. These hysteresis effects may help to explain why excess earnings heterogeneity is commonly observed in real-world labor markets.

  Leigh Tesfatsion, "Preferential Partner Selection in Evolutionary Labor Markets: A Study in Agent-Based Computational Economics," pp. 15-24 in V. W. Porto, N. Saravanan, D. Waagen, and A. E. Eiben (eds.), Evolutionary Programming VII, Proceedings of the Seventh Annual Conference on Evolutionary Programming, Springer-Verlag, Berlin, 1998 (ps preprint,130K).

  Abstract: This study develops an agent-based computational labor market framework for studying the formation and evolution of contractual networks between workers and employers. Resource-constrained workers and employers choose and refuse contractual partners on the basis of continually updated expected utility, engage in risky worksite interactions modelled as two-person "efficiency-wage" prisoner's dilemma games, and evolve their work-site strategies over time on the basis of past worksite earnings. Illustrative computational experiments are reported and interpreted.

Software, Toolkits, and Demos

• Annotated list of pointers to ACE/CAS General Software and Toolkits

• Annotated list of pointers to ACE/CAS Computational Laboratories and Demonstration Software

• Labor Applications of the TNG Comp Lab (Tesfatsion)

Resource Sites, Groups, and Individual Researchers

• ACE/CAS Research Sites and Groups

• Individual Researchers using ACE/CAS Tools

• Roberto Leombruni and Matteo Richiardi maintain a web page for the LABORatorio Riccardo Revelli, a research institute of CORIPE Piemonte directed by Bruno Contini (University of Torino, Italy). The institute specializes in agent-based models of labor and industry dynamics. Resources available at this site include lab publications, data bases, conference and workshop information, and related links.

• The Institute for Empirical Research in Economics (University of Zurich, Switzerland), headed by Prof.Dr. Ernst Fehr, provides links to a variety of resources related to microeconomics and experimental economics on its home page. Institute researchers combine insights from modern economic theory with results from social psychology and sociology to understand important economic phenomena. Topics stressed include the functioning of labor markets, the organization of the modern corporation, the private and public provision of public goods, and intertemporal choice problems.

• Giorgio Fagiolo (Laboratory of Economics and Management, Sant'Anna School of Advanced Studies, Pisa, Italy): ACE model of labor dynamics; Local interaction models; Evolution of social and economic networks; Learning; Endogenous interactions; Economics of innovation and technical change.

• Roberto Gabriele (Laboratory of Economics and Management, Sant'Anna School of Advanced Studies, Pisa, Italy): Labor market dynamics and institutions; Evolutionary modeling; Agent-based modeling.

• Peter Howitt (Department of Economics, Brown University, Providence, Rhode Island): Job creation and destruction; The emergence of economic organization; Monetary exchange; Endogenous growth.

• Filippo Menczer (School of Informatics and Department of Computer Science, Indiana University, Bloomington): Adaptive and evolutionary computation applied to intelligent and distributed information agents; Interactions between learning and evolution; Distributed decision making; Artificial life.

• Michael Neugart (Wissenschaftszentrum Berlin fur Sozialforschung, Germany): Labor economics; Endogenous matching functions; Nonlinear economic dynamics; Political economics; Agent-based computational modeling; Applied econometrics.

• Troy Tassier (Department of Economics, Fordham University, Bronx, NY): Microeconomics; Public policy; Labor economics; Agent-based computational economics.

• Leigh Tesfatsion (Economics, Iowa State University): ACE labor market studies; Market power, efficiency, path dependence, network formation, and "excess earnings heterogeneity" in labor markets; Evolution of cooperation in labor markets; Labor market experiments with real and computational agents.

Copyright © 2007 Leigh Tesfatsion. All Rights Reserved.