APRIL 29 2011

Richard Portes, VoxEU: Restructure Ireland’s debt. There is a way for Ireland to escape responsibility. Just wait for Greece to restructure its debt, at which point there will be general confusion and the markets will shun Ireland anyway. Then restructure, when it will be widely accepted as unavoidable. Maybe that is the unspoken strategy. If so, there may not be long to wait.

Natalia Kolesnikova, Yang Liu, St Louis Fed: Jobless Recoveries: Causes and Consequences. Many researchers have pointed to a labor market mismatch as one of the reasons for persistently high unemployment. Job growth polarization, industrial reallocation and organizational restructuring create a severe mismatch between available workers and appropriate job opportunities. Unemployed workers are forced to look for jobs in different occupations, industries and locations.  If the US economy immediately generates 350,000 jobs a month—the pace of the late 1990s—four years would be needed to reach an unemployment rate of 5 percent, whereas at a rate of 210,000 jobs a month—the 2005 pace—11 years would be needed to achieve a 5 percent unemployment rate. The social consequences may be as painful as economic consequences. A generation of childhoods, career paths, eating habits and marriage culture may be permanently altered.

Richard Barwell, Oliver Burrows, BoE: Growing fragilities? Balance sheets in The Great Moderation. The years leading up to the financial crisis are widely acclaimed as a period of remarkable, if not unprecedented, stability in the global economy. From a perspective that focuses on the value and volume of gross domestic product, that assessment is valid. But from a perspective that focuses on the value of financial assets and on the volume of market activity, this period was anything but stable. The past decade has borne witness to sharp swings in asset prices and a large expansion in credit and balance sheets. This paper considers a flow-of-funds approach that stresses the role of asset prices, credit and balance sheets. It suggests that there were linkages between many of the macroeconomic puzzles of the day and the balance sheet developments that led to financial instability. It further argues that approaches to macroeconomics that stress the importance of balance sheet linkages might be helpful in spotting building financial fragility.

Justine Hastings, Jesse M. Shapiro, Brown University: Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks. We formulate a simple test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity. We embed the test in a discrete-choice model of product quality choice and estimate the model on aggregate and panel microdata on purchases of gasoline. We find that when gasoline prices rise consumers substitute to lower grades of gasoline, to an extent that cannot be explained by income effects. We reject the null that households treat “gas money” as fungible with earned income. We show that the rejection of fungibility survives a wide range of specifications and argue that our findings should be interpreted as evidence of mental accounting.

Sylvie Blasco, Michael Rosholm, IZA: The Impact of Active Labour Market Policy on Post-Unemployment Outcomes: Evidence from a Social Experiment in Denmark. We use a social experiment, which was conducted in Denmark in 2005-6, to investigate the effects of a dramatic intensification of ALMPs on reemployment stability. We estimate a duration model with lagged duration dependence to separately identify "indirect" (via shorter unemployment duration) and "direct" (through a more efficient matching process) effects of ALMPs on subsequent employment duration. We find that overall intensive activation significantly reduces unemployment recurrence for men, but not for women. When we control for dynamic selection into employment and lagged duration dependence, the positive impact of the treatment becomes smaller but remains significant. 80! % of the global impact of intensification acts through the direct channel for men.

Tito Boeri, Herbert Brücker, IZA: Short-Time Work Benefits Revisited: Some Lessons from the Great Recession. In this paper we analyse the rationale for short time work benefits and their effects on labour adjustment from both a cross-country and a time-series perspective. We find that STW actually contributed to reduce job losses during the Great Recession. However, the number of jobs saved, according to our macroeconomic estimates, is smaller than the full-time equivalents jobs involved by these programmes, pointing in some cases to sizeable deadweight costs. Other institutions, like plant-level bargaining over hours, wages and employment levels may be more effective than STW in encouraging adjustment along the inten! sive margins in presence of temporary shocks. Our results also suggest that STW cannot be readily extended to countries having much different institutional configurations as the demand for STW is very much affected by other institutions such as employment protection legislation and the degree of centralization of collective bargaining. The micro evidence from firm-level data in Germany is more encouraging as to the effectiveness of STW, pointing to rather moderate deadweight losses.

Liwa Rachel Ngai, Christopher Pissarides, LSE: Taxes, Social Subsidies and the Allocation of Work Time. We examine the allocation of hours of work across industrial sectors in OECD countries. We find large disparities across three sector groups, one that produces goods without home substitutes, and two others that have home substitutes but treated differently by welfare policy. We attribute the disparities to the countries' tax and subsidy policies. High taxation substantially reduces hours in sectors that have close home substitutes but less so in other sectors. Subsidies increase hours in the subsidized sectors that have home substitutes. We compute these policy effects for nineteen OECD countries.

Edward L. Glaeser, Giacomo A. M. Ponzetto, Kristina Tobio, NBER: Cities, Skills, and Regional Change. This paper examines almost 200 years of regional change in the U.S. and finds that few, if any, growth relationships remain constant, including Gibrats Law. Education does a reasonable job of explaining urban resilience in recent decades, but does not seem to predict county growth a century ago. After reviewing this evidence, we present and estimate a simple model of regional change, where education increases the level of entrepreneurship. Human capital spillovers occur at the city level because skilled workers produce more product varieties and thereby increase labor demand. We find that skills are associated with growth in productivity or entrepreneurship, not with growth in quality of life, at least outside of the West. We also find that skills seem to have depressed housing supply growth in the West, but not in other regions, which supports the view that educated residents in that region have fought for tougher land-use controls. We also present evidence that skills have had a disproportionately large impact on unemployment during the current recession.

Filipe R. Campante, Davin Chor, Harvard Kennedy School: The People Want the Fall of the Regime: Schooling, Political Protest, and the Economy. We examine several hypotheses regarding the determinants and implications of political protest, motivated by the wave of popular uprisings in Arab countries starting in late 2010. While the popular narrative has emphasized the role of a youthful demography and political repression, we draw attention back to one of the most fundamental correlates of political activity identified in the literature, namely education. Using a combination of individual-level micro data and cross-country macro data, we highlight how rising levels of education coupled with economic under-performance jointly provide a strong explanation for participation in protest modes of political activity as well as incumbent turnover. Political protests are thus more likely when an increasingly educated populace does not have commensurate economic gains. We also find that the implied political instability is associated with heightened pressures towards democratization.

Randi Hjalmarsson, Matthew Lindquist, CEPR: The Origins of Intergenerational Associations in Crime: Lessons from Swedish Adoption Data. We use Swedish adoption data combined with police register data to study parent-son associations in crime. For adopted sons born in Sweden, we have access to the criminal records of both the adopting and biological parents. This allows us to assess the relative importance of pre-birth factors (genes, prenatal environment and perinatal conditions) and post-birth factors for generating parent-son associations in crime. We find that pre-birth and postbirth factors are both important determinants of sons’ convictions and that mothers and fathers contribute equally through these two channels. We find little evidence of interaction effects between biological and adoptive parents’ criminal convictions. Having a more highly educated adoptive mother, however, does appear to mitigate the impact of biological parents’ criminality.

Antonella Tutino, Dallas Fed: ‘Rational Inattention’ Guides Overloaded Brains, Helps Economists Understand Market Behavior. Limitations on the ability to process information force people to make choices regarding the subjects to which they pay more or less attention. Economists have long acknowledged the existence of human cognitive capacities, but only in recent years have models embodying such limits known as “rational inattention” found their way into mainstream macroeconomics. Rational inattention models have a broad range of applications. They may reconcile relatively unchanged prices and volatile ones and how the two play out in aggregate demand in the U.S. economy. Moreover, such models can capture salient features of the business cycle, providing a rationale for sharp contractions or slower expansions. Finally, rational inattention models have significant implications for monetary policy.