Thomas
A. Lubik and Christian Matthes, Richmond FED:
Calculating the Natural Rate of Interest: A Comparison of Two
Alternative Approaches.
The natural rate of interest is a key concept in monetary economics because its
level relative to the real rate of interest allows economists to assess the stance
of monetary policy. However, the natural rate cannot be observed; it must be
calculated using identifying assumptions. This Economic Brief compares the
popular Laubach-Williams approach to calculating the natural rate with an
alternative method that imposes fewer theoretical restrictions. Both approaches
indicate that the natural rate has been above the real rate for a long time.
Lennart
Flood, Ekonomisk Debatt: Skatter räknas, räkna med skatter. Sverige har en mycket hög högsta nivå på
beskattningen av förvärvsinkomster. Det finns flera skäl till att denna skatt
bör sänkas. Teorin om en optimal inkomstbeskattning stödjer en skatteprofil
utan progressiva inslag. Det empiriska underlaget visar, trots stora
variationer, att skatter påverkar våra val och att dessa val sträcker sig långt
utanför valet av arbetstid. Det är väsentligt att framhålla betydelsen av att
göra konsekvensanalyser av skatte- och bidragsreformer. Vid dessa utvärderingar
bör strukturella modeller spela en väsentlig roll.
Brookings:
The power of the nudge: Policy lessons from behavioral economics.
Research is proliferating in behavioral economics, a field at the intersection
of psychology and economics which tries to study how people actually behave, as
opposed to the way they are assumed to behave in economists’ abstract models.
This work has developed new and effective policies across many areas, from
encouraging people to save for retirement to discouraging them from smoking. On
September 18, the Hutchins Center on Fiscal and Monetary Policy at Brookings
explored lessons from behavioral economics for fiscal and monetary policy with
leading scholars in the field, who shared their findings and suggestions for
policy.
Henk-Wim de Boer, Egbert L.
W. Jongen, Jan Kabátek, IZA: The Effectiveness of Fiscal Stimuli for Working
Parents. To promote
the labor participation of parents with young children, governments employ a
number of fiscal instruments. Prominent examples are childcare subsidies and
in-work benefits. However, which policy works best for employment is largely
unknown. We study the effectiveness of different fiscal stimuli in an empirical
model of household labor supply and childcare use. We use a large and rich
administrative data set for the Netherlands. Large-scale reforms in childcare
subsidies and in-work benefits in the data period facilitate the identification
of the structural parameters. We find that an in-work benefit for secondary
earners that increases with income is the most effective way to stimulate total
hours worked. Childcare subsidies are less effective, as substitution of other
types of care for formal care drives up public expenditures. In-work benefits
that target both primary and secondary earners are much less effective, because
primary earners are rather unresponsive to financial incentives.
Guillermo
Montt, OECD: How the Labour Market Drives Mismatch and its Penalties. Results from the Survey of Adult Skills (PIAAC)
(2015) show that the more a field is saturated – when the supply of graduates
exceeds the demand by firms – the more it forces its graduates to seek work in
another field, and the more it forces them to work at a level for which they
are over-qualified. The more a field is saturated, the more likely its
graduates will receive an important wage penalty. Results also show that
workers benefit when the skills they have earned are transferable to other
sectors as they can put a larger part of their skill set to use when in other
sectors. These workers are more likely to work in another field at the
corresponding qualifications level; they do not experience a wage penalty.
Committee
on the Long-Run Macroeconomic Effects of the Aging U.S. Population: The Growing
Gap in Life Expectancy by Income:
Implications for Federal Programs and Policy Responses.. To evaluate the effect of the widening life-span gap
on benefits received from Social Security, Medicare, and Medicaid, the
committee simulated the levels of benefits received by a generation with the
lifespans of those born in 1930 and compared them with the benefits received by
a generation with the lifespans of those born in 1960. (The simulation kept all
other characteristics across the groups the same, except for health and
mortality.) The simulation found that for men born in 1930, lifetime entitlement
benefits received after age 50 are roughly similar across income groups. Even among those born in 1930, high earners
had longer life spans, so they tend to receive more from Social Security, while
lower earners receive more on average from Medicaid, disability insurance, and
Supplemental Security Income. For men
born in 1960, however, high earners are projected to receive markedly more --
$132,000 more -- in lifetime benefits from entitlement programs than is projected
for men in the bottom earnings category.
Nicholas
W. Papageorge Victor Ronda Yu Zhengx, JHU: The Economic Value of Breaking Bad:
Misbehavior, Schooling and the Labor Market. Prevailing research argues that childhood
misbehavior in the classroom is bad for schooling and, presumably, bad overall.
In contrast, we argue that childhood misbehavior captures underlying
non-cognitive skills that are potentially valuable in the labor market. We
follow work from psychology and summarize observed classroom misbehavior as two
underlying latent factors. Next, we estimate a model of education decisions and
labor market outcomes, allowing the impact of each of these two factors to vary
by outcome. We show the first evidence that one of the factors driving
childhood misbehavior, discussed in psychological literature as externalizing
behavior (and linked, for example, to aggression), does indeed reduce
educational attainment, but also increases earnings. This finding highlights a broader
point: non-cognitive skills are not well summarized as a one-dimensional object
that is either good or bad per se. Using the estimated model, we assess
competing pedagogical policies. We find that policies aimed at eliminating
externalizing behavior increase schooling attainment, but also reduce earnings.
In comparison, policies that decrease the schooling penalty of externalizing
behavior increase both schooling and earnings.
Sebastien
Buttet, Udayan Roy: Macroeconomic Stabilization When the Natural Real Interest
Rate Is Falling.
The authors modify the Dynamic Aggregate Demand-Dynamic Aggregate Supply model
in Mankiw's widely used intermediate macroeconomics textbook to discuss
monetary policy when the natural real interest rate is falling over time. Their
results highlight a new role for the central bank's inflation target as a tool
of macroeconomic stabilization. They show that even when the zero lower bound
is not binding, a prudent central bank must match every decrease in the natural
real interest rate with an equal increase in the target rate of inflation in
order to stabilize the risk of the economy falling into a deflationary spiral,
which is an acute case of simultaneously falling output and inflation in which
the economy's self-correcting forces are inactive.
Richard
Freeman et al, Center for American progress: Bargaining for the American Dream.
What Unions do for Mobility. Areas with higher union membership demonstrate more mobility for
lowincome children. Using Chetty and others’ data, we find that low-income children
rise higher in the income rankings when they grow up in areas with high-union
membership. A 10 percentage point increase in a geographic area’s union
membership is associated with low-income children ranking 1.3 percentile points
higher in the national income distribution. This relationship between unions
and the mobility of low-income children is at least as strong as the
relationship between mobility and high school dropout rates—a factor that is
generally recognized as one of the most important correlates of economic mobility.
Indeed, union density is one of the strongest predictors of an area’s mobility.
David
Autor, NBER: Polanyi's Paradox and the Shape of Employment Growth. I begin by sketching the historical thinking about
machine displacement of human labor, and then consider the contemporary
incarnation of this displacement--labor market polarization, meaning the
simultaneous growth of high-education, high-wage and low-education, low-wages
jobs--a manifestation of Polanyi's paradox. I discuss both the explanatory
power of the polarization phenomenon and some key puzzles that confront it. I
then reflect on how recent advances in artificial intelligence and robotics
should shape our thinking about the likely trajectory of occupational change
and employment growth. A key observation of the paper is that journalists and
expert commentators overstate the extent of machine substitution for human
labor and ignore the strong complementarities. The challenges to substituting
machines for workers in tasks requiring adaptability, common sense, and
creativity remain immense. Contemporary computer science seeks to overcome
Polanyi's paradox by building machines that learn from human examples, thus
inferring the rules that we tacitly apply but do not explicitly understand. David Autor: Automation – opportunities and challenges
(video).
Guy
Michaels, Georg Graetz, VOX: Estimating the impact of robots on productivity
and employment.
Robots may be dangerous not only to the action heroes of cinema, but also to
the average manufacturing worker. This column analyses the effect robots have
had in 14 industries across 17 developed countries from 1993 to 2007.
Industrial robots increase labour productivity, total factor productivity, and
wages. While they don’t significantly change total hours worked, they may be a
threat to low- and middle-skilled workers.
William
D. Nordhaus, NBER: Are We Approaching an Economic Singularity? Information
Technology and the Future of Economic Growth. What are the prospects for long-run economic growth?
The present study looks at a recently launched hypothesis, which I label
Singularity. The idea here is that rapid growth in computation and artificial
intelligence will cross some boundary or Singularity after which economic
growth will accelerate sharply as an ever-accelerating pace of improvements
cascade through the economy. The paper develops a growth model that features
Singularity and presents several tests of whether we are rapidly approaching
Singularity. The key question for Singularity is the substitutability between
information and conventional inputs. The tests suggest that the Singularity is
not near.
Claire
Cain Miller, The Upshot: Restaurant of the Future? Service With an Impersonal
Touch. At this
restaurant, customers order, pay and receive their food and never interact with
a person. The restaurant, Eatsa, the first outlet in a company with national
ambitions, is almost fully automated. There are no waiters or even an order
taker behind a counter. There is no counter. There are unseen people helping to
prepare the food, but there are plans to fully automate that process, too, if
it can be done less expensively than employing people.
Francisco
J. Buera, Joseph P. Kaboski, Richard Rogerson, NBER: Skill Biased Structural
Change. We document
for a broad panel of advanced economies that increases in GDP per capita are
associated with a shift in the composition of value added to sectors that are
intensive in high-skill labor. It follows that further development in these
economies leads to an increase in the relative demand for skilled labor. We
develop a two-sector model of this process and use it to assess the
contribution of this process of skill-biased structural change to the rise of
the skill premium in the US, and a broad panel of advanced economies, over the
period 1977 to 2005. We find that these compositional demands account for
between 25 and 30% of the overall increase of the skill premium due to
technical change.
Lyndsey
Pereira-Brereton. BoE: Izzy Whizzy let’s get Vizzy – The magic of using
visualisation to analyse and understand data. This blog draws on some examples to highlight how
different visualisation techniques help not only the communication of data, but
more importantly, how it can aid data exploration, analysis and understanding. Visualisation
is a powerful technique because our brains are naturally wired to process
information visually. One of the best examples of this power is Anscombe’s
Quartet, which comprises of 4 sets of data that have the same mean, variance,
correlation, and linear regression. However, it is only when they are graphed
that we immediately see very different patterns, and therefore interpretations,
of the data:
Sara
G. Miller, Livescience: The Best Country to Live in If You're Over 60. According to the Global Age Watch Index 2015, which
measures the social and economic wellbeing of older people across the globe,
Switzerland ranks as the No. 1 country in the world to live for older people.
Norway and Sweden came in second and third, respectively. The U.S. managed to
snag a spot in the top 10, coming in at No. 9, according to the report.
Carmen
Reinhart, Project Syndicate: Inflation, the Fed, and the Big Picture. The share of countries recording outright deflation in
consumer prices (the green line) is higher in 2015 than that of countries
experiencing double-digit inflation (7% of the total). Whatever nasty surprises
may lurk in the future, the global inflation environment is the tamest since
the early 1960s. Indeed, the risk for the world economy is actually tilted
toward deflation for the 23 advanced economies in the sample, even eight years
after the onset of the global financial crisis. For this group, the median
inflation rate is 0.2% – the lowest since 1933. The only advanced economy with
an inflation rate above 2% is Iceland (where the latest 12-month reading is
2.2%).
Justin
Fox, Bloomberg: Maybe This Global Slowdown Is Different. Finally, consider the things that people do want to
spend their money on. The defining consumer product of our age is the
smartphone. A smartphone is a good, and it takes resources to make and
transport it. Still, it takes a lot less resources than, say, a car. Most of
its value is in the software that is loaded onto it and the people, information
and entertainment you can connect to with it. That's a different sort of value
creation than 20th-century resource-based value creation. If that's the
direction the global economy is headed in, the connections between growth,
trade and resource consumption aren't going to be the same as they have been.
That is probably a good thing.
Agneta
Berge, Fokus: Dags att lämna valvet! Bland dem finns Narayana Kocherlakota, som är
ordförande för Federal Reserve Bank of Minneapolis. För USA:s del har den
neutrala räntan sjunkit, menar han. Riksbankens ekonomer bedömer att detsamma
har hänt i Sverige – och att det dröjer innan den når normala nivåer igen. Det
betyder att räntevapnet är svagt, kanske obrukbart. Inte heller så kallade
kvantitativa lättnader verkar ge önskad effekt. Finns det då kvar något i
Riksbankens arsenal som kan få fart på priserna? Eller står vi, som
Kocherlakota kallar det, vid penningpolitikens bortre gräns? Det skulle enligt
honom kräva en ny ekonomisk-politisk doktrin, snarare än extremare åtgärder
inom den befintliga.
Òscar
Jordà, Moritz Schularick, Alan Taylor, VOX: Leveraged bubbles. The risk that asset price bubbles pose for financial
stability is still not clear. Drawing on 140 years of data, this column argues
that leverage is the critical determinant of crisis damage. When fuelled by
credit booms, asset price bubbles are associated with high financial crisis
risk; upon collapse, they coincide with weaker growth and slower recoveries.
Highly leveraged housing bubbles are the worst case of all.
Jörgen Hansen, Damba
Lkhagvasuren, IZA: New Evidence on Mobility and Wages of the Young and the Old. We present new evidence on the wage and mobility of
young and old workers, which is difficult to explain using standard human
capital theory. Instead, we propose a simple dynamic extension of the Roy
model, where worker migration and wages are jointly determined at the
individual level. According to this model, a higher moving cost among older
workers is the main factor driving the lower mobility among this group. Because
of the higher moving costs, older workers require a higher wage increase to
move across regions than younger workers, a pattern that is consistent with
individual-level U.S. data. We also find an interesting dynamic effect
suggesting that, given a persistent labor income shock, a higher future moving
cost makes workers more mobile today.
Ann-Sofie
Kolm, Mirco Tonin, SU: Benefits conditional on work and the Nordic model. Welfare benefits in the Nordic countries are often
tied to employment. We argue that this is one of the factors behind the success
of the Nordic model, where a comprehensive welfare state is associated with
high employment. In a general equilibrium setting, the underlining mechanism
works through wage moderation and job creation. The benefits make it more important
to hold a job, thus lower wages will be accepted, and more jobs created.
Moreover, we show that the incentive to acquire higher education improves,
further boosting employment in the long run. These positive effects help in
counteracting the negative impact of taxation. Through numerical simulations,
we show how this mechanism can contribute to explain the better labor market
performance and more equitable income distribution of Nordic countries compared
to Continental European ones.
Erez
Yoeli, David Rand, NYT: The Trick to Acting Heroically. Much has been made of the military training of two of
the Americans on the French train, and the envelope game helps to explain why.
While many heroes have no military or other formal training, a sizable
proportion do. The military hones soldiers’ cooperative instincts in an
environment that has all of the required characteristics: Soldiers occasionally
find themselves helping others at enormous personal risk; and they live, train
and work together for relatively long periods, during which they have plenty of
opportunities to observe whether a peer helps others without thinking. Every
day, decent folk do good. But as the recent heroics in France remind us, heroes
don’t just do good — they do good instinctively.
Mårten
Palme, Emilia Simeonova, SU: Does women's education affect breast cancer risk
and survival? Evidence from a population based social experiment in education. Breast cancer is a notable exception to the well
documented positive education gradient in health. A number of studies have
found that highly educated women are more likely to be diagnosed with the disease.
Breast cancer is therefore often labeled as a “welfare disease”. However, it
has not been established whether the strong positive correlation holds up when
education is exogenously determined. We estimate the causal effect of education
on the probability of being diagnosed with breast cancer by exploiting an
education reform that extended compulsory schooling and was implemented as a
social experiment. We find that the incidence of breast cancer increased for
those exposed to the reform.
Borko
Handjiski, Brookings: Mobile connectivity in Africa has already arrived. Lack of resources, be it electricity, roads, or
doctors, makes it difficult for developing countries to produce goods and
services that are energy intensive, need efficient land transport, or a healthy
workforce. However, in today’s modern economy we are witnessing a rapidly
expanding array of services with mobile technologies as their backbone. High
mobile penetration gives developing economies the capacity to produce and
consume these services. In 2014, mobile technologies were responsible for an
estimated 3.8 percent of global GDP, of which 2 percentage points came from the
associated productivity increases (just think of your drop in productivity when
your cell phone battery dies). In SSA, the contribution of mobile technologies
to GDP was even higher—5.4 percent. McKinsey estimates that (mobile) internet
could make up 10 percent of Africa’s economy by 2025.
Gillian
Tett, FT: Productivity paradox deepens Fed’s rate-rise dilemma.
And while logic
might suggest that innovation should boost productivity, the problem with new
technology, as economists such as Andrew McAfee of MIT point out, is that it
takes time for companies to harness. So, just as it took a couple of decades
before computers raised US productivity trends, it might take time before the
economy is truly boosted by today’s smartphones. If this theory turns out to be
correct (as I suspect it is), it suggests that eventually those productivity
numbers should rise sharply. The problem, however, is that it could take
several years. Until then, better keep watching the productivity numbers — if
nothing else, because they show that central banking is an art, not a science;
especially when the time comes to change course.
Tim
Harford, The Undercover Economist: The myth of the robot job-ocalypse. Private investment in computers and software in the
US has been falling almost continuously for 15 years. That is hard to square
with the story of a robotic job-ocalypse. Surely we should expect to see a
surge in IT investment as all those machines are installed? Instead, in the
wake of the great recession, managers have noted an ample supply of cheap human
labour and have done without the machines for now. Perhaps there is some vast
underground dormitory somewhere, all steel and sparks and dormant androids. In
a corner, a chromium-plated robo-hack is tapping away at a column lamenting the
fact that the humans have taken all the robots’ jobs.
Jonathan
L. Willis, Guangye Cao, KC Fed: Has the U.S. Economy Become, Less Interest Rate
Sensitive? Although
monetary policy is an important tool for promoting price and economic
stability, its efficacy can change over time. This article investigates the
interest rate channel of monetary policy and, more specifically, the response
of employment to changes in the federal funds rate. Analytical results suggest
the interest sensitivity of employment has declined in recent decades for
nearly all industries and for the overall economy. The article tests three
possible explanations for the observed change in interest sensitivity. First,
changes in the conduct of monetary policy do not appear to be responsible for
the shift in interest sensitivity. Second, linkages between the short end and
the long end of the yield curve along with linkages between financial markets
and the overall economy have become protracted. Third, structural shifts have
altered how employment changes at the industry level feed back to the aggregate
economy. Overall, the findings suggest that the decline in the interest
sensitivity of the economy is not due to changes in the conduct of monetary
policy, but rather to structural changes in industries and financial markets.
Future research should investigate whether and how monetary policy should adapt
in response to these changes.
Joseph
Tracy, Robert Rich, Samuel Kapon, Ellen Fu, NY Fed: Mind the Gap: Assessing
Labor Market Slack. Indicators
of labor market slack enable economists to judge pressures on wages and prices.
Direct measures of slack, however, are not available and must be constructed.
Here, we build on our previous work using the employment-to-population (E/P)
ratio and develop an updated measure of labor market slack based on the
behavior of labor compensation. Our measure indicates that roughly 90 percent
of the labor gap that opened up following the recession has been closed.
Alan
Auerbach, Yuriy Gorodnichenko, NBER: How Powerful Are Fiscal Multipliers in
Recessions? During the
Great Recession, countries around the world adopted expansionary fiscal
policies aimed at counteracting the large negative shocks to their economies.
These actions occurred in spite of skepticism among many economists about the
potential of fiscal policy to stimulate economic activity. The results of our
and related work suggest that fiscal policy activism may indeed be effective at
stimulating output during a deep recession, and that the potential negative
side effects of fiscal stimulus, such as increased inflation, are also less
likely in these circumstances. These empirical results call into question the
results from the new Keynesian literature, which suggests that shocks to
government spending, even when increasing output, will crowd out private
economic activity. While there has been some recent progress providing a
rationale for large multipliers when economies confront a binding zero lower
bound on interest rates, our findings apply to more general recessionary
conditions, and thus present a challenge for the development of new models
that, like the simple traditional Keynesian model, can encompass positive
fiscal multipliers for private activity.
Roland
G. Fryer, Jr., Steven D. Levitt, John A. List, NBER: Parental Incentives and
Early Childhood Achievement: A Field Experiment in Chicago Heights. This article describes a randomized field experiment
in which parents were provided financial incentives to engage in behaviors
designed to increase early childhood cognitive and executive function skills
through a parent academy. Parents were rewarded for attendance at early
childhood sessions, completing homework assignments with their children, and
for their child’s demonstration of mastery on interim assessments. This
intervention had large and statistically significant positive impacts on both
cognitive and non-cognitive test scores of Hispanics and Whites, but no impact
on Blacks. These differential outcomes across races are not attributable to
differences in observable characteristics (e.g. family size, mother’s age,
mother’s education) or to the intensity of engagement with the program.
Children with above median (pre-treatment) non cognitive scores accrue the most
benefits from treatment.
Josh
Bivens, Lawrence Mishel, EPI: Understanding the historic divergence between
productivity and a typical worker’s pay. Why it matters and why it’s real. Since 1973, hourly compensation of the vast majority
of American workers has not risen in line with economywide productivity. In
fact, hourly compensation has almost stopped rising at all. Net productivity
grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly
compensation of the median worker rose just 8.7 percent, or 0.20 percent
annually, over this same period, with essentially all of the growth occurring
between 1995 and 2002. Another measure of the pay of the typical worker, real
hourly compensation of production, nonsupervisory workers, who make up 80
percent of the workforce, also shows pay stagnation for most of the period
since 1973, rising 9.2 percent between 1973 and 2014. Again, the lion’s share
of this growth occurred between 1995 and 2002.
Will
Knight, MIT Technology Review: New Boss on Construction Sites Is a Drone. Drones are being used to capture video footage that
shows construction progress at the Sacramento Kings’ new stadium in California.
Once per day, several drones automatically patrol the Sacramento work site,
collecting video footage. That footage is then converted into a
three-dimensional picture of the site, which is fed into software that compares
it to computerized architectural plans as well as a the construction work plan
showing when each element should be finished. The software can show managers
how the project is progressing, and can automatically highlight parts that may
be falling behind schedule.
Larry
Summers, FT: The Fed looks set to make a dangerous mistake. Raising rates this year will threaten all of the
central bank’s major objectives. The biggest risk is that inflation will be
lower than 2 % — a risk that would be exacerbated by tightening policy. More
than half the components of the consumer price index have declined in the past
six months — the first time this has happened in more than a decade. CPI
inflation, which excludes volatile energy and food prices and
difficult-to-measure housing, is less than 1 per cent. Market-based measures of
expectations suggest that, over the next 10 years, inflation will be well under
2 per cent. If the currencies of China and other emerging markets depreciate
further, US inflation will be even more subdued.
Olivier
Blanchard, Christopher J. Erceg, Jesper Lindé, NBER: Jump Starting the Euro
Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? We show that a fiscal expansion by the core
economies of the euro area would have a large and positive impact on periphery
GDP assuming that policy rates remain low for a prolonged period. Under our
preferred model specification, an expansion of core government spending equal
to one percent of euro area GDP would boost periphery GDP around 1 percent in a
liquidity trap lasting three years, about half as large as the effect on core
GDP. Accordingly, under a standard ad hoc loss function involving output and
inflation gaps, increasing core spending would generate substantial welfare
improvements, especially in the periphery. The benefits are considerably
smaller under a utility-based welfare measure, reflecting in part that higher
net exports play a material role in raising periphery GDP.
Wolfgang Frimmel, Thomas
Horvath, Mario Schnalzenberger, Rudolf Winter-Ebmer, IZA: Seniority Wages and
the Role of Firms in Retirement. In general, retirement is seen as a pure labor
supply phenomenon, but firms can have strong incentives to send expensive older
workers into retirement. Based on the seniority wage model developed by Lazear
(1979), we discuss steep seniority wage profiles as incentives for firms to
dismiss older workers before retirement. Conditional on individual retirement
incentives, e.g., social security wealth or health status, the steepness of the
wage profile will have different incentives for workers as compared to firms
when it comes to the retirement date. Using an instrumental variable approach
to account for selection of workers in our firms and for reverse causality, we
find that firms with higher labor costs for older workers are associated with
lower job exit age.
Peter
Berg, Mary K. Hamman, Matthew Piszczek, Christopher J. Ruhm, NBER: Can Policy
Facilitate Partial Retirement? Evidence from Germany. In 1996, Germany introduced the Altersteilzeit (ATZ)
law, which encouraged longer working lives through partial retirement
incentives. Using matched pension system and establishment survey data, we estimate
changes in part-time employment and retirement after ATZ. We find the policy
induced growth in part-time work for men and extended men's expected duration
of employment by 1.8 years. As the policy evolved to include an abrupt
retirement option, the worklife gain for men fell to 1.2 years. Among women,
part-time employment grew less and employment duration changed little initially
but later declined by 0.2 years when abrupt retirement became available.
Long,
Iain, Polito, Vito W, Cardiff Business School: Cash-in-Hand, Benefit Fraud and
Unemployment Insurance.
Recent evidence questions the nature of the re-employment spike as unemployment
insurance (UI) payments expire. Unemployed agents do not appear to devote more
time to search and are observed leaving the UI scheme early without necessarily
entering employment. We show that benefit fraud is consistent with both
observations. Over time, UI recipients become increasingly willing to accept
short-term cash-in-hand work. This takes them away from job search. Immediately
before UI expiry, the risk of punishment for fraud exceeds the value of
remaining payments. Recipients may voluntarily leave the scheme to accept
cash-in-hand opportunities.
Lex Borghans, Bart H.H.
Golsteyn, Ulf Zölitz , IZA: School Quality and the Development of Cognitive Skills
between Age Four and Six.
This paper studies the extent to which young children develop their cognitive
ability in high and low quality schools. We use a representative panel data set
containing cognitive test scores of 4-6 year olds in Dutch schools. School
quality is measured by the school's average achievement test score at age 12.
Our results indicate that children in high-quality schools develop their skills
substantially faster than those in low-quality schools. The results remain
robust to the inclusion of initial ability, parental background, and
neighborhood controls. Moreover, using proximity to higher-achieving schools as
an instrument for school choice corroborates the results. The robustness of the
results points toward a causal interpretation, although it is not possible to
erase all doubt about unobserved confounding factors.
Eric A. Hanushek, Jens
Ruhose, Ludger Woessmann, IZA: Human Capital Quality and Aggregate Income
Differences: Development Accounting for U.S. States. Although many U.S. state policies presume that human
capital is important for state economic development, there is little research
linking better education to state incomes. In a complement to international
studies of income differences, we investigate the extent to which
quality-adjusted measures of human capital can explain within-country income
differences. We develop detailed measures of state human capital based on
school attainment from census micro data and on cognitive skills from state-
and country-of-origin achievement tests. Partitioning current state workforces
into state locals, interstate migrants, and immigrants, we adjust achievement
scores for selective migration. We use the new human capital measures in
development accounting analyses calibrated with standard production parameters.
We find that differences in human capital account for 20-35 percent of the
current variation in per-capita GDP among states, with roughly even
contributions by school attainment and cognitive skills. Similar results emerge
from growth accounting analyses
Alexander Ahammer, Thomas
Horvath, Rudolf Winter-Ebmer, IZA: The Effect of Income on Mortality: New
Evidence for the Absence of a Causal Link. We analyze the effect of income on mortality in
Austria using administrative social security data. To tackle potential
endogeneity concerns arising in this context, we estimate time-invariant
firm-specific wage components and use them as instruments for actual wages.
While we do find quantitatively small yet statistically significant effects in
our naïve least squares estimations, IV regressions reveal a robust zero-effect
of income on ten-year death rates for prime-age workers, both in terms of
coefficient magnitude and statistical significance. These results are robust to
a number of different sample specifications and both linear and non-linear
estimation methods.
Elizabeth
Dougherty, MIT News: Wired for habit. Researchers discover neurons in the brain that weigh
costs and benefits to drive formation of habits. We are creatures of habit,
nearly mindlessly executing routine after routine. Some habits we feel good
about; others, less so. Habits are, after all, thought to be driven by
reward-seeking mechanisms that are built into the brain. It turns out, however,
that the brain’s habit-forming circuits may also be wired for efficiency
Will
Knight, MIT Technology Review: Robots Learn to Make Pancakes from WikiHow
Articles. A robot
called PR2 in Germany is learning to prepare pancakes and pizzas by carefully
reading through WikiHow’s written directions. It’s part of a European project
called RoboHow, which is exploring ways of teaching robots to understand
language. This could make it easier for people to communicate instructions to
robots, and provide a way for machines to figure out how to perform unfamiliar
tasks. Instead of programming a robot to perform precise movements, the goal is
for a person to simply tell a robot what to do.
André
Albuquerque Sant’Anna, MPRA: A spectre has haunted the west: did socialism
discipline income inequality? The aim of this paper is to discuss the role of the
existence of a powerful socialist bloc as a disciplining device to inequality
in western countries. The recent literature on top income inequality has
emphasized explanations that go beyond the marginal productivity framework to
explain top incomes. This literature does not embody the contributions of the
state capacity literature that recognizes external conflicts as a source for
the development of institutions that increase state capacity. In this paper, we
analyze the role of a latent conflict that has occurred from WWII to the eighties:
the Cold War. We believe this lasting conflict helped to shape the creation of common-interest
states, as Besley and Persson (2013) defined. Under these commoninterest states,
a social cohesion emerged because of the presence of a powerful external enemy,
leading to reduced top income shares. In order to test our hypothesis, we run a
panel of 18 OECD countries between 1960-2010. We find a robust and negative
significant relation between Soviet Union’s relative military power and top
income shares.
Lukasz
Rachel, Thomas Smith, BoE: Drivers of long-term global interest rates – can
weaker growth explain the fall? Long-term real interest rates have fallen
substantially over the past thirty years. The co-movement in real rates across both advanced and emerging
economies suggests a common driver is at work – the global neutral rate may
have fallen. In this two-part blog post
we attempt to identify which secular trends could have driven such a fall. In Part 1 we highlight how weaker
expectations for global trend growth can account for around 100bps of the
450bps fall in real rates since the 1980s.
But this effect seems to mainly apply to the post-crisis period –
suggesting other factors are responsible for the protracted decline before the
crisis.
Lukasz
Rachel, Thomas Smith, BoE: Drivers of long-term global interest rates – can
changes in desired savings and investment explain the fall? In this post we show how various secular trends –
demographics, inequality and the emerging market savings glut – raised desired
savings at the global level and put downward pressure on real rates. We also show how desired investment could have
fallen due to the decline in the relative price of capital goods, lower public
investment and a rise in the spread between risk-free rates and the return on
capital. Together we think these secular
trends can account for 300bps of the historic decline in the global real
rate. Moreover, we think these secular
trends are likely to persist. This suggests the global neutral rate, which acts
as an anchor for individual countries’ equilibrium rates in the long-term, will
remain low, perhaps around 1%.
Barry
Eichengreen, NBER: Secular Stagnation: The Long View. Four explanations for secular stagnation are
distinguished: a rise in global saving, slow population growth that makes
investment less attractive, averse trends in technology and productivity
growth, and a decline in the relative price of investment goods. A long view
from economic history is most supportive of the last of these four views.
Martin
Feldstein, Project Syndicate: Are US Middle-Class Incomes Really Stagnating? The challenge of raising the incomes of middle-class
families has emerged as an important focus of the presidential election
campaign in the United States. Everyone agrees that incomes at the top have
surged ahead in recent decades, helped by soaring rewards for those with a
high-tech education and rising share prices. And there is general support for
improving programs – such as food stamps and means-tested retiree benefits –
that help those who would otherwise be poor. But the public debate is largely
about how to help the more numerous (and politically more important) middle
class. With the traditional definition of money income, the CBO found that real
median household income rose by just 15% from 1980 to 2010, similar to the
Census Bureau’s estimate. But when they expanded the definition of income to
include benefits and subtracted taxes, they found that the median household’s
real income rose by 45%. Adjusting for household size boosted this gain to 53%.
Andreas
Beerli, Giovanni Peri, VOX: The labour market effect of opening the border to
immigrant workers.
The case for immigration restrictions is periodically debated in the political
arena. This column shows that fully opening the border to neighbouring countries
increased immigrants to Switzerland only by 4% of the labour force over eight
years. Such an increased inflow did not have significant aggregate effects.
Highly educated workers, however, benefited in terms of higher wages, while
middle-educated ones experienced employment losses.
David
Card, Jochen Kluve, Andrea Weber, NBER: What Works? A Meta Analysis of Recent
Active Labor Market Program Evaluations. We present a meta-analysis of impact estimates from
over 200 recent econometric evaluations of active labor market programs from
around the world. We classify estimates by program type and participant group,
and distinguish between three different post-program time horizons. Using
meta-analytic models for the effect size of a given estimate (for studies that
model the probability of employment) and for the sign and significance of the
estimate (for all the studies in our sample) we conclude that: (1) average
impacts are close to zero in the short run, but become more positive 2-3 years
after completion of the program; (2) the time profile of impacts varies by type
of program, with larger gains for programs that emphasize human capital
accumulation; (3) there is systematic heterogeneity across participant groups,
with larger impacts for females and participants who enter from long term
unemployment; (4) active labor market programs are more likely to show positive
impacts in a recession.
Diane
Whitmore Schanzenbach, NBER Reporter: Understanding the Effects of Early
Investments in Children.
A growing economics literature is seeking to understand the effects of early
childhood influences on later life outcomes. While much recent work explores
the effects of health measured at birth, my work and that of others
demonstrates the importance of events in early life–but after birth–on
long-term outcomes. A recent review
by Douglas Almond and Janet Currie concludes that child and family characteristics
measured at school entry explain as much of the variation in adult outcomes as
factors such as years of education that are more typically studied by
economists. James Heckman argues that the rates of return to human capital
investment in disadvantaged populations are highest in early life.
Sandra
E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi, NBER: Poor Little
Rich Kids? The Determinants of the Intergenerational Transmission of Wealth. Wealth is highly correlated between parents and
their children; however, little is known about the extent to which these
relationships are genetic or determined by environmental factors. We use
administrative data on the net wealth of a large sample of Swedish adoptees
merged with similar information for their biological and adoptive parents.
Comparing the relationship between the wealth of adopted and biological parents
and that of the adopted child, we find that, even prior to any inheritance,
there is a substantial role for environment and a much smaller role for
genetics. We also examine the role played by bequests and find that, when they
are taken into account, the role of adoptive parental wealth becomes much
stronger. Our findings suggest that wealth transmission is not primarily
because children from wealthier families are inherently more talented or more
able but that, even in relatively egalitarian Sweden, wealth begets wealth.
Ulf-G
Gerdtham ,Petter Lundborg, Carl Hampus Lyttkens, Paul Nystedt, Scandinavian
Journal of Economics: Do Socioeconomic Factors Really Explain Income-Related
Inequalities in Health? Applying a Twin Design to Standard Decomposition
Analysis. In
prior studies, where the decomposition analysis is based on OLS estimation of the
health production function using cross-sectional data, the estimated
contribution of income and education is probably substantially exaggerated. The
WTP-based (within-twin-pair) analysis gives more rigorous estimates and
provides an upper bound for the contribution of the health factors to the
inequalities in health. The results are obviously important for policy makers,
but leave them somewhat in limbo. The effects of income and education, which
could be prime targets for policy interventions, are insignificant. If
anything, among the observed socioeconomic factors, it is labor market
variables (more specifically, the state of being economically inactive) which
contribute most to the inequalities in health.
Tyler
Cowan, NYT: Don’t Be So Sure the Economy Will Return to Normal. It
is hard to avoid the feeling that our current economic problems are more than
just a cyclical downturn. We know that the economy has gone through some bad
times. But what exactly are we experiencing? One relatively optimistic view is
that observed deficiencies — like slow growth in real wages and the overall
economy, persistently low interest rates and low levels of labor participation
— are merely temporary. In this view, these problems will dwindle after
manageable problems like high levels of public or household debt have been
reduced. There is a much more disturbing possibility that could turn out to be
more accurate: namely, that the recession was a learning experience that we
haven’t fully absorbed. From this perspective, the radical and sudden changes
of the financial crisis were early indicators of deep fragility and
dysfunctionality.
Tim
Harford, The Undercover Economist: Tax: a Scandinavian solution. With tax, our politicians seem determined to make the
process as clumsy and painful as possible. If a politician was a surgeon, faced
with the task of amputating your leg, we can well imagine how it would go.
First he’d deny that he planned to amputate the leg. Then he’d pass a law
making it illegal to amputate the leg. Then he’d say that he’d amputate an
investment banker’s leg instead. Finally, he would blame the mess handed to him
by the previous surgeon and would begin to rub away at your toes with a cheese
grater.
Brad
Hershbein, Melissa S. Kearney, and Lawrence H. Summers: Increasing Education,
The Hamilton Project: What It Will And Will Not Do For Earnings And Earnings
Inequality. We have
empirically simulated what would happen to the distribution of earnings if one
out of every ten men aged 25–64 who did not have a bachelor’s degree were to
instantly obtain one—a sizeable increase in college attainment. We focus on men
not because women are unimportant—they clearly are important to the
workforce—but because low-skilled men have seen the largest drops in employment
and earnings over the past few decades, and are now considerably less likely to
attend and graduate from college. We focus on college attainment because the
data are readily available, but we acknowledge that it is an imperfect measure
of skills, perhaps increasingly so. Despite these caveats, this empirical
exercise is illuminating and sheds much needed light on an often-muddled public
debate. Increasing educational attainment will not significantly change overall
earnings inequality. The reason is that a large share of earnings inequality is
at the top of the earnings distribution, and changing college shares will not
shrink those differences.
Paul
Withrington and Richard Wellings, IEA: Paving over the tracks: a better use of
Britain’s railways? The
politicisation of the transport sector has stifled the market processes that
reallocate infrastructure to higher value uses. As a consequence, government
transport spending is misallocated on a grand scale. This is particularly
apparent on the rail network, where high levels of taxpayer subsidy are
combined with poor levels of service. There is strong evidence that allowing
some commuter railways to be converted into busways would provide higher
capacity at lower cost, reduce fares for passengers and cut subsidies from taxpayers.
A related policy of phasing out government support for the railways could save
around £6 billion a year. In combination with the existing road network,
busways would facilitate fast and direct services into city centres from
suburbs and villages not currently linked by rail, increasing the choice of
routes and reducing overall journey times for many commuters. Express coaches
on congestion-free infrastructure could match the train for speed except on the
longest journeys, and would also deliver much more frequent services.
Gavyn
Davies, FT: Has the rethinking of macroeconomic policy been successful? What should we expect from macro-policy makers in
future, assuming the economic back-drop remains relatively benign? Probably,
more of the same: broadly stable central bank balance sheets, very slow
declines in public debt ratios and a gradual return to using interest rates as
the main weapon of monetary policy. A more rapid return to pre-2008 norms for
fiscal and central bank balance sheets is somewhat unlikely. The much more
serious challenge of how policy should adjust in the event of another crisis –
a renewed recession; a major outbreak of deflation; a permanent slowdown in
productivity growth; a political crisis over rising inequality; or a financial
disruption, such as a Chinese debt implosion or a break-up in the euro.
Jonathan
D. Ostry, Atish R. Ghosh, and Raphael Espinoza, IMF: When Should Public Debt Be
Reduced? Under
these conditions, economic theory provides three insights. First, inherited
public debt, though accumulated for good reasons, represents a deadweight
burden on the economy, dimming both its investment and growth prospects; a
corollary is that an economy that has inherited a lot of public debt (for
example, because of a financial crisis) will rationally choose to invest less
in public capital than one with a lower level of debt. Second, if fiscal space
remains ample, policies to deliberately pay down debt are normatively
undesirable. The reason is that for such countries, the distortive cost of
policies to deliberately pay down the debt is likely to exceed the
crisis-insurance benefit from lower debt. In such cases, debt-to-GDP ratios
should be reduced organically through growth, or opportunistically when less
distortionary sources of revenue are available. Third, public debt should be
issued to smooth the taxes necessary to finance lumpy expenditures. This action
yields a version of the golden rule whereby public investment is debt-financed
and undertaken to the point that social returns equal the market interest rate,
with the twist that the social return will itself be reduced by the need to
raise distortive taxation on labor and capital to service the higher debt.
Amartya
Sen, New Statesman: The economic consequences of austerity. As it is quite common these days to blame economists
for failing to see the real world, I take this opportunity to note that very
few professionally trained economists were persuaded by the direction in which
those in charge of European finances decided to take Europe. The European
debacle demonstrated, in effect, that you do not need economists to generate a
holy mess: the financial sector can generate its own gory calamity with the greatest
of elegance and ease. Further, if the policy of austerity deepened Europe’s
economic problems, it did not help in the aimed objective of reducing the ratio
of debt to GDP to any significant extent – in fact, sometimes quite the
contrary. ...
Jason
Zweig, WSJ: The Anti-Poverty Experiment. In the U.S. and abroad, a new generation of
data-driven programs is testing ways to help the poor to save more, live better
and find their own way to economic security. Many of these poverty fighters
call themselves “randomistas,” after the randomized controlled trials that are
at the heart of their methods. In such field experiments, people are randomly
assigned either to a treatment group that receives an “intervention” or to a
control group that does not. The experimenters meticulously collect and analyze
data, then try to replicate the results elsewhere to see if they hold up. A
report published in the journal Science in May found that the randomistas’
methods not only work but stick. In Ethiopia, Ghana, Honduras, India, Pakistan
and Peru, 10,495 households—about half of them earning less than the equivalent
of $1.25 a day—took part in two-year experiments intended to help them become
more self-sufficient.
Sara
B. Heller el al, NBER: Thinking, Fast and Slow? Some Field Experiments to
Reduce Crime and Dropout in Chicago. We suggest that people often respond to situations
without conscious deliberation. Interventions that reduce automaticity can lead
to positive outcomes for disadvantaged youths. We test this hypothesis by
presenting the results of three large-scale randomized controlled trials (RCTs)
of interventions carried out on the south and west sides of Chicago that seek
to improve the outcomes of low-income youth by teaching them to be less
automatic. Two of our RCTs test a program called Becoming a Man (BAM) developed
by Chicago-area non-profit Youth Guidance; the first, carried out in 2009-10,
shows participation improved schooling outcomes and reduced violent-crime
arrests by 44%, while the second RCT in 2013-14 showed participation reduced
overall arrests by 31%. The third RCT was carried out in the Cook County
Juvenile Temporary Detention Center (JTDC) in 2009-11 and shows reductions in
return rates of 22%. We also present results from various survey measures
suggesting the results do not appear to be due to changes in mechanisms like
emotional intelligence or self-control. On the other hand results from some
decision-making exercises we carried out seem to support reduced automaticity
as a key mechanism.
