AUGUST 28 2015

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.