NOVEMBER 13 2015

Katie Stratford, BoE: Why has world trade been so weak in recent years? Before the crisis world trade tended to grow around twice as quickly as world GDP, but since 2012 trade growth has simply matched that of GDP.  So what explains this weakness?  Contrary to some other economists, this post finds no evidence that factors such as slowing growth of supply chains or the expenditure split of demand can explain the weakness relative to GDP.  Instead, it is due to the changing composition of global activity: over time a greater share of world activity has been accounted for by countries whose imports grow more slowly relative to GDP.  These trends are likely to continue, such that world trade is likely to grow more slowly relative to GDP than in the past.

Larry Summers, Washington Post: Where Paul Krugman and I differ on secular stagnation. I think we have both been focused on demand and the liquidity trap for a long time. But there are two areas where I have had somewhat different views from Paul. First, I believe that structural issues are often important for demand and growth. I have often asserted that "business confidence is the cheapest form of stimulus," and once quoted to President Obama the famous 1938 letter by Keynes to Roosevelt. Second, I have never related well to Paul’s celebrated liquidity trap analysis. It has always seemed to me be a classic example of economists’ tendency to "assume a can opener." Paul studies an economy in liquidity trap that will, by deus ex machina, be lifted out at some point in the future. He makes the point that if you assume sufficiently inflationary policy after this point, you can drive ex ante real rates down enough to stimulate the economy even before the deus ex machina moment.

Wolfgang Frimmel, Rudolf Winter-Ebmer, VOX: The contribution of the wage structure to early retirement behavior. The literature on retirement age has tended to focus on the supply side of the labour market. Using Austrian data, this column examines how firms can influence workers’ retirement decisions through wage structure. Deferred compensations schemes characterised by steeper seniority-wage profiles are found to be associated with workers retiring earlier. Given that early labour market exit is associated with higher costs to social security systems, policymakers could focus on creating incentives for firms to flatten wage profiles.

Anek Belbase, Geoffrey T. Sanzenbacher, Christopher M. Gillis (CRR): Does Age-Related Decline in Ability Correspond with Retirement Age? While declines in physical and mental performance are inevitable as workers age, they are not uniform across the various systems of the body – some physical and cognitive abilities decline much earlier than others. This variance implies that workers in occupations that rely on skills that decline early may be unable to work until late ages. This paper finds that a variety of white-collar occupations, such as police detective and designer, are just as susceptible to declines in the abilities required for work as are blue-collar occupations. The Susceptibility Index is a significant predictor of early retirement; for example, workers in occupations in the 90th percentile of the Index are 5.7 percentage points more likely to retire by age 65 than workers in the 10th percentile.

Fatih Karahan, NY FED: Understanding Earnings Dispersion. Drawing on a recent New York Fed staff report "What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risks?", this blog post investigates the nature of earnings inequality over a lifetime.  It finds that earnings are subject to significant downside risk and that such risk contributes substantially to overall earnings dispersion. Salary and wage data from 33 years of W-2 forms (more than 200 million observations) show how much earnings inequality among men increases with age. The chart below plots the variance of how much men earn from age twenty-five to sixty. While earnings are quite dispersed among twenty-five-year-olds, dispersion increases dramatically over the next thirty-five years.

George J. Borjas, NBER:  The Wage Impact of the Marielitos: A Reappraisal. This paper brings a new perspective to the analysis of the Mariel supply shock, revisiting the question and the data armed with the accumulated insights from the vast literature on the economic impact of immigration.  A crucial lesson from this literature is that any credible attempt to measure the wage impact of immigration must carefully match the skills of the immigrants with those of the pre-existing workforce.  The Marielitos were disproportionately low-skill; at least 60 percent were high school dropouts.  A reappraisal of the Mariel evidence, specifically examining the evolution of wages in the low-skill group most likely to be affected, quickly overturns the finding that Mariel did not affect Miami's wage structure.  The absolute wage of high school dropouts in Miami dropped dramatically, as did the wage of high school dropouts relative to that of either high school graduates or college graduates.  The drop in the relative wage of the least educated Miamians was substantial (10 to 30 percent), implying an elasticity of wages with respect to the number of workers between -0.5 and -1.5.  In fact, comparing the magnitude of the steep post-Mariel drop in the low-skill wage in Miami with that observed in all other metropolitan areas over an equivalent time span between 1977 and 2001 reveals that the change in the Miami wage structure was a very unusual event.

Brad Hershbein, Melissa S. Kearney and Lawrence H.Summers, Hamilton Project: Increasing education: What it will and will not do for earnings and earnings inequality. In this analysis we have simulated the effects of increasing the college attainment of working-age men to illustrate the likely effects on earnings and earnings inequality. Our empirical simulation supports the following general observations. Increasing the educational attainment of men without a college degree will increase their average earnings and their likelihood of being employed. Increasing educational attainment will not significantly change overall earnings inequality. Increasing educational attainment will, however, reduce inequality in the bottom half of the earnings distribution, largely by pulling up the earnings of those near the 25th percentile

Christopher J. Ruhm, VOX: Economic crises and mortality. Conventional wisdom tells us that health deteriorates when the economy weakens and improves when it strengthens. Some research tentatively agrees, but there is a marked dearth of challenges and robust research. This column presents new evidence suggesting that the reductions in mortality occurring during typical economic downturns also occur in periods of crisis, adding useful caveats for different types of downturns and crises.

NOVEMBER 6 2015

Larry Summers blog: Advanced economies are so sick we need a new way to think about them. Blanchard Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. We find that in the vast majority of cases output never returns to previous trends. Indeed there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words “super hysteresis” to use Larry Ball’s term is more frequent than “no hysteresis.” Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent this is true of the DSGE (dynamic stochastic general equilibrium) models that are the workhorse of central bank staffs and much practically oriented academic work.

Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff , Lawrence H. Summers, MIT Press: Progress and Confusion. The State of Macroeconomic Policy. What will economic policy look like once the global financial crisis is finally over? Will it resume the pre-crisis consensus, or will it be forced to contend with a post-crisis “new normal”? Have we made progress in addressing these issues, or does confusion remain? In April of 2015, the International Monetary Fund gathered leading economists, both academics and policymakers, to address the shape of future macroeconomic policy. This book is the result, with prominent figures—including Ben Bernanke, Lawrence Summers, and Paul Volcker—offering essays that address topics that range from the measurement of systemic risk to foreign exchange intervention. The chapters address whether we have entered a “new normal” of low growth, negative real rates, and deflationary pressures, with contributors taking opposing views; whether new financial regulation has stemmed systemic risk; the effectiveness of macro prudential tools; monetary policy, the choice of inflation targets, and the responsibilities of central banks; fiscal policy, stimulus, and debt stabilization; the volatility of capital flows; and the international monetary and financial system, including the role of international policy coordination. In light of these discussions, is there progress or confusion regarding the future of macroeconomic policy? In the final chapter, volume editor Olivier Blanchard answers: both. Many lessons have been learned; but, as the chapters of the book reveal, there is no clear agreement on several key issues.

Martin Wolf, FT: America’s labour market is not working. In 2014, 12 per cent — close to one in eight — of US men between the ages of 25 and 54 were neither in work nor looking for it. This was very close to the Italian ratio and far higher than in other members of the group of seven leading high-income countries: in the UK, it was 8 per cent; in Germany and France 7 per cent; and in Japan a mere 4 per cent. In the same year, the proportion of US prime-age women neither in work nor looking for it was 26 per cent, much the same as in Japan and less only than Italy’s. US labour market performance was strikingly poor for the men and women whose responsibilities should make earning a good income vital. So what is going on.

Kai Rehwald, Michael Rosholm, Michael Svarer, IZA: Are Public or Private Providers of Employment Services More Effective? Evidence from a Randomized Experiment. This paper compares the effectiveness of public and private providers of employment services. Reporting from a randomized field experiment conducted in Denmark we assess empirically the case for contracting out employment services for a well-defined group of highly educated job-seekers (unemployed holding a university degree). Our findings suggest, first, that private providers deliver more intense, employment-oriented, and earlier services. Second, public and private provision of employment services are equally effective regarding subsequent labour market outcomes. And third, the two competing service delivery systems appear to be equally costly from a public spending perspective.

Tim Harford, The Undercover Economist: The real benefits of migration. Among policy wonks and fact-checkers, one statement in the speech found the spotlight: “The evidence . . . shows that while there are benefits of selective and controlled immigration, at best the net economic and fiscal effect of high immigration is close to zero.” (Translation: immigration costs us nothing but we want to reduce it anyway.) Is May’s summary of the evidence correct? Probably not, although there is room for reasonable people to disagree…But there was a far bigger lacuna in May’s speech, and most commentators have missed it: the fact that these supposed costs or benefits always omit one crucial group. That group is the migrants themselves. They prosper hugely from being allowed to migrate yet that prosperity hardly ever figures in debates about immigration.

Neeraj Kaushal, Yao Lu, Nicole Denier, Julia Shu-Huah Wang, Stephen J. Trejo, NBER:  Immigrant Employment and Earnings Growth in Canada and the U.S.: Evidence from Longitudinal Data. We study the short-term trajectories of employment, hours worked, and real wages of immigrants in Canada and the U.S. using nationally representative longitudinal datasets covering 1996-2008.  Models with person fixed effects show that on average immigrant men in Canada do not experience any relative growth in these three outcomes compared to men born in Canada. Immigrant men in the U.S., on the other hand, experience positive annual growth in all three domains relative to U.S. born men. This difference is largely on account of low-educated immigrant men, who experience faster or longer periods of relative growth in employment and wages in the U.S. than in Canada.  We further compare longitudinal and cross-sectional trajectories and find that the latter over-estimate wage growth of earlier arrivals, presumably reflecting selective return migration.

Nabanita Datta Gupta, Mona Larsen, Lars Stage Thomsen, IZA Journal of Labor Policy: Do wage subsidies for disabled workers reduce their non-employment? - evidence from the Danish Flexjob scheme. We evaluate the potential of wage subsidy programs for reducing non-employment of the disabled by exploiting a reform of the Danish Flexjob scheme targeted towards employing the long-term (partially) disabled. Firms received a salary reimbursement for all employees granted a Flexjob. We examine whether a change from full to partial reimbursement to governmental units affected the share of Flexjobs allocated to retained (insiders) versus non-employed hirees (outsiders). After the reform, the composition of hires changed substantially in favor of insiders, both in absolute and relative terms. A reduction in subsidies thus leads to a decrease in the hiring of the non-employed disabled.

Yves Smith, Naked Capitalism: Stunning Rise in Death Rate, Pain Levels for Middle-Aged, Less Educated Whites. One of the long standing patterns in economies showing economic growth is longer life spans, and falls are see the result of severe distress and dislocation, as took place in the period right after the fall of the Soviet Union, when the expectancies of adult men fell by over seven years. The US has just become the first country to approach this appalling record. A stark warning about the level of distress in America comes from an important study by Angus Deaton, the 2015 Nobel prize winner in economics, and his wife Anne Case. We’ve embedded their short and readable article at the end of this post. The authors found that from 1999 to 2013, the death rate among non-Hispanic whites aged 45 to 54 with a high school education or less rose, while it fell in other age and ethnic groups. This is an HIV-level silent epidemic: AIDS killed an estimated 650,000 from the mid-1980s to present, while an estimated close to half-million died in half that time period who would have lived had their mortality rates fallen in line with the rest of the population. It is hard to overstate the significance of these findings.

Mark Thoma, The Fiscal Times: Are Economists Driven by Ideology or Evidence? The problem is that, in economics, the evidence rarely delivers clear answers. That leads to ongoing disputes among economists, and since ideology influences the questions researchers ask, these disputes are often viewed along ideological lines.Again, so long as, in the end, economists follow the evidence once it accumulates on one side or the other, I don’t see this as a problem. But, despite the confidence in the academic community expressed above, there have been some worrisome trends in recent years. Too many economists have been unwilling to change their views on issues such as whether quantitative easing in a deep recession will cause runaway inflation and interest rate spikes despite clear evidence those views are wrong. That must change. Our reputation with the public is bad enough as it is, and our best hope of changing that is to be honest about the evidence, and follow it wherever it might take us.

OCTOBER 30 2015

Angel Ubide, Peterson Institute for International Economics: The Fed's Confusion over Interest Rates. Ben Bernanke, in his recently published memoirs, says that monetary policy is 98 percent communication and 2 percent action. During his tenure as a central banker he scrupulously followed this principle. Unfortunately, in recent months the Fed has created tremendous confusion with its communication policy, losing much of the credibility it had gained. An accumulation of execution errors, not a change in strategy, is beginning to take its toll. Markets are paying increasingly less attention to Fed statements and warnings, and the gap between market pricing and the Fed's public guidance on interest rates is increasing. The more this disagreement continues, the harder it will be to solve it without pain.

Julie Hotchkiss, Atlanta Fed: Should We Be Concerned about Declines in Labor Force Growth? For the second month in a row, the October jobs report from the U.S. Bureau of Labor Statistics (BLS) has revealed a decline in the labor force. From August to September, the labor force lost a seasonally adjusted 350,000 participants. And the August number of participants was a seasonally adjusted 41,000 below July's level. Although two months don't necessarily make a trend, observers have noticed the declines in the labor force (here and here, for example), and they deserve some attention. Labor is an important component in the production process. Short of dramatic technological advancements, both the manufacturing and service sectors need a consistent source of labor to fuel output. Even though the economy appears to be on the right track with respect to job creation, ongoing declines in labor force growth could pose a challenge to economic growth. Additionally, as employers compete for fewer workers, we would expect wages to be bid up. Keep an eye on the Atlanta Fed's wage tracker to see how slowing labor force growth plays out in wages.

Robert Z. Lawrence, VOX: Explaining recent declines in labour’s share in US income. The US debate over income inequality in the 1980s and 1990s focused on the growing disparity between the earnings of the skilled, the unskilled and the super-rich. After the global crash, the decline in labour’s share of national income has been added to these concerns. This column presents an alternative explanation for this decline, arguing that limited substitution possibilities between capital and labour combined with the acceleration in the pace of labour-augmenting technical change raises the effective labour-capital ratio. The policy implications of this alternative explanation are profoundly different from those currently circulating.

Mona Larsen, Peder J. Pedersen, IZA: Labor Force Activity after 60: Recent Trends in the Scandinavian Countries with Germany as a Benchmark. In most OECD member countries labor force attachment has increased in recent years in the 60+ group. Focus in the paper is on the development in this area in Denmark, Norway and Sweden since the 1990s. The development in the same period in the German labor market is included as a frame of reference. Main emphasis is given to the development in two distinct age groups, i.e. people in the first half of the 60s of which many are eligible for early retirement programs and people older than 65 mostly eligible for social security retirement programs. For these two age groups the actual development in labor force participation is described based on register data and on labor force surveys along with indicators of cohort relevant changes in education and health. Focus in the paper includes also the gender aspect to accommodate stronger cohort effects for women than for men. The impact on labor force participation from individual education and from self-assessed health is analyzed based on available micro data. Policy reforms and changes in the retirement area have been enacted since the mid-1990s in the included countries and more sweeping reforms are enacted or under review for the years ahead. We include a brief survey of policy changes in the Scandinavian countries and Germany as other determinants of labor force participation in the 60 and older group.

OECD: Children are paying a high price for today’s growing inequality. The OECD’s latest How’s Life? shows the extent to which some children are getting a better start in life than others. Income poverty affects one child in seven in OECD countries, while 10% of children live in jobless households. Since the economic crisis, child poverty rates have risen in two thirds of OECD countries. In most OECD countries, the poverty rate for children is higher than for the population in general. Looking at child well-being for the first time, the report shows how children from more affluent backgrounds tend to have better health and a happier school life. Children from less well-off families find fewer of their classmates to be kind and helpful and are more likely to be bullied at school. Life satisfaction, reading and problem-solving skills, communication with parents and intentions to vote in national elections in later life are all lower among children from less affluent backgrounds. Growing inequality among parents ends up sapping opportunities available to their children.ooking at child well-being for the first time, the report shows how children from more affluent backgrounds tend to have better health and a happier school life. Children from less well-off families find fewer of their classmates to be kind and helpful and are more likely to be bullied at school. Life satisfaction, reading and problem-solving skills, communication with parents and intentions to vote in national elections in later life are all lower among children from less affluent backgrounds. Growing inequality among parents ends up sapping opportunities available to their children.

Alexander C. Kaufman, The Huffington Post: Stephen Hawking Says We Should Really Be Scared Of Capitalism, Not Robots. Machines won't bring about the economic robot apocalypse -- but greedy humans will, according to physicist Stephen Hawking. In a Reddit Ask Me Anything session on Thursday, the scientist predicted that economic inequality will skyrocket as more jobs become automated and the rich owners of machines refuse to share their fast-proliferating wealth. “If machines produce everything we need, the outcome will depend on how things are distributed. Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution. So far, the trend seems to be toward the second option, with technology driving ever-increasing inequality.”

William B. Peterman and Kamila Sommer, FED: A Historical Welfare Analysis of Social Security: Whom Did the Program Benefit? In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security tended to improve these cohorts' welfare. In particular, we estimate that the original program benefited households alive at the time of the program's adoption with a likelihood of over 80 percent, and increased these agents' welfare by the equivalent of 5.9% of their expected future lifetime consumption. The welfare benefit was particularly large for poorer agents and agents who were near retirement age when the program was enacted. Through a series of counterfactual experiments we demonstrate that the difference between the steady state and transitional welfare effects is primarily driven by a slower adoption of payroll taxes and a quicker adoption of benefit payments during the program's phase-in. Overall, the opposite welfare effects experienced by agents in the steady state versus agents who experienced the program's adoption might offer one explanation for why a program that potentially reduces welfare in the steady state was originally adopted.

Michael Spence, James Manyyika, Project syndicate: Job-Saving Technologies. This is an age of anxiety about the job-killing effects of automation, with dire headlines warning that the rise of robots will render entire occupational categories obsolete. But this fatalism assumes that we are powerless to harness what we create to improve our lives – and, indeed, our jobs. Evidence of technology’s potential to help resolve our job concerns can be found in online talent platforms. Digital platforms already have transformed many parts of the economy. The online marketplaces built by Amazon and Alibaba, for example, have reshaped the retail landscape, partly by changing the local nature of retail markets.

Jack Karsten and Darrell M. West, Brookings: Unlocking the potential of the Internet of Things. Many smartphone users already appreciate the power of having an Internet-connected device in their pockets. That same power will extend to many more people in developing countries as the price of basic smartphones continues to fall. The biggest impacts from IoT may come from outside the realm of consumer electronics, however. As the price of sensors also fall, larger numbers of industrial machines and equipment will be connected to a network to provide constant streams of performance data. The ability to track the data from sensors has applications in many different areas. For example, measuring energy consumption with sensors could lead to significant savings as inefficient devices are identified. Health care delivery would benefit from sensors that monitor patients remotely. The panelists also referenced the idea of a “smart city” where vehicles and traffic lights are wirelessly connected to improve traffic flows and reduce the number of accidents.

Kamilla Gumede, Michael Rosholm, IZA: Your Move: The Effect of Chess on Mathematics Test Scores. We analyze the effect of substituting a weekly mathematics lessons in primary school grades 1-3 with a lesson in mathematics based on chess instruction. We use data from the City of Aarhus in Denmark, combining test score data with a comprehensive data base from administrative register. We use a difference-in-differences approach to investigate treatment effects on the treated and tend to find positive effects. Looking at sub groups, we find significant positive effects for native Danish children, while we find no effects for children of immigrants.

Florence Jaumotte, Carolina Osorio Buitron, VOX: Union power and inequality. Inequality in advanced economies has risen considerably since the 1980s, largely driven by the increase of top earners’ income shares. This column revisits the drivers of inequality, emphasising the role played by changes in labour market institutions. It argues that the decline in union density has been strongly associated with the rise of top income inequality and discusses the multiple channels through which unionisation matters for income distribution.

Frank Jacobs, Big Think: What the 'Ideal' Man Looks Like, Country by Country. What makes these 29 pairs of eyes even more unsettling is the fact that these are not real people. Each face is a composite, assembled from the mugshots of between 10 to 24 male athletes from each of the 29 European countries represented here. This gallery of facial averages is like a collection of artist's sketches of usual suspects pinned to the bulletin board of a police station. Who are these imaginary men? What are their faces trying to tell us? As averages of random but comparable samples by country, these faces are uniquely "national." The French face is the Frenchest face possible, and the German face couldn't be any more German, et cetera. Does that mean these faces are merely average? Or are they in some way "ideal"? Or — and this is even more disconcerting — could it perhaps be that to be facially average is ideal?

Tom Simonite, MIT Technology Review: You’ve Been Misled About What Makes a Good Password. The latest password guessing software is smarter than just guessing at random. Instead it is trained using leaked lists of millions of passwords to make guesses that try the passwords—or patterns found in passwords—most commonly used first. Password-guessing software can be used to try to reveal improperly encrypted passwords leaked online, like the 130 million taken from Adobe in 2013, or to directly access password-secured software or devices that don’t limit guessing attempts. A study that tested state-of-the-art password-guessing techniques found that requiring numbers and uppercase characters in passwords doesn’t do much to make them stronger. Making a password longer or including symbols was much more effective.

OCTOBER 23 2015

David Elliott, Chris Jackson, Marek Raczko, Matt Roberts-Sklar: Do moves in oil prices drive longer-term financial market inflation expectations? The data imply an empirical link exists for the US and euro area, but not for the UK. But this is unlikely to reflect a direct impact of oil on actual expectations of future inflation at those long horizons.  Instead, such changes in inflation swap rates could reflect a range of factors other than inflation expectations, including changes in investor behaviour, market structure and risk premia. All of which adds a note of caution when trying to gauge inflation expectations from market-based instruments.

Gaetano D'Adamo, Riccardo Rovelli, IZA: Labour Market Institutions and Inflation Differentials in the EU. Adopting a simple Phillips curve framework, we show that different labour market institutions across EU countries are associated with significant differences in the response of inflation to unemployment and exchange rate shocks. More wage coordination and higher union density flatten the Phillips curve and increase the inflation response to the real exchange rate, i.e. the exchange rate pass-through. In addition, using a new approach to the classification of goods and services as "traded" or "non-traded", we show that both these institutional effects are significantly stronger for the more exposed (traded) sector.

Eduardo Porter, NYT: The myth of welfares corrupting influence on the poor. There is some disincentive effect consistent with theory, but the economic magnitude is not large,” said James P. Ziliak, head of the Center for Poverty Research at the University of Kentucky. “Oftentimes these disincentive effects are overstated in the policy discourse.” On the other hand, welfare provides very tangible benefits. New research shows that more cash welfare early in a child’s life improves the child’s longevity, educational attainment and nutritional status, and income in adulthood.

Richard Freeman, Eunice Han, David Madland, Brendan V. Duke, NBER: How Does Declining Unionism Affect the American Middle Class and Intergenerational Mobility? This paper examines unionism’s relationship to the size of the middle class and its relationship to intergenerational mobility. We use the PSID 1985 and 2011 files to examine the change in the share of workers in a middle-income group (defined by persons having incomes within 50% of the median) and use a shift-share decomposition to explore how the decline of unionism contributes to the shrinking middle class. We also use the files to investigate the correlation between parents’ union status and the incomes of their children. Additionally, we use federal income tax data to examine the geographical correlation between union density and intergenerational mobility. We find: 1) union workers are disproportionately in the middle-income group or above, and some reach middle-income status due to the union wage premium; 2) the offspring of union parents have higher incomes than the offspring of otherwise comparable non-union parents, especially when the parents are low-skilled; 3) offspring from communities with higher union density have higher average incomes relative to their parents compared to offspring from communities with lower union density. These findings show a strong, though not necessarily causal, link between unions, the middle class, and intergenerational mobility.

Jason Furman, Peter Orszag, President’s Council of Economic Advisers: A Firm-Level Perspective on the Role of Rents in the Rise in Inequality. There has been a trend of increased dispersion of returns to capital across firms, with an increasingly large fraction of firms getting returns over 10, 20 or 30 percent annually—a trend that somewhat precedes the shift in the profit share. Longstanding evidence (e.g. Krueger and Summers 1988) has documented substantial inter-industry differentials in pay—a mid-level analyst may have the same marginal product wherever he or she works but is paid more at a high-return company than at a low-return company. Newer evidence (Barth et al. 2014 and Song et al. 2015) suggests that much of the rise in earnings inequality represents the increased dispersion of earnings between firms rather than within firms. This is consistent with the combination of a rising dispersion of returns at the firm level and the inter-industry pay differential model, as well as with the notion that firms are wage setters rather than wage takers in a less-than-perfectly-competitive marketplace.

OECD: Tightening environmental policies have had little effect on productivity growth. Environmental policies address wellbeing and sustainability objectives, affecting firm and household behaviour. A newly developed OECD indicator (EPS) shows that environmental policies have become more stringent over the past two decades. Tightening environmental policies have spurred only short-term adjustments to aggregate productivity growth. Nevertheless, they have led to various effects within the economy. The most technologically advanced industries and firms have seen a small increase in productivity, possibly as they were in the best position to adapt. Least productive firms have seen their productivity fall further.

Olof Johansson-Stenman, Erik Mohlin, Ekonomistas: Blir man mer korrupt av att läsa nationalekonomi? Statsvetaren Bo Rothstein tycks mena att forskningen skulle visa att så är fallet. I ett långt brev till Kungliga Vetenskapsakademin (KVA), samt i en relaterad artikel på DN Debatt (11/10, 2015), argumenterar han för att KVA därför tills vidare bör upphöra med att dela ut Sveriges Riksbanks pris i ekonomisk vetenskap till minne av Alfred Nobel.... Man brukar säga att extraordinära påståenden kräver extraordinära belägg. Hypotesen att nationalekonomiutbildningar skulle generera korruption är onekligen extraordinär, dock visade sig de redovisade beläggen alltså i detta fall vara helt obefintliga.

OCTOBER 16 2015

Phil Bunn, Lizzie Drapper, Alice Pugh, Jeremy Rowe, BoE: How important are households’ expectations for spending? If the car you’re thinking of buying may be £500 cheaper in six months’ time, why not wait until then to buy it? This kind of thinking is one reason why falling prices trouble central bankers. The spectre of deflation is especially dangerous when households keep delaying their spending in expectation of further price falls. With the economy experiencing close to zero inflation, households may have adjusted their expectations of future prices. But how important are these expectations in influencing household spending? Using a rich household survey dataset we find that while there is some evidence that lower inflation expectations lead to lower spending, income expectations (reassuringly) also play an important role, and they have picked up recently.

Kaarlo Reipas and Mikko Sankala, Finnish Centre for Pensions: Retirement age will rise as planned. According to the projects the Government bill on the 2017 pension reform will lead to retirement at a later age and a higher employment rate. As working lives are extended, the pressure to increase the earnings-related pension contributions will be alleviated and the average pensions will rise.  The Finnish Centre for Pensions projects that with the proposed amendments, the targeted average retirement age of 62.4 years (62 yrs and 5 mos) would be achieved in the mid-2020s.  Based on the projection, the average effective retirement age by the year 2040 will be 63 years and 7 months. In the long run, raising the old-age retirement age will raise the employment rate by approximately two percentage points. By 2040, the number of employed will grow by approximately 50,000 people, although the unemployment rate at the brink of retirement will also rise.

Tim Harford, The Undercover Economist: Peer-to-peer pressure. Are these new players providing a valuable new service or are they merely an arbitrage play? It was exciting, for a while, to realise that you could actually get a car home on a Saturday night in San Francisco, or make money renting out your attic, but the backlash has been simmering for some time. That backlash mixes two complaints, elegantly exemplified when a group of taxicab owners and drivers sued Uber in Atlanta a year ago. “Uber has been operating in Atlanta with little concern about the safety of their passengers and zero concern for the laws that protect them,” said one of the plaintiffs in a statement to The Atlanta Journal-Constitution. “Our incomes have steadily dropped since Uber started and legally licensed drivers are leaving the business.”

Ariana Eunjung Cha, Washington Post: Thought process: Building an artificial brain. Now 62 and worth an estimated $17.7 billion, the Microsoft co-founder is using his wealth to back two separate philanthropic research efforts at the intersection of neuroscience and artificial intelligence that he hopes will hasten that future. The first project is to build an artificial brain from scratch that can pass a high school science test. It sounds simple enough, but trying to teach a machine not only to respond but also to reason is one of the hardest software-engineering endeavors attempted — far more complex than building his former company’s breakthrough Windows operating system, said to have 50 million lines of code. The second project aims to understand intelligence by coming at it from the opposite direction — by starting with nature and deconstructing and analyzing the pieces. It’s an attempt to reverse-engineer the human brain by slicing it up — literally — modeling it and running simulations.

Cass R. Sunstein, The New York Review of Books: Why Free Markets Make Fools of Us.  Akerlof and Shiller believe that once we understand human psychology, we will be a lot less enthusiastic about free markets and a lot more worried about the harmful effects of competition. In their view, companies exploit human weaknesses not necessarily because they are malicious or venal, but because the market makes them do it. Those who fail to exploit people will lose out to those who do. In making that argument, Akerlof and Shiller object that the existing work of behavioral economists and psychologists offers a mere list of human errors, when what is required is a broader account of how and why markets produce systemic harm.

OCTOBER 9 2015

Ludger Schuknecht, FT: What the bankers can teach stimulus-addicted economists. Germany’s sound public finances are the basis for European stability. Without guarantees and support from Berlin, the €500bn European Stability Mechanism, meant to protect against future crises, would not be credible. Were it not for the strength of Germany’s economy and balance sheet, the European Central Bank would have much less scope to use unconventional policies and remain credible. Not to mention the fact that Berlin is one of the largest contributors to the EU’s €150bn annual budget, a significant part of which is transferred to the poorer countries of Europe and beyond. In the increasingly globalised economy, nations lacking resilience increasingly rely on support from others who fear that, unless they commit their own resources to fighting faraway crises, they will find themselves engulfed by the gathering storm. This creates a new form of moral hazard: since countries that behave recklessly will be bailed out, they have little incentive to reform

Sushant Acharya, Alvaro Pedraza, FED NY:  Natural Experiment Sheds Light on the Market Effects of Herding. This blog analysis underscores how certain financial regulation might have unintended consequences by altering the behavior of investors in a perverse fashion. The Minimum Return Guarantee MRG is intended to protect the interests of pension-fund beneficiaries by limiting unnecessary risk-taking by fund managers. However, by relying on a benchmark based on peer returns, the regulation incentivizes herding. Consequently, asset prices can move in the short and medium run due to forces independent of fundamentals. Whether the welfare loss from this increased financial market inefficiency is clouded by the reduction in other forms of risk-taking is still an open question and requires further investigation.

Martin Wolf, Foreign Affairs (2015): Same as it Ever Was. Why the Techno-optimists Are Wrong. What we know for the moment is that there is nothing extraordinary in the changes we are now experiencing. We have been here before and on a much larger scale. But the current and prospective rounds of changes still create problems—above all, the combination of weak growth and significant increases in inequality. The challenge, as always, is to manage such changes. The only good reason to be pessimistic is that we are doing such a poor job of this.

American Educational Research Association: Are American schools making inequality worse? The answer appears to be yes. Schooling plays a surprisingly large role in short-changing the nation's most economically disadvantaged students of critical math skills. Findings from the study indicate that unequal access to rigorous mathematics content is widening the gap in performance on a prominent international math literacy test between low- and high-income students, not only in the United States but in countries worldwide. Using data from the 2012 Programme for International Student Assessment (PISA), conducted by the Paris-based Organisation for Economic Co-operation and Development (OECD), researchers from Michigan State University and OECD confirmed not only that low-income students are more likely to be exposed to weaker math content in schools, but also that a substantial share of the gap in math performance between economically advantaged and disadvantaged students is related to those curricular inequalities.

Eugenio J. Miravete, Maria J. Moral, Jeff Thurk, VX: Innovation, emissions policy, and competitive advantage in the diffusion of European diesel automobiles. Diesel vehicles have never been popular in the US, but have dominated sales in Europe. This column presents new evidence explaining why this is the case. A change in preferences and the numerous competing suppliers benefited the diffusion of diesel cars. But more important was a European environmental policy that favoured CO2 reductions. As diesel vehicles are only produced by European manufacturers, this policy provided a competitive advantage for domestic producers equivalent to a 20% import duty.

Jay Bhattacharya, Alan M. Garber, Jeremy D. Goldhaber-Fiebert, NBER: Nudges in Exercise Commitment Contracts: A Randomized Trial. We consider the welfare consequences of nudges and other behavioral economic devices to encourage exercise habit formation. We analyze a randomized trial of nudged exercise commitment contracts in the context of a time-inconsistent intertemporal utility maximization model of the demand for exercise. The trial follows more than 4,000 people seeking to make exercise commitments. Each person was randomly nudged towards making longer (20 weeks) or shorter (8 weeks) exercise commitment contracts. Our empirical analysis shows that people who are interested in exercise commitment contracts choose longer contracts when nudged to do so, and are then more likely to meet their pre-stated exercise goals. People are also more likely to enroll in a subsequent commitment contract after the original expires if they receive a nudge for a longer duration initial contract. Our theoretical analysis of the welfare implications of these effects shows conditions under which nudges can reduce utility even when they succeed in the goal of promoting habitual exercise.

Michael Grossman, NBER: The Relationship between Health and Schooling: What's New? Many studies suggest that years of formal schooling completed is the most important correlate of good health.  There is much less consensus as to whether this correlation reflects causality from more schooling to better health.  The relationship may be traced in part to reverse causality and may also reflect "omitted third variables" that cause health and schooling to vary in the same direction. The past five years (2010-2014) have witnessed the development of a large literature focusing on the issue just raised.  I deal with that literature and what can be learned from it in this paper.  I conclude that there is enough conflicting evidence in the studies that I have reviewed to warrant more research on the question of whether more schooling does in fact cause better health outcomes.

Simon Caulkin, Harvard Business Review: Staying Human in the Robot Age. Invasion has been interpreted in different ways, which is the beauty of imaginative human creations. Viewed today, however, one reading suggests itself above any other: the threat to human-ness is not communist or right-wing infiltration (the film came out when the Cold War was in full swing), but technology – particularly digital technology, whose seductions make all too easy the draining away of humanity that the doctor observes in his patients. New workplace technology makes possible an unprecedented degree of control over working (and sometimes private) life. A wealth of information creates poverty of attention. More and more of human lives are marketized and commodified on technology platforms. Homes and cars via Uber and Airbnb; personal and medical details, likes and preferences, are for sale via search and social media.

Elizabeth Palermo, Livescience: Sizzling Longevity: World's Oldest Person Eats Bacon Daily. Could it be that a few slices of bacon a day keep the doctor away? The world's oldest living person, Susannah Mushatt Jones of Brooklyn, New York, recently said that she eats a serving of bacon every day. Jones, who turned 116 on July 6 and was crowned the world's oldest living person by Guinness World Records that month, confessed her bacon habit in an interview published this week on the New York Post's site Page Six. So far, the Internet is having a field day with this information. "If the world's oldest woman eats bacon every day, we can too — right?"