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.