NOVEMBER 30 2017

Olivier J. Blanchard, NBER: Should we Get rid of the Natural Rate Hypothesis? 50 years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. The paper reviews the arguments and the macro and micro evidence against each. It concludes that, in each case, the evidence is suggestive, but not conclusive. Policy makers should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives

Björn Tyrefors Hinnerich et al., Research Institute of Industrial Economics: Extended right to vote kick-started the economic development in Sweden: How important are political rules for economic growth? Recent work supports theories that changes in political institutions can be key determinants of economic institutions and growth. We examined the impact of Sweden’s 1862 suffrage reform, which extended the voting rights of industrialists. Using a unique data set they found that the reform was a key factor in Sweden’s growth miracle because it gave industrialists more political clout, kick-starting the process.

Emmanuel Saez, Benjamin Schoefer, David Seim, VOX: The effects of employer payroll tax cuts on employment, business activity and wages.  Cuts to the employer portion of payroll taxes are often discussed as a policy lever to reduce labour costs for firms. This column examines the effects of a Swedish experiment which dramatically cut employer payroll taxes for young workers between 2007 and 2015. The tax cut reduced youth unemployment by 2-3 percentage points, without any differential increase in wages of young workers. Firms used the tax windfall to expand employment and business activity, and firms with larger tax windfalls raised wages for workers – both young and old – collectively.

Lisa A. Robinson, James K. Hammitt, Harvard: Assessing the Distribution of Impacts in Global Benefit‐Cost Analysis. There is widespread agreement that benefit‐cost analyses should be supplemented with information on how the impacts are distributed across individuals with different characterics (such as income). Yet reviews of completed analyses suggest that such information is rarely provided. Conventionally, benefit‐cost analysis focuses on economic efficiency, summing the values of a policy’s costs and benefits based on the preferences of those affected. Decision‐makers and other stakeholders typically find this information useful but insufficient; they also want to know who is harmed and who is helped and by how much. The goal of this paper is therefore relatively simple: to encourage analysts to provide information on the distribution of net benefits throughout the population in addition to assessing the overall impacts of the policy.

Jon Kristian Pareliussen, OECD: How self-sorting affects migrants’ labour market outcomes. Assuming that immigrants select destinations according to absolute returns to their observable and unobservable human capital, I present a human capital model of migration accounting for taxes, transfers and limited portability of skills. The model predicts both segmented sorting of migrants to countries with a compressed income distribution, with negative sorting increasing with lower portability and positive sorting increasing with portability. Sorting to countries with greater income dispersion increases unambiguously with host-country relevant skills. Migrants to countries with compressed incomes will hence be more likely to be either out of work or overqualified and low-paid compared to natives with similar observable skills, and compared to migrants to countries with greater income dispersion. Regressions results on data for 16 OECD countries from the OECD Survey of Adult Skills are in line with the model. Controlling for observable skills and characteristics, including a literacy test score, immigrants from countries that are less wealthy or further away in geographical and cultural distance are significantly more likely to be either out of work or overqualified and low-paid in high-benefit countries. Wage compression, generous transfers and high taxes, typical traits of the so-called “Nordic” or “Flexicurity” model, may therefore contribute to making immigrant integration more challenging.

David H. Autor, Christopher J. Palmer, Parag A. Pathak, NBER: Gentrification and the Amenity Value of Crime Reductions: Evidence from Rent Deregulation. Gentrification involves large-scale neighborhood change whereby new residents and improved amenities increase property values. In this paper, we study whether and how much public safety improvements are capitalized by the housing market after an exogenous shock to the gentrification process. We use variation induced by the sudden end of rent control in Cambridge, Massachusetts in 1995 to examine within-Cambridge variation in reported crime across neighborhoods with different rent-control levels, abstracting from the prevailing city-wide decline in criminal activity. Using detailed location-specific incident-level criminal activity data assembled from Cambridge Police Department archives for the years 1992 through 2005, we find robust evidence that rent decontrol caused overall crime to fall by 16 percent—approximately 1,200 reported crimes annually—with the majority of the effect accruing through reduced property crime. By applying external estimates of criminal victimization’s economic costs, we calculate that the crime reduction due to rent deregulation generated approximately $10 million (in 2008 dollars) of annual direct benefit to potential victims. Capitalizing this benefit into property values, this crime reduction accounts for 15 percent of the contemporaneous growth in the Cambridge residential property values that is attributable to rent decontrol. Our findings establish that reductions in crime are an important part of gentrification and generate substantial economic value. They also show that standard cost-of-crime estimates are within the bounds imposed by the aggregate price appreciation due to rent decontrol.

Janet M. Currie, Contemporary Economic Policy: Inequality in Mortality over The Life Course: Why Things Are Not As Bad As You Think. Recent research shows increasing inequality in mortality among middle-aged and older adults. But this is only part of the story. Inequality in mortality among young people has fallen dramatically in the United States converging to almost Canadian rates. Increases in public health insurance for U.S. children, beginning in the late 1980s, are likely to have contributed.

Carrie Arnold, Quanta Magazine: Choosy Eggs May Pick Sperm for Their Genes, Defying Mendel’s Law. The oldest law of genetics says that gametes combine randomly, but experiments hint that sometimes eggs select sperm actively for their genetic assets. Random fertilization should lead to specific ratios of gene combinations in offspring, but Nadeau has found two examples just from his own lab that indicate fertilization can be far from random: Certain pairings of gamete genes are much more likely than others. After ruling out obvious alternative explanations, he could only conclude that fertilization wasn’t random at all. “It’s the gamete equivalent of choosing a partner,” Nadeau said. His hypothesis – that the egg could woo sperm with specific genes and vice versa – is part of a growing realization in biology that the egg is not the submissive, docile cell that scientists long thought it was. Instead, researchers now see the egg as an equal and active player in reproduction, adding layers of evolutionary control and selection to one of the most important processes in life.