JANUARY 2012

JANUARY 27 2012

Greg Ip, Free exchange blog: Perverse austerity. Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio. It is not clear if the IMF thinks that has actually happened, and it recommends caution in interpreting these results. The analysis examined behavior across countries rather than across time, and thus the results may reflect circumstances unique to 2011.Still, the findings are sobering and explain the IMF's advice that countries that have not been cut off from the markets must avoid further discretionary austerity. “Decreasing debt is a marathon, not a sprint,” observed Olivier Blanchard, the fund’s chief economist. “Going too fast will kill growth.”

Chris Dillow, Stumbling and Mumbling Blog: Is there an austerity curve? Duncan’s idea is an austerity curve: Ccutting government spending up to a certain point leads to lower deficits but beyond a certain point, the impact of lower growth and higher unemployment means that deficits get worse as the government cuts more. But the response of economies to macro policies varies over time and place, so that there are few stable coefficients. It is therefore simply not possible to know the precisely correct macro policies. Which makes the debate between big cutters and little cutters a little like arguments about how many angels dance on the head of a pin.

Fareed Zakaria, CNN Blog: Post-Communist lessons for the new Middle East. Perhaps the biggest reason for poverty-stricken nations like Egypt to pay close attention to Poland is that it is a very rare breed in today's world, especially in Europe. Poland has a strong economy - the sixth biggest in the European Union now and the only European Union country to avoid a recession altogether. None of its banks needed to be rescued. Its economy grew 4% last year, and is on track to grow 3% in 2012. Why, you'll ask. How did it survive the turmoil in the Euro Zone? One answer is that it has strong domestic demand and has been pouring money into infrastructure projects. But the real - and fortuitous - reason is that Poland has yet to be allowed in to the Euro Zone - it continues to use zlotys instead of the euro. So unlike Greece or Italy, it was able to devalue its currency to stay competitive.

Gary Gorton, Andrew Metrick, Yale: Getting up to Speed on the Financial Crisis: A One‐Weekend‐Reader’s Guide. All economists should be conversant with “what happened?” during the financial crisis of 2007‐2009. We select and summarize 16 documents, including academic papers and reports from regulatory and international agencies. This reading list covers the key facts and mechanisms in the build‐up of risk, the panics in short‐term‐debt markets, the policy reactions, and the real effects of the financial crisis.

A.C.S, Free Exhange Blog: Heads I win, tails you pay. STATE pensions in American are in trouble.  Just how underfunded they are depends on how you calculate their assets and liabilities. Some estimates suggest the unfunded liability is several times larger than all outstanding municipal debt. Many states assume that their investments will generate about an 8% annual return. States justify this assumption based on the fact that most of their assets, about 70%, are invested in equity. But whether or not stocks will return 8% is uncertain. If you invested in a well diversified equity fund over the last ten years you’d have been lucky to average 2% annually. And so some critics argue that 8% is almost certainly too high.

John Cochrane, The Grumpy Economist Blog: Demographics and stock prices. See the graph to the left, taken from the letter: M/O is the ratio of middle aged to old, and P/E is the stock market price-earnings ratio. In the 1970s, there were relatively few prime-age savers around to buy stocks, and the prices fell. Starting in the 1980s to late 1990s, boomers entered their prime saving years, bought stocks and drove the prices up. And now that the boomers are retiring, they start selling, and watch out for prices! Zheng and Mark make a pretty discouraging forecast. I'm still not convinced, however, for a few reasons.

Robert Gebeloff, Shaila Dewan, NYT Blog: What the Top 1% of Earners Majored In. Below is a chart showing the majors most likely to get into the 1 percent (excluding majors held by fewer than 50,000 people in 2010 census data). The third column shows the percentage of degree holders with that major who make it into the 1 percent. The fourth column shows the percent of the 1 percent (among college grads) that hold that major. The majors providing the best entree into the top income rank are pre-med, economics, biochemistry, zoology and biology.

Justin Wolfers, Freakonomics blog: Is Higher Income Inequality Associated with Lower Intergenerational Mobility? A lot of our political debate boils down to questions about equality of outcomes versus equality of opportunity. But it turns out that they’re pretty closely related. Take a look at the chart below, which is from a terrific recent speech (with charts!) by Alan Krueger. The horizontal axis shows the Gini coefficient, which is a summary of the degree of income inequality for each country. I think of this as a measure of inequality of outcomes. The United States sits out there on the right, which says that we have high inequality, which I bet that doesn’t surprise you.

AGING AND RETIREMENT

Maes, Marjan, Hogeschool-Universiteit Brussel: The impact of (early) retirement on the subsequent physical and mental health of the retired: a survey among general practitioners in Belgium. The objectives is to investigate, on the basis of the perceptions of general practitioners (GPs) in Belgium, the impact of (early) retirement on subsequent physical and mental health. A cross-sectional survey on the basis of a self-completed anonymous questionnaire sent at random to 120 GPs in Flanders (Belgium) to which 81 responded. According to GPs, the mere fact of retiring early may be a (very) important cause of mental health problems, in particular depressions (due to the disappearance of social networks) and deterioration of cognitive capacities. GPs claim that most physical health problems that appear after retirement, like obesity and cardiovascular diseases, are due to insufficient adaptation (in terms of food consumption and physical activities) of the retired to a new lifestyle.

Mette Gørtz, SFI Danmark: Early retirement in the day-care sector: the role of working conditions and health. This article studies the role of working conditions and health for elderly female day-care teachers’ decision to enter early retirement. Entry into retirement is analysed in a duration framework that allows for unobserved heterogeneity in the baseline hazard. Data are from a Danish longitudinal data set based on administrative register records for 1997–2006. Working conditions are measured by four indicators. First, work pressure is measured by the child-to-teacher ratio, which varies across municipalities and over time. Second, working conditions are measured by the proportion of children with a problematic social background. Third, the share of trained teachers is considered an indicator of working conditions. And fourth, the size of the institution is assessed as an indicator of working conditions. Regressions in a duration model framework show that there is no significant relationship between the child-to-teacher ratio or the size of the institution and early retirement. However, working conditions measured by the social background of the children and the share of trained day-care teachers have a significant effect on the probability of early retirement. Finally, a poor health condition is associated with a higher propensity to enter early retirement.

JANUARY 20 2012

Robert J. Shiller, Project Syndicate:  Does Austerity Promote Economic Growth?  In his classic Fable of the Bees: or, Private Vices, Publick Benefits (1724), Bernard Mandeville, the Dutch-born British philosopher and satirist, described – in verse – a prosperous society (of bees) that suddenly chose to make a virtue of austerity, dropping all excess expenditure and extravagant consumption. What then happened?

The Price of Land and Houses falls;

Mirac’lous Palaces, whose Walls,

Like those of Thebes, were rais’d by Play

Are to be let; . . . .

The building Trade is quite destroy’d

Artificers are not employ’d; . . .

Those, that remain’d, grown temp’rate strive

Not how to spend, but how to live . . .

Tim Duy, Fed Watch Blog: Is Europe About to Unravel? Lacking currency devaluation as a tool to resolve imbalances, European policymakers turned to fiscal austerity. That plan has failed, pushing nation after nation into ever deepening recession. With Greece going on its fifth year of recession, I imagine by now that Portugal, Spain, and even Italy now see the writing on the wall for themselves. Sadly, however, the alternative is exiting the Euro, which almost certainly means financial chaos for the Continent as a whole. The Eurozone is like a roach motel. You can get in, but you can't get out.

Sudeep Reddy, WSJ Blog: At One Think Tank, Two Opposing Views on the Euro-Zone Outlook. Whichever camp you’re in, the Peterson Institute for International Economics has arguments to support your view. In presentations today, four economists at the Washington think tank – two on each side – debated opposing scenarios for how the crisis will play out. In one corner are Peter Boone and Simon Johnson, who are bracing for a spectacularly ugly outcome. With a $211 trillion market for interest-rate swaps in Europe under pressure, the euro faces the risk of a serious breakdown, they say. In the other corner are Fred Bergsten and Jacob Kirkegaard, who expect more turbulence ahead but remain optimistic about the ultimate outcome. Europeans are committed to European integration, they say, and the largest euro-zone member — Germany – will protect its economic interests by keeping the currency bloc intact. (The one exception: Greece could still exit.) That will prevent the apocalyptic scenarios, they say.

Ryan Avent, Free Exchange Blog: The hangover America is recovering from the debt bust faster than European countries. Why? These transatlantic differences stem from the trajectory of private debt. Government borrowing soared everywhere after 2008 as government deficits ballooned. But in America the swelling of the public balance-sheet has mirrored a shrinking of private ones. Every category of private debt—financial, corporate and household—has fallen as a share of GDP since 2008. The financial sector’s debt is now at its 2000 level. Corporate indebtedness, never very high, has shrunk. So, more importantly, has household debt. America’s ratio of household debt to income is down by 15 percentage points from its peak in 2008, after rising by over 30 percentage points in the eight preceding years. McKinsey reckons America’s households are between a third and halfway through their debt-reduction process. They think the household-debt hangover could end by mid-2013.

Anginer, Deniz; Demirguc-Kunt, Asli, World Bank: Has the global banking system become more fragile over time? This paper examines time-series and cross-country variations in default risk co-dependence in the global banking system. The authors construct a default risk measure for all publicly traded banks using the Merton contingent claim model, and examine the evolution of the correlation structure of default risk for more than 1,800 banks in more than 60 countries. They find that there has been a significant increase in default risk co-dependence over the three-year period leading to the financial crisis. They also find that countries that are more integrated, and that have liberalized financial systems and weak banking supervision, have higher co-dependence in their banking sector. The results support an increase in scope for international supervisory co-operation, as well as capital charges for "too-connected-to-fail" institutions that can impose significant externalities.

Alan B. Krueger, CEA: The Rise and Consequences of Inequality in the United States. The rise in inequality in the United States over the last three decades  has reached the point that inequality in incomes is causing an unhealthy division in opportunities, and is a threat to our economic growth. Restoring a greater degree of fairness to the U.S. job market would be good for businesses, good for the economy, and good for the country.

Esther Duflo, NBER: Women Empowerment and Economic Development.

Women empowerment and economic development are closely related: in one direction, development alone can play a major role in driving down inequality between men and women; in the other direction, empowering women may benefit development. Does this imply that pushing just one of these two levers would set a virtuous circle in motion? This paper reviews the literature on both sides of the empowerment-development nexus, and argues that the inter-relationships are probably too weak to be self-sustaining, and that continuous policy commitment to equality for its own sake may be needed to bring about equality between men and women.

Rajashri Chakrabarti and Sarah Sutherland, NY Fed: Precarious Slopes? The Great Recession, Federal Stimulus, and New Jersey Schools. We exploit unique panel-data and trend-shift analysis to analyze how New Jersey school finances were affected during the Great Recession and the ARRA federal stimulus period. Our results show strong evidence of downward shifts in both revenue and expenditure following the recession. Federal stimulus seemed to have helped in 2010, however, both revenue and expenditure still declined. While total revenue declined, the various components of revenue did not witness symmetric changes. The infusion of funds with the federal stimulus occurred simultaneously with statistically and economically significant cuts in state and local financing, especially the former. Our results also show a compositional shift in expenditures in favor of categories that are linked most closely to instruction, while several noninstruction categories, including transportation and utilities, declined. Interestingly, budgetary stress seems to have led to significant layoffs for untenured teachers, leading to a rightward shift of the teacher salary and experience distributions.

Alexander M. Gelber, Adam Isen, NBER:  Children's Schooling and Parents' Investment in Children: Evidence from the Head Start Impact Study. Parents may have important effects on their children, but little work in economics explores how children's schooling opportunities impact parents' investment in children.  We analyze data from the Head Start Impact Study, in which a lottery granted randomly-chosen preschool-aged children the opportunity to attend Head Start.  We find that Head Start causes a substantial and significant increase in parents' involvement with their children--such as time spent reading to children, math activities, or days spent with children by fathers who do not live with their children--both during and after the period when their children are potentially enrolled in Head Start.  We discuss a variety of mechanisms that are consistent with our findings, including a simple model we present in which Head Start impacts parent involvement in part because parents perceive their involvement to be complementary with child schooling in the production of child qualities.

Sascha O Becker, Ludger Woessmann, VoxEU: Religion matters, in life and death. Does religion affect suicide? This column presents new evidence from 19th century Prussia showing that suicide rates are much higher in Protestant than in Catholic areas, and that this reflects a causal effect of Protestantism. It also suggests that economic modelling can help understand why this is so.

Stephen J. Dubner, Freakonomics Blog: What Do Hand-Washing and Financial Illiteracy Have in Common? There’s something in the human condition that somehow disconnects what is really good evidence from personal choice and habit. And I don’t know why that is. I’m not a psychiatrist; my field is internal medicine. I just have the observation. Physicians are no different.

AGING AND RETIREMENT

Petter Lundborg, Martin Nilsson, Johan Vikström, IZA: Socioeconomic Heterogeneity in the Effect of Health Shocks on Earnings: Evidence from Population-Wide Data on Swedish Workers. In this paper, we estimate socioeconomic heterogeneity in the effect of unexpected health shocks on labor market outcomes, using register-based data on the entire population of Swedish workers. We effectively exploit a Difference-in-Difference-in-Differences design, in which we compare the change in labor earnings across treated and control groups with high and low education levels. If the anticipation effects are similar for individuals with high and low education, any difference in the estimates across socioeconomic groups could plausibly be given a causal interpretation. Our results suggest a large amount of heterogeneity in the effects, in which individuals with a low education level suffer relatively more from a given health shock. These results hold across a wide range of different types of health shocks and become more pronounced with age. Our results suggest that socioeconomic heterogeneity in the effect of health shocks offers one explanation for how the socioeconomic gradient in health arises.

Alan L. Gustman, Thomas Steinmeier, Nahid Tabatabai, Michigan Retirement Research Center: How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study? This paper uses asset and labor market data from the Health and Retirement Study (HRS) to investigate how the recent "Great Recession" has affected the wealth and retirement of those in the population who were just approaching retirement age at the beginning of the recession, a potentially vulnerable segment of the working age population. The retirement wealth held by those ages 53 to 58 before the onset of the recession in 2006 declined by a relatively modest 2.8 percentage points by 2010. In more normal times, their wealth would have increased over these four years. The adverse labor market effects of the Great Recession are more modest. Although there is an increase in unemployment, that increase is not mirrored in the rate of flow out of full-time work or partial retirement. All told, the retirement behavior of the Early Boomer cohort looks similar, at least so far, to the behavior observed for members of older cohorts at comparable ages.

Tunga Kantarc, Arthur van Soest, Tilburg University: Effects of Partial and No Retirement on Health in the United States. Some studies find that retirement yields a loss in cognitive skills while others find that retirement preserves physical health. We study the amount of work hours that deteriorates or preserves the physical or mental health conditions of the elderly between 50 and 75 years old in the last eight waves (1994-2008) of the Health and Retirement Study. Deteriorating health conditions can cause employees to work fewer hours and therefore bias the effect of working part-time or full-time on health outcomes. Retirement eligibility ages are used as instruments for part-time or full-time work decisions. We also control for, possibly health related, unobserved heterogeneity across the individuals. We find that part-time and full-time workers report worse overall health and memory than full-time retirees. On the other hand, part-time and full-time workers have a much lower body weight, and part-time white collar workers have a much better word recall score. Part-time and full-time workers are also less prone to depression. We also find that health status of the elderly responds to working part-time much more than it responds to working full-time. This result suggests that the effect of the number of hours worked on health outcomes is nonlinear.

Mette Gørtz, EJA: Early retirement in the day-care sector: the role of working conditions and health. This article studies the role of working conditions and health for elderly female day-care teachers’ decision to enter early retirement. Entry into retirement is analysed in a duration framework that allows for unobserved heterogeneity in the baseline hazard. Data are from a Danish longitudinal data set based on administrative register records for 1997–2006. Working conditions are measured by four indicators. First, work pressure is measured by the child-to-teacher ratio, which varies across municipalities and over time. Second, working conditions are measured by the proportion of children with a problematic social background. Third, the share of trained teachers is considered an indicator of working conditions. And fourth, the size of the institution is assessed as an indicator of working conditions. Regressions in a duration model framework show that there is no significant relationship between the child-to-teacher ratio or the size of the institution and early retirement. However, working conditions measured by the social background of the children and the share of trained day-care teachers have a significant effect on the probability of early retirement. Finally, a poor health condition is associated with a higher propensity to enter early retirement.

JANUARY 13 2012

Satyajit Das, EconoMonitor: Europe’s Road to Nowhere (Part 1). Financially futile, economically erroneous, politically puzzling and socially irresponsible, the December 2011 European summit was a failure. Only the attending leaders and their acolytes believe otherwise. German Chancellor Angela Merkel’s post-summit homilies about the “long run”, “running a marathon” and “more Europe” rang hollow. The proposed plan is fundamentally flawed. It made no attempt to tackle the real issues – the level of debt, how to reduce it, how to meet funding requirements or how to restore growth. Most importantly there were no new funds committed to the exercise.

Stéphanie Guichard, Elena Rusticelli, OECD: Reassessing the NAIRUs after the Crisis. The financial crisis has resulted in a substantial increase in unemployment in the OECD. This paper shows that this increase has reversed the reduction in structural unemployment which has been estimated to have occurred in most OECD countries since the late 1990s. Structural unemployment is defined as a time-varying NAIRU derived from the information contained in a reduced Phillips curve equation (linking inflation to the unemployment gap) by means of a Kalman filter. The overall limited revisions in historical NAIRU estimated in 2008 after such a large labour market shock support the robustness of the OECD approach. This approach is therefore extended to almost all OECD countries. Alternative specifications of the Phillips curve are proposed for some specific groups of countries.

Waikei Raphael Lam, Kiichi Tokuoka, IMF: Assessing the Risks to the Japanese Government Bond (JGB) Market. Despite the rise in public debt, Japanese Government Bond (JGB) yields have remained low and stable, supported by steady inflows from the household and corporate sectors, high domestic ownership of JGBs, and safe-haven flows from heightened sovereign risks in Europe. Over time, however, the market’s capacity to absorb new debt will likely shrink as population ages and risk appetite recovers. In the short term, a decline in fund supply from the corporate sector, where financial surpluses are abnormally high, and spillovers from global financial distress could push up JGB yields. Fiscal reforms to reduce public debt more quickly and lengthen the maturity of government bonds will help limit these risks.

Eamonn Fingleton, NYT: The Myth of Japan’s Failure. Despite some small signs of optimism about the United States economy, unemployment is still high, and the country seems stalled. Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Carmen Reinhart, VoxEU: A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crises. We document that the global scope and depth of the crisis that began with the collapse of the subprime mortgage market in the summer of 2007 is unprecedented in the post World War II era and, as such, the most relevant comparison benchmark is the Great Depression (or the Great Contraction, as dubbed by Friedman and Schwartz, 1963) of the 1930s. Some of the similarities between these two global episodes are examined but the analysis of the aftermath of severe financial crises is extended to also include the most severe post-WWII crises as well. As to the causes of these great crises, we focus on those factors that are common across time and geography. We discriminate between root causes of the crises, recurring crises symptoms, and common features (such as misguided financial regulation or inadequate supervision) which serve as amplifiers of the boom-bust cycle. There are recurring temporal patterns in the boom-bust cycle and their broad sequencing is analyzed.

Steven J. Davis, Till M. von Wachter, NBER: Recessions and the Cost of Job Loss. We develop new evidence on the cumulative earnings losses associated with job displacement, drawing on longitudinal Social Security records for U.S. workers from 1974 to 2008. In present value terms, men lose an average of 1.4 years of pre-displacement earnings if displaced in mass-layoff events that occur when the national unemployment rate is below 6 percent. They lose a staggering 2.8 years of pre-displacement earnings if displaced when the unemployment rate exceeds 8 percent. These results reflect discounting at a 5% annual rate over 20 years after displacement. We also document large cyclical movements in the incidence of job loss and job displacement and present evidence on how worker anxieties about job loss, wage cuts and job opportunities respond to contemporaneous economic conditions.

Matthew Yglesias, Moneybox Blog: Mitt Romney Says Concern About Inequality Is Just "Envy". Mitt Romney explained that people talk about inequality because they're envious: “You know, I think it’s about envy. I think it’s about class warfare. When you have a President encouraging the idea of dividing America based on the 99 percent versus 1 percent—and those people who have been most successful will be in the 1 percent—you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God. The American people, I believe in the final analysis, will reject it.” Of course there is envy in America, but there's also spite. And I think you see some of it in Romney's reply. He has a lot of money, personally. That money is very useful to him in a number of ways.

Jérôme Adda, Christian Dustmann, Katrien Stevens, IZA: The Career Costs of Children. This paper analyzes the life-cycle career costs associated with child rearing and decomposes their effects into unearned wages (as women drop out of the labor market), loss of human capital, and selection into more child-friendly occupations. We estimate a dynamic life-cycle model of fertility, occupational choice, and labor supply using detailed survey and administrative data for Germany for numerous birth cohorts across different regions. We use this model to analyze both the male-female wage gap as it evolves from labor market entry onward and the effect of pro-fertility policies. We show that a substantial portion of the gender wage gap is explainable by realized and expected fertility and that the long-run effect of policies encouraging fertility are considerably lower than the short-run effects typically estimated in the literature.

Peder J. Pedersen, IZA: Immigration and Welfare State Cash Benefits: The Danish Case. The purpose in this paper is to summarize existing evidence on welfare dependence among immigrants in Denmark and to supply new evidence with focus on the most recent years. Focus is on immigrants from non-western countries. The paper contains an overview of the background regarding immigration in recent decades followed by a survey of relevant benefit programmes in the Danish welfare state. Existing studies focus on both macro analyses of the overall impact from immigration on the public sector budget and on micro oriented studies with focus on specific welfare programs. Existing studies focus on the importance for welfare dependence of demographic variables, on the big variation between countries of origin and on the importance of cyclical factors at time of entry and during the first years in the new country. Evidence from the most recent years reinforce the importance of aggregate low unemployment in contrast to fairly small effects found from policy changes intending to! influence the economic incentives between welfare and a job for immigrants.

Marco Caliendo, Steffen Künn, Ricarda Schmidl, IZA: Fighting Youth Unemployment: The Effects of Active Labor Market Policies. We use administrative data on youth unemployment entries in 2002 and analyze the short- and long-term impacts for a variety of different programs. With informative data at hand we apply inverse probability weighting, thereby accounting for a dynamic treatment assignment and cyclical availability of programs. Our results indicate positive long-term employment effects for nearly all measures aimed at labor market integration. Measures aimed at integrating youths in apprenticeships are effective in terms of education participation, but fail to show any impact on employment outcomes until the end of our observation period. Public sector job creation is found to ! be harmful for the medium-term employment prospects and ineffective in the long-run. Our analysis further indicates that the targeting of German ALMP systematically ignores low-educated youths as neediest of labor market groups. While no employment program shows a positive impact on further education participation for any subgroup, the employment impact of participation is often significantly lower for low-educated youths.

John P. Papay, Martin R. West, Jon B. Fullerton, Thomas J. Kane, NBER:  Does Practice-Based Teacher Preparation Increase Student Achievement? Early Evidence from the Boston Teacher Residency. The Boston Teacher Residency is an innovative practice-based preparation program in which candidates work alongside a mentor teacher for a year before becoming a teacher of record in Boston Public Schools. Initially, BTR graduates for whom value-added performance data are available are no more effective at raising student test scores than other novice teachers in English language arts and less effective in math.  The effectiveness of BTR graduates in math improves rapidly over time, however, such that by their fourth and fifth years they out-perform veteran teachers.  Simulations of the program's overall impact through retention and effectiveness suggest that it is likely to improve student achievement in the district only modestly over the long run.

 

Fernando Ferreira, Joseph Gyourko, NBER:  Does Gender Matter for Political Leadership? The Case of U.S. Mayors. What are the consequences of electing a female leader for policy and political outcomes? We answer this question in the context of U.S. cities, where women's participation in mayoral elections increased from negligible numbers in 1970 to about one-third of the elections in the 2000's. We use a novel data set of U.S. mayoral elections from 1950 to 2005, and apply a regression discontinuity design to deal with the endogeneity of female candidacy to city characteristics.  In contrast to most research on the influence of female leadership, we find no effect of gender of the mayor on policy outcomes related to the size of local government, the composition of municipal spending and employment, or crime rates.  While female mayors do not implement different policies, they do appear to have higher unobserved political skills, as they have a 6-7 percentage point higher incumbent effect than a comparable male.  But we find no evidence of political spillovers:  exogenously electing a female mayor does not change the long run political success of other female mayoral candidates in the same city or of female candidates in local congressional elections.

Cahit Guven, Wang-Sheng Lee, IZA: Height and Cognitive Function among Older Europeans: Do People from "Tall" Countries Have Superior Cognitive Abilities? Previous research has found that height is correlated with cognitive functioning at older ages. It therefore makes sense to ask a related question: do people from countries where the average person is relatively tall have superior cognitive abilities on average? Using data from the Survey of Health, Ageing, and Retirement in Europe (SHARE), we find empirical evidence that this is the case, even after controlling for self-reported childhood health, self-reported childhood abilities, parental characteristics and education. We find that people from countries with relatively tall people, such as Denmark and the Netherlands, have on average superior cognitive abilities compared to people from countries with relatively shorter people, such as Italy and Spain. We exploit variations in height trends due to nutritional deprivation in World War II in Europe and use an instrumental variable analysis to further estimate the potential impact of height on cognitive function. We find some suggestive evidence that a causal link from height to cognitive outcomes could be operating via nutrition and not via educational attainment.

AGING AND RETIREMENT

Damian Paletta, Dionne Searcey, WSJ: Jobless Tap Disability Fund. The prolonged economic slump has fueled a surge in applications for Social Security disability benefits, with many desperate Americans seeking refuge in the program as a last resort after their unemployment insurance and savings run out. Two new studies, one of them co-authored by the White House's top economist, show a correlation between when people seek Social Security disability payments and when their unemployment benefits are exhausted. Some economists say that connection shows many people now view the system as an extended unemployment program

Eva Garcia-Moran, Zoe Kuehn, European University Institute: With Strings Attached: Grandparent-Provided Child care, Fertility, and Female Labor Market Outcomes. Grandparents are an important source of child care. According to data from the 2^nd wave of the Survey of Health, Ageing and Retirement in Europe (SHARE), between 23% (Denmark) and 70% (Italy) of grandparents take care of their grandchildren age ten or younger on a daily or weekly basis. In the Netherlands, Belgium, and Switzerland more than 40% of grandparents take care of their small grandchildren each week, while in Italy, Greece, and Poland more than 40% of grandparents provide daily care for grandchildren age ten or younger. Similar to any other form of child care, availability of grandparent-provided child care affects fertility and labor market decisions of women positively. We find that women in Germany, residing close to parents or in-laws are more likely to have children and that as mothers they are more likely to hold a regular part-or fulltime job.

Benoit Dostie, Pierre Thomas Léger, IZA: Firm-Sponsored Classroom Training: Is It Worth It for Older Workers? We use longitudinal linked employer-employee data and find that the probability of participating in firm-sponsored classroom training diminishes rapidly for workers aged 45 years and older. Although the standard human capital investment model predicts such a decline, we also consider the possibility that returns to training decline with age. Taking into account endogenous training decisions, we find that the training wage premium diminishes only slightly with age. However, estimates of the impact of training on productivity decrease dramatically with age, suggesting that incentives for firms to invest in classroom training are much lower for older workers.

DECEMBER 2011

DECEMBER 16 2011
Ryan Avent, the Economist Blog: The outer limits. No one really wants everything to blow up around the holidays, so markets and governments seem to have crawled out of their trenches to sing Silent Night for now, and will resume the bloodshed in the new year. We won't have to wait long for trouble in 2012. Early in the new year, auctions of sovereign debt will crank back up. And as a new report from Moody's Economy.com indicates, much of Europe is moving past the point of no return.

Oscar Jorda, Moritz Schularick, Alan M. Taylor, San Francisco Fed: When Credit Bites Back: Leverage, Business Cycles, and Crises. This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We  find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.

Paul Beaudry, Deokwoo Nam, Jian Wang, Dallas Fed: Do Mood Swings Drive Business Cycles and is it Rational? This paper provides new evidence in support of the idea that bouts of optimism and pessimism drive much of US business cycles. In particular, we begin by using sign-restriction based identification schemes to isolate innovations in optimism or pessimism and we document the extent to which such episodes explain macroeconomic fluctuations. We then examine the link between these identified mood shocks and subsequent developments in fundamentals using alternative identification schemes (i.e., variants of the maximum forecast error variance approach). We find that there is a very close link between the two, suggesting that agents' feelings of optimism and pessimism are at least partially rational as total factor productivity (TFP) is observed to rise 8-10 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self-fulfilling beliefs. Overall, we argue that mood swings account for over 50% of business cycle fluctuations in hours and output.

Simon Potter, NY Fed: The Failure to Forecast the Great Recession. Why Did We Fail to Forecast the Great Recession? 1) Misunderstanding of the housing boom. 2) A lack of analysis of the rapid growth of new forms of mortgage finance. 3) Insufficient weight given to the powerful adverse feedback loops between the financial system and the real economy.

Paul Bergin, San Francisco Fed: Asset Price Booms and Current Account Deficits. Before the global financial crisis of 2007–2009, the United States and several other countries posted large current account deficits. Many of these countries also experienced asset price booms. Evidence suggests the two developments were linked. Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset prices since the crisis can make it easier to reduce current account imbalances

Luca Agnello, Ricardo M Sousa, NIPE: Fiscal Consolidation and Income Inequality: Using a panel of 18 industrialized countries from 1970 to 2010, we find that income inequality significantly rises both during periods of fiscal consolidation and in the aftermath of such adjustments. In addition, fiscal authority that is driven by spending cuts seems to be more detrimental for income distribution than in the case of tax hikes. Considering the linkages between banking crises and fiscal consolidation, we show that the impact on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Our results also provide support for the Kuznets relationship and corroborate the idea that trade can lead to a more unequal distribution of income.

Annabelle Krause, IZA: Work to Live or Live to Work? Unemployment, Happiness, and Culture. Happiness drops when individuals become unemployed. The negative impact of the unemployment shock, however, may differ by cultural background. To test the hypothesis of a 'Teutonic work ethic', this paper takes advantage of Switzerland in its cultural diversity. By comparing different cultural groups in the same institutional setting, I empirically test whether such deep psychological traits have an influence on how unemployment is perceived. It is found that unemployment has a significantly negative effect on life satisfaction in Switzerland. I furthermore present evidence which confirms to some extent the hypothesis that Swiss German individuals suffer more from unemployment, although for the most part, these results are without statistical significance. Swiss Germans are additionally found to be happier than their French-speaking compatriots – independent of whether they are unemployed. This difference between Romanic and Germanic cultural backgrounds is in line with previous findings, but deserves further research attention.

Emanuela Marrocu, Raffaele Paci, University of Cagliari: Education Or Creativity: What Matters Most For Economic Performance? This paper aims to disentangle this issue by proposing a disaggregation of human capital into three nonoverlapping categories of creative graduates, bohemians and non creative graduates. Using a spatial error model to account for spatial dependence, we assess the concurrent effect of the human capital indicators on total factor productivity for 257 regions of EU27. Our results indicate that highly educated people working in creative occupations are the most relevant component in explaining production efficiency, non creative graduates exhibit a lower impact, while the bohemians do not show a significant effect on regional performance. Moreover, a significant influence is exerted by technological capital, cultural diversity and industrial and geographical characteristics, thus providing robust evidence that a highly educated, innovative, open and culturally diverse environment is becoming more and more central for productivity enhancements.

Joshua D. Angrist, Parag A. Pathak, Christopher R. Walters, NBER: Explaining Charter School Effectiveness. Estimates using admissions lotteries suggest that urban charter schools boost student achievement, while charter schools in other settings do not. We explore student-level and school-level explanations for these differences using a large sample of Massachusetts charter schools. Our results show that urban charter schools boost achievement well beyond ambient non-charter levels (that is, the average achievement level for urban non-charter students), and beyond non-urban achievement in math. Student demographics explain some of these gains since urban charters are most effective for non-whites and low-baseline achievers. At the same time, non-urban charter schools are uniformly ineffective. Our estimates also reveal important school-level heterogeneity in the urban charter sample. A non-lottery analysis suggests that urban schools with binding, well-documented admissions lotteries generate larger score gains than under-subscribed urban charter schools with poor lottery records. We link the magnitude of charter impacts to distinctive pedagogical features of urban charters such as the length of the school day and school philosophy. The relative effectiveness of urban lottery-sample charters is accounted for by over-subscribed urban schools' embrace of the No Excuses approach to education.

Christopher J. Ruhm, Jane Waldfogel, IZA: Long-Term Effects of Early Childhood Care and Education. We find only limited evidence that expansions of parental leave durations improved long-run educational or labor market outcomes of the children whose parents were affected by them, perhaps because benefits are hard to measure or confined to sub-groups, or because leave entitlements were sufficiently long, even before recent extensions, to yield most potential benefits. By contrast, expansions of early education generally yield benefits at school entry, adolescence, and for adults, particularly for disadvantaged children; however the gains may be less pronounced when high quality subsidized child care was available prior to the program expansion or when subsidies increased the use of low quality care.

The Browser: Daron Acemoglu on Inequality. The problem is that in society over the last 20 years – and Wall Street is a poster child of this – we have created a platform where the ambition and greed of people, often men, has been channelled in a very anti-social, selfish and socially destructive direction. The risk-taking that for Steve Jobs and Bill Gates led to innovation has led to exploitative behaviour and risk-taking at the expense of the government and poor people for the Wall Street bankers. What’s to blame are the institutions. We have let our institutions fail.

Costas Meghir, Mårten Palme, Marieke Schnabel, IZA: The Effect of Education Policy on Crime: An Intergenerational Perspective. A number of studies have shown that education reforms extending compulsory schooling reduce criminal behavior of those affected by the reform. We consider the effects of a major Swedish educational reform on crime by exploiting its staggered implementation across Sweden. We first show that the reform reduced crime rates for the generation directly affected by the reform. We then show that the benefits extended to the next generation with large reductions in the crime rates of the children of those affected. The effect operates only through the father and points in the direction of improved parenting rather than resources.

Matthew Yglesias, Slate:  The Norwegian Butter Crisis. An absurd dairy shortage and its very valuable economic lessons. It seems more than a little absurd for one of the richest countries on earth (per capita of GDP, only Luxembourg and tiny Liechtenstein have it beat) to be rationing a basic household commodity, which is what’s happening . But behind this silly story are several important economic lessons about trade and the surprising economic dilemmas posed by striking it rich,

AGING AND RETIREMENT

Axel H. Börsch-Supan, MEA: Entitlement Reforms in Europe: Policy mixes in the current pension reform process. Current costs are high, and the pressures will increase due to population aging and negative incentive effects. This paper focuses on the pension reform process in Europe. It links the causes for current problems to the cures required to make the pay-as-you-go entitlement programs in Continental Europe sustainable above and beyond the financial crisis. It discusses examples which appear, from a current point of view, to be the most viable and effective options to achieve successful changes in the entitlement system. There is no single policy prescription that can solve all problems at once. Reform elements include a freeze in the contribution and tax rates, an indexation of benefits to the dependency ratio, measures to stop the current trend towards early retirement, an adaptation of the normal retirement age to increased life expectancy, and more reliance on private savings – elements of a sustainable but complex multipillar system of pensions and similar entitlement programs.

DECEMBER 9 2011

Kenneth Rogoff, Project Syndicate: Is Modern Capitalism Sustainable? Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability. China’s  Darwinian capitalism, with its fierce competition among export firms, a weak social-safety net, and widespread government intervention, is widely touted as the inevitable heir to Western capitalism, if only because of China’s huge size and consistent outsize growth rate. Yet China’s economic system is continually evolving. Perhaps the real point is that, in the broad sweep of history, all current forms of capitalism are ultimately transitional. As pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now.

Aaron Tornell, Frank Westerman, VoxEU: Eurozone Crisis, Act Two: Has the Bundesbank reached its limit? If you thought the Eurozone crisis was coming to an end this week, this column argues that we may barely be reaching the end of Act One. In Act Two of the unfolding Eurozone drama, the new measures might include the ECB printing more money, the EU announcing the issuance of Eurobonds, or the IMF extending credit lines to strapped governments. The motive of such a policy response is to prevent a speculative attack and induce a shift to the good equilibrium. These actions will buy some time for economic and fiscal reforms to take place. However, as previous experiences suggest, if reforms do not take place, these measures may be very costly to the taxpayer.

Kevin Drum, Mother Jones Blog: Who's Responsible For the Euromess? Let me make it clear that nothing here is meant to absolve the periphery countries from their part in this. Ireland fed the fire of its property bubble irresponsibly, Greece lied about its finances, and throughout southern Europe there was a persistent refusal to reform their labor practices, improve productivity, and live within their means. The core countries have every right to hold the periphery accountable for this. At the same time, this is fundamentally a story of economics, not morality, and it's only in Step 1 above that the periphery countries bear even a share of the blame for what happened. The rest was either a result of deliberate core policies or else the inevitable result of those policies. Whether Germany likes to hear it or not, it's simply a fact that both sides allowed — even encouraged — capital flows to remain imbalanced for far too long. The periphery enjoyed access to cheap money and the core liked having a thriving market for its exports. The core and the periphery both rode this wave up, and now they're both going to have to ride it down.

Paul Krugman, NYT Blog: Profligate Zombies. Dean Baker has a series of posts about bad reporting on the euro crisis; he is evidently, and with good reason, upset at the way just about every report states as a fact that excessive borrowing caused the crisis. This is another one of those zombie ideas that permeate our discourse; it’s part of the narrative, and no amount of evidence can kill it or even stop reporters/editors from stating it as a fact.

Felix Salmon, Reuters Blog: How the ECB could be forced to print money. Basically, there’s a constant flow of money out of the European periphery and towards the center. Up until now, that flow has been matched by an equal and opposite flow of central bank lending from the Bundesbank to the PIIGS central banks. And when the Bundesbank runs out of money to lend those central banks? The ECB will have no choice but to step in and print all the money necessary to stop those banks from going bust. And that, I think, is how we’re going to see the ECB finally take on the lender-of-last-resort role it has been so reluctant to adopt until now.

 Greg Howard, Robert Martin, Beth Anne Wilson, Fed: Are Recoveries from Banking and Financial Crises Really So Different? This paper studies the behavior of recoveries from recessions across 59 advanced and emerging market economies over the past 40 years. Focusing specifically on the performance of output after the recession trough, we find little or no difference in the pace of output growth across types of recessions. In particular, banking and financial crisis do not affect the strength of the economic rebound, although these recessions are more severe, implying a sizable output loss. However, recovery does change with some characteristics of recession. Recoveries tend to be faster following deeper recessions, especially in emerging markets, and tend to be slower following long recessions. Most recessions are associated with a slowing, if not outright decline in house prices, but recessions with large declines in house prices also tend to have slower recoveries. Long recessions and those associated with poor housing-market outcomes can lead to sustained output losses relative to pre-crisis trends. Consistent with microeconomic studies showing permanent income loss to job-losing workers during recessions, we find that the sustained deviation in output from trend is associated with a reduction in labor input, especially linked to declines in employment and labor-force participation following recessions. On net, our results imply that the output/employment gap following a severe, long recessions is considerably smaller than is typically assumed by standard macro models, which in turn may have substantial implications for macroeconomic policy during recoveries.

Viral V. Acharya, Raghuram G. Rajan, NBER: Sovereign Debt, Government Myopia, and the Financial Sector. What determines the sustainability of sovereign debt? In this paper, we develop a model where myopic governments seek electoral popularity but can nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector. Interestingly, the more myopic a government, the greater the advantage it sees in borrowing, and therefore the less likely it will be to default (in contrast to models where sovereigns repay because they are concerned about their long term reputation). More myopic governments are also likely to tax in a more distortionary way, and create more dependencies between the domestic financial sector and government debt that raise the costs of default. We use the model to explain recent experiences in sovereign debt markets.

Roberto Perotti, NBER: The "Austerity Myth": Gain Without Pain? As governments around the world contemplate slashing budget deficits, the “expansionary fiscal consolidation hypothesis” is back in vogue. I argue that, as a statement about the short run, it should be taken with caution. I present four detailed case studies, two – Denmark and Ireland – undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two – Finland and Sweden - after floating the currency. All four episodes were associated with an expansion; but only in Denmark the driver of growth was internal demand. However, after three years a long slump set in as the economy lost competitiveness. In all the others for a long time the main driver of growth was exports. In Ireland this occurred because the sterling coincidentally appreciated. In Finland and Sweden the currency experienced an extremely large depreciation after floating. In all consolidations interest rate fell fast, and wage moderation played a key role in generating a gain competitiveness and a decline in interest rates. These results cast doubt on at least some versions of the “expansionary fiscal consolidations” hypothesis.

Paul Hannon WSJ Blog: OECD Suggests Raising Taxes to Combat Inequality. Governments in a number of developed economies should consider introducing or raising taxes on wealth and property as part of a range of measures designed to halt and reverse rising income inequality, the Organization for Economic Cooperation and Development said Monday. In its first report on the subject since 2008, the OECD said the gap between rich and poor in most of its 34 members has continued to widen. The average income of the richest 10% of the population in developed economies is now nine times that of the poorest 10%, having been five times as large in the 1980s

Thomas Piketty, Emmanuel Saez, Stefanie Stantcheva, NBER: Optimal Taxation of Top Labor Incomes: A Tale of Three. We develop a model where top incomes respond to marginal tax rates through three channels: (1) the standard supply-side channel through reduced economic activity, (2) the tax avoidance channel, (3) the compensation bargaining channel through efforts in influencing own pay setting. We then analyze top income and top tax rate data in 18 OECD countries. There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed.

Dani Rodrik, Harvard University: Unconditional Convergence. Unlike economies as a whole, manufacturing industries exhibit unconditional convergence in labor productivity. The paper documents this finding for 4-digit manufacturing sectors for a large group of developed and developing countries over the period since 1990. The coefficient of unconditional convergence is estimated quite precisely and is large, at 3.0-5.6 percent per year depending on the estimation horizon. The result is robust to a large number of specification tests, and statistically highly significant. Because of data coverage, these findings should be as viewed as applying to the organized, formal parts of manufacturing.

Olivier Bargain, André Decoster, Mathias Dolls, Dirk Neumann, Andreas Peichl, Sebastian Siegloch, IZA: Welfare, Labor Supply and Heterogeneous Preferences: Evidence for Europe and the US. Following the report of the Stiglitz Commission, measuring and comparing well-being across countries has gained renewed interest. Yet, analyses that go beyond income and incorporate non-market dimensions of welfare most often rely on the assumption of identical preferences to avoid the difficulties related to interpersonal comparisons. In this paper, we suggest an international comparison based on individual welfare rankings that fully retain preference heterogeneity. Focusing on the consumption-leisure trade-off, we estimate discrete choice labor supply models using harmonized microdata for 11 European countries and the US. We retrieve preference heterogeneity within and across countries and analyze several welfare criteria which take into account that differences in income are partly due to differences in tastes. The resulting welfare rankings clearly depend on the normative treatment of preference heterogeneity with alternative metrics. We show that these differences can ! indeed be explained by estimated preference heterogeneity across countries – rather than demographic composition.

Will Dobbie, Roland G. Fryer, Jr, NBER: Getting Beneath the Veil of Effective Schools: Evidence from New York City. Charter schools were developed, in part, to serve as an R&D engine for traditional public schools, resulting in a wide variety of school strategies and outcomes. In this paper, we collect unparalleled data on the inner-workings of 35 charter schools and correlate these data with credible estimates of each school's effectiveness. We find that traditionally collected input measures -- class size, per pupil expenditure, the fraction of teachers with no certification, and the fraction of teachers with an advanced degree -- are not correlated with school effectiveness. In stark contrast, we show that an index of five policies suggested by over forty years of qualitative research -- frequent teacher feedback, the use of data to guide instruction, high-dosage tutoring, increased instructional time, and high expectations -- explains approximately 50 percent of the variation in school effectiveness. Our results are robust to controls for three alternative theories of schooling: a model emphasizing the provision of wrap-around services, a model focused on teacher selection and retention, and the "No Excuses'' model of education. We conclude by showing that our index provides similar results in a separate sample of charter schools.

Petter Lundborg, Martin Nordin, Dan-Olof Rooth, IZA: The Intergenerational Transmission of Human Capital: Exploring the Role of Skills and Health Using Data on Adoptees and Twins. In this paper, we focus on possible causal mechanisms behind the intergenerational transmission of human capital. For this purpose, we use both an adoption and a twin design and study the effect of parents' education on their children's cognitive skills, non-cognitive skills, and health. Our results show that greater parental education increases children's cognitive and non-cognitive skills, as well as their health. These results suggest that the effect of parents' education on children's education may work partly through the positive effect that parental education has on children's skills and health.

Antonio Filippin, Marco Paccagnella, IZA: Family Background, Self-Confidence and Economic Outcomes. In this paper we analyze the role played by self-confidence, modeled as beliefs about one's ability, in shaping task choices. We propose a model in which fully rational agents exploit all the available information to update their beliefs using Bayes' rule, eventually learning their true type. We show that when the learning process does not convergence quickly to the true ability level, even small differences in initial confidence can result in diverging patterns of human capital accumulation between otherwise identical individuals. As long as inital differences in the level of self-confidence are correlated with the socioeconomic background (as a large body of empirical evidence suggests), self-confidence turns out to be a channel through which education and earnings inequalities are transmitted across generations. Our theory suggests that cognitive tests should take place as early as possible, in order to avoid that systematic differences in self-confidence among equally talented people lead to the emergence of gaps in the accumulation of human capital.

Charlotte Cabane, Ecole d'Économie de Paris: Childhood Sporting Activities and Adult Labour-Market Outcomes. It is well known that non-cognitive skills are an important determinant of success in life. However, their returns are not simple to measure and, as a result, relatively few studies have dealt with this empirical question. We consider sports participation while at school as one way of improving or signaling the individual's non-cognitive skills endowment. Using the National Longitudinal Study of Adolescent Health, which looks at students who were in grades 7-12 in 1994-95, we track how the students are doing as late as 2008. In the end, participating in team sports once a week as a student increases the hourly wage by 1.5%. Not a lot but still significant, especially as this for adults in their thirties, and gaps tend to widen later on. Individual sports seem only to have an impact for adult outcomes of girls.

AGING AND RETIREMENT

Rob Euwals, Elisabetta Trevisan, CPB: Early Retirement and Financial Incentives: Differences Between High and Low Wage Earners. This paper investigates the impact of financial incentives on early retirement behaviour for high and low wage earners. Using a stylized life-cycle model, we derive hypotheses on the behaviour of the two types. We use administrative data and employ two identification strategies to test the predictions. First, we exploit exogenous variation in the replacement rate over birth cohorts of workers who are eligible to a transitional early retirement scheme. Second, we employ a regression discontinuity design by comparing workers who are eligible and non-eligible to the transitional scheme. The empirical results show that low wage earners are, as predicted by the model, more sensitive to financial incentives. The results imply that low wage earners will experience a stronger incentive to continue working in an optimal early retirement scheme.

Malene Kallestrup-Lamb, Aarhus University:  The Role of the Spouse in Early Retirement Decisions for Older Workers. Instead of considering dual retirement we recognize the importance of the spouse in the early retirement decision by assessing the effect of a rich number of spousal variables. Given the grouped nature of the data we set up a semi-parametric single risk grouped duration proportional hazard model accounting for right censoring and allows for time-varying covariates, a nonparametric baseline and unobserved heterogeneity. We find that spousal characteristics do influence the retirement decision and significant gender asymmetries also exist in the effects of spouse's characteristics.

Garry F. Barrett, Milica Kecmanovic, University of Sydney: Subjective Well-being in Retirement: Evidence from HILDA. This research examines individual's self-reported changes in standard of living, financial security, and overall happiness over the transition to retirement. It is found subjective wellbeing SWB either improves or remains constant for the large majority of individuals as retire from the labour force. However, there are significant disparities in changes in well-being with retirement. In particular, the subset of individuals who are forced to retire early due to job loss or their own health, and who find their income in retirement is much less than expected, report marked declines in their well-being in retirement. This research also makes a methodological contribution by examining the accuracy of relative SWB measures. For the subset of individuals who retire after 2001, we use the longitudinal information in HILDA to assess the reliability of the retrospective reports of changes in SWB with contemporaneous responses.

DECEMBER 2 2011

Joe Weisenthal, Business Insider: The Entire Sovereign Debt Crisis Can Be Understood By Looking At Sweden Vs. Finland. These two charts basically explain everything. The first chart shows the yield on the Swedish 5-year bond. As you can see, it's absolutely plummeting right now. Now here's a look at its neighbor, Finland, and the yields on its 5-year bond. Basically they look identical all through the year up until November and then BAM. Finnish yields are exploding higher, right as Swedish yields are blasting lower. The only obvious difference between the two: Finland is part of the Eurozone, meaning it can't print its own money. Sweden has no such risk.

Martin S. Feldstein, NBER: The Euro and European Economic Conditions. The creation of the euro should now be recognized as an experiment that has led to the sovereign debt crisis in several countries, the fragile condition of major European banks, the high levels of unemployment, and the large trade deficits that now exist in most Eurozone countries. Although the European Central Bank managed the euro in a way that achieved a low rate of inflation, other countries both in Europe and elsewhere have also had a decade of low inflation without incurring the costs of a monetary union. The emergence of these problems just a dozen years after the start of the euro in 1999 was not an accident or the result of bureaucratic mismanagement but the inevitable consequence of imposing a single currency on a very heterogeneous group of countries, a heterogeneity that includes not only economic structures but also fiscal traditions and social attitudes.

Ryan Avent, Free Exchange Blog: Armies of the unemployed. There are several striking facts about recent movements in euro-zone labour markets. The first is the remarkable extent to which increased joblessness is due to deteriorating conditions around the periphery. Since the beginning of the year, Greek unemployment is up nearly 4 percentage points. The jobless rate in Germany, by contrast, has fallen a full percentage point over that period (see chart).

Michael D. Plante, Mine K. Yücel, Dallas Fed: Did Speculation Drive Oil Prices? Market Fundamentals Suggest Otherwise. Activity in the futures market increased appreciably in the past decade, as did the number of noncommercial traders. This rise was coincident with the rise in oil prices, leading some to hypothesize that speculation—rather than market fundamentals—drove the price of oil. The tripling of oil prices from early 2007 to mid-2008 is consistent with several market fundamentals, including increased demand from emerging markets, low elasticities of demand and reduced OPEC excess capacity. The behavior of inventories was also consistent with the reality of a tight market, not with a story of speculation-driven hoarding, whether we look at inventories above ground, below ground or floating at sea. Hence, evidence from the physical market for oil, similar to that from the futures market, is consistent with oil-market fundamentals leading to increasing oil prices before the global recession.

Philippe Bracke, IMF: How Long Do Housing Cycles Last? A Duration Analysis for 19 OECD Countries. I provide two sets of results, one pertaining to the average length and the other to the length distribution. On average, upturns are longer than downturns, but the difference disappears once the last house price boom is excluded. In terms of length distribution, upturns (but not downturns) are more likely to end as their duration increases. This duration dependence is consistent with a boom-bust view of house price dynamics, where booms represent departures from fundamentals that are increasingly difficult to sustain.

Casey Mulligan, NBER:  Rising Labor Productivity during the 2008-9 Recession. During the recession of 2008-9, labor hours fell sharply, while wages and output per hour rose.  Some, but not all, of the productivity and wage increase can be attributed to changing quality of the workforce.  The rest of the increase appears to be due to increases in production inputs other than labor hours.  All of these findings, plus the drop in consumer expenditure, are consistent with the hypothesis that labor market "distortions" were increasing during the recession and have remained in place during the slow "recovery." Producers appear to be trying to continue production with less labor, rather than cutting labor hours as a means of cutting output.

Corrado Giulietti, Martin Guzi, Martin Kahanec, Klaus F. Zimmermann, IZA: Unemployment Benefits and Immigration: Evidence from the EU. A sample of 19 European countries observed over the period 1993-2008 is used to test the hypothesis that unemployment benefit spending (UBS) is correlated with immigration flows from EU and non-EU origins. While OLS estimates reveal the existence of a moderate correlation for non-EU immigrants only, IV and GMM techniques used to address endogeneity issues yield, respectively, a much smaller and an essentially zero causal impact of UBS on immigration. All estimates for immigrants from EU origins indicate that flows within the EU are not related to unemployment benefit generosity. This suggests that the so-called "welfare migration" debate is misguided and not based on empirical evidence.

Eric A. Hanushek, Ludger Woessmann, Lei Zhang, IZA: General Education, Vocational Education, and Labor-Market Outcomes over the Life-Cycle.  Policy debates about the balance of vocational and general education programs focus on the school-to-work transition. But with rapid technological change, gains in youth employment from vocational education may be offset by less adaptability and thus diminished employment later in life. To test our main hypothesis that any relative labor-market advantage of vocational education decreases with age, we employ a difference-in-differences approach that compares employment rates across different ages for people with general and vocational education. Using micro data for 18 countries from the International Adult Literacy Survey, we find strong support for the existence of such a trade-off, which is most pronounced in countries emphasizing apprenticeship programs. Results are robust to accounting for ability patterns and to propensity-score matching.

PEW: Does America Promote Mobility As Well As Other Nations? In the United States, there is a stronger link between parental education and children’s economic, educational, and socio-emotional outcomes than in any other country investigated. An adolescent’s advantage from having high-educated parents is largest in the United States, England, and Sweden (the higher the blue bar, the greater the advantage). An adolescent’s disadvantage from having low-educated parents is largest in Germany, the United States, and England (the lower the red bar, the greater the disadvantage).

Nicholas Confessore, NYT: Policy-Making Billionaires. Over the past 30 years, as the gap between wealthy and poor grew ever wider, total philanthropic giving almost tripled, according to annual estimates published by the Giving USA Foundation and the Center on Philanthropy at Indiana University. In an age of widening partisanship and plummeting trust in government, this outpouring of philanthropy has produced a distinct breed of philanthropist: The policy-making billionaire. “What’s going on at a broader level is a sense of, ‘Hey, we can be much more effective and efficient than government in doing things’ ”

AGING AND RETIREMENT

Goulão, Catarina, Gouveia, Miguel, Toulouse School of Economics: Are we doing enough to discourage early retirement? Increasing the effective retirement age contributes to the sustainability of pension systems. However, oftentimes policies aiming at rising employment rates of older workers fall short in delaying retirement. This seems to be the case with retirement age flexibility reforms in Portugal. We analyze the recent Portuguese history of incentives to retire. For 1990-2006 we find that individuals faced very high implicit taxes on working with the result that half the workers had already left the labour force before age 65. We then look at the Social Security reforms in 2007 and find that the incentives to continue working became even smaller than they already were. We conclude that increasing the labour supply of older workers in a system with flexible retirement age needs policies with more aggressive use of penalties and bonuses than what decision makers were willing to accept.

Craig Berry, ILCUK: Gradual retirement and pensions policy. It is too often assumed that retirement is a one-off event, rather than a process. Yet there is increasing evidence that we are moving towards a process of ‘gradual retirement”. Ca 40 per cent of people would consider delaying their retirement if they could defer the state pension in return for higher payments later; yet 59 per cent are unaware that this option is already available. Ca 42 per cent of people would consider delaying their retirement if they could combine income from a work-based/employer pension and their current job; yet 66 per cent are unaware that this option is already available to many employees.

Roel M. W. J. Beetsma, Alessandro Bucciol, CESifo: Risk Sharing in Defined-Contribution Funded Pension Systems. This paper explores the introduction of collective risk-sharing elements in defined contribution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equivalent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductability of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses.