Complicated Southern European recessions

On both sides of the Atlantic, the last recession was unconventional. This has meant that the mainstream business cycle models needed to be rethought to make good sense of what is happening. By that I mean, they need to be augmented or altered, not thrown out completely, as some have claimed. In doing so, one needs to identify new channels for the transmission of shocks, and possibly new shocks as well. And because this is unconventional, it is sometimes difficult to wrap one's head around some of those models.

One good example of that is the paper by Zhen Huo and José-Víctor Ríos-Rull that tries to understand the last Southern European recessions. They are looking for a model that would explain simultaneously an increase in savings while wealth and employment are decreasing. To make it work, they need frictions in the reallocation of resources across sectors, frictions on the labor market, and some shock that increases the savings rate. The latter generates then a paradox of thrift: even though savings are up, wealth is down. This comes by in the following way: as savings go up, consumption is down in a way that reduces the number of varieties of goods that are demanded. This leads to excess capacity, an apparent decrease in total factor productivity and thus the value of firms and capital decreases.

Now, the shocks triggering this are shocks to patience. Alternatively, it works as well with shocks to financial costs. Yet, I have a hard time believing that these were the triggers of the last recessions in Southern Europe. It seems to me that wealth decreased before the savings rate went up. And the reason of the former was a sudden recall of debt by Northern savers (in particular banks) that needed to cover losses in US mortgage instruments. In other words, it may have been as simple as a negative wealth shock triggering a standard decrease in consumption that gets the ball rolling. The financial costs came after. The labor market frictions and the reallocation frictions should also be enough to prevent labor to increase.

Research and teaching are complements in terms of quality

Are good teachers also good researchers? Does spending more time on research improve one's teaching? Or does research get in the way of good teaching performance? It seems everyone has his own theory about this, some thinking that teaching and research are substitutes (you hear that mostly in teaching colleges) or complements (research universities think that). What about some empirical evidence on the matter?

Aurora García-Gallego, Nikolaso Georgantzís, Joan Martín-Montaner and Teodosio Pérez-Amaral provide this for a Spanish university. It turns out research and teaching are complements, at least for that university. What I find striking is that the professors who perform the most research also teach the most, and do it better. Those doing no research are among the worst teachers. That seems like the way a social planner would do it: Get the best people to work their ass off, while the worst should be kept away from anything productive. That is the way to increase productivity. That does not seem very fair, though, unless pay is tied to performance, which is not likely in this case. And how this study can generalize to other universities is not clear, especially as we do not know much about the university in this case.

Minimum wage increases hurt the old, not the young

The empirical literature on the minimum wage is really disorienting. While relatively simple theory tells us that a minimum wage increase should decrease labor demand for the lowest wage categories and thus hurt the young workers most, results on the labor demand have certainly not been clear-cut. But at least there is agreement that it hurts the young workers most, right?

Wrong. Sofía Galán and Sergio Puente managed to find a contradictory result by looking at the impact of the major minimum wage increases from 2004 to 2010 in Spain. And among all age groups, the ones that lost the most jobs are the oldest. Of course, there is a way to rationalize this: The oldest are not going to improve the productivity in coming years. The young do, however, and are more worth keeping on the job, especially knowing the rigid labor laws in Spain. Speaking of which, I wonder how those labor laws, which have changed during that sample period, could affect the results. In particular, these changes in laws about temporary workers and firing costs must have had a different impact on the various worker cohorts.

Does it help to search for a job?

Getting unemployed workers to search with sufficient intensity has been for a long time an important aspect of active and passive labor market policies. For example, unemployment insurance benefits decrease over an unemployment spell or expire exactly for this reason. But for it to make sense, it would need to be established that search intensity actually matters for the probability of finding a job. It seems obvious, but there are so many different ways to do this that some may turn out not to be that good and should thus not be required for eligibility to some programs.

Javier Vázquez-Grenno tries this for Spain, a country with an unusually high unemployment rate. He finds that immigrants have a higher search success, at least before the current crisis. Search intensity as measured by the number of search methods matters, and all methods improve the chances of employment, except one. Registering at the public employment office. That must be a big disappointment for all those who have maintained that these offices were the center part of lowering the unemployment rate. It does not seem to work at the microeconomic level, although it may still work at the macroeconomic one: after all, the office employees would probably be unemployed without that job.

Spain: an eventful history of economic crises

There is talk that Spain could get dragged into a financial crisis. While it is debatable whether this will happen or not, and whether it is inevitable, it is instructive to study Spain's economic history in this regard.

Concha Betrán, Pablo Martín-­‐Aceña and María Pons look at a century and a half of data and basically do in more details for Spain what Carmen Reinhardt and Kenneth Rogoff did for many countries in their best seller. And as the latter book, the picture is depressing. Crises of all sorts were a rather regular occurrence, we have been just blessed with rather few of them over the last half century. For example, in the second half of the 2oth century, Spain experiences half a dozen currency crises, a couple of banking crises, three periods with negative stock returns over several years, and the IMF had to intervene three times for a debt crisis. It takes from this that while crises are becoming less frequent, they still occur, and the current one was long overdue.

Referee home bias

Referees are supposed to be impartial. In academics, this is most of the time helped by the fact that they are anonymous. In sports, referees are public and meeting participants, including spectators, try to influence them. This becomes particularly relevant when the referee has to take a decision against the home team than leaves spectators irate. They could retaliate against him. Does this influence referees?


Andrés Picazo-Tadeo, Francisco Gónzalez-Gómez and Jorge Guardiola Wanden-Berghe look at first division football in Spain, carefully taking into account stadium capacity, how full it is, how far spectators are from the pitch, and referee experience. They find that awarding a free kick does not have a home bias, which is consistent with the fact that this is a split-second decision. The ensuing decision to give the offending player a caution is, however, affected by home bias. This decision is not instantaneous, and social pressure can be exerted on the referee, especially when the stadium is full. The presence of a running track that separates the local supporters form the action does not seem to matter, though. I wonder whether some teams have a larger home bias than others, as the fans' reputation could also influence referees.

Spain: how to mess with the labor market

Spain has long been a puzzle because of its abnormally high employment rate, in particular among the young. But things seem to have rectified themselves somewhat since Spain got more integrated into the European market, which unemployment rates comparable to France. But the last recession turned out to be a disaster, with the unemployment rate increasing by 11% points, compared to 2% points in France. What is wrong with Spain? For one, there was a spectacular drop in activity in th construction sector, which initially accounted for a sixth of GDP and was basically divided by six.

Samuel Bentolila, Pierre Cahuc, Juan Dolado and Thomas Le Barbanchon claim that there is also a serious issue with labor market institutions. While both France and Spain have extensive employment protection legislation, and severance pay is formally higher in France, Spain requires, for example, administrative approval for collective dismissals of over 10% of the workforce. Such approval can only be obtained by collective bargaining and much higher severance pay. While severance pay is usually not problematic (it is accounted for in wages), it is the red-tape associated with this and the hoops firms that firms need to go through to dismiss that become economically relevant, because these are transfers that captured by a third party: administration. This makes it then very costly to hire someone, given expected firing costs, and especially so in uncertain times.

Using a search and matching model, Bentolila, Cahuc, Dolado and Le Barbanchon find that the unemployment gap between France and Spain would have been reduced by 45% had Spain adopted French labor market institutions. And I surmise it would be much more with other laws, as France has quite high employment protection in international comparison. No wonder that Spain recently scrapped much of its employment protection regulation in the midst of a deep recession, which may sound counter-intuitive at first. But if you want firms to hire in a recession, they should not have to commit for long-term employment.

The falling college premium in Spain

The college premium, the difference between the wage of a worker with a college degree and one without, has been steadily increasing in the United States despite a large increase in the proportion of college graduates in the population. And the US college premium is substantial, more than 70% nowadays. The standard explanation is that this is due to an even larger increase in the demand for college graduates on the labor market. It appears that this experience cannot be generalized.

Florentino Felgueroso, Manuel Hidalgo and Sergi Jiménez-Martín show that the college premium in Spain has actually been decreasing, especially for males, and is at about 70% to 95%, depending on the definition. Why is this evolution so different from the United States? First, there seems to be a much more prevalent mismatch between skills and occupations. Higher education in Spain is much more specialized, which is a disadvantage when you cannot find a job in your specialization. This would indicate the drop in the college premium is a composition effect. But the premium also decreased for well-matched workers. Second, job rotation has increased and temporary jobs have become more prevalent. Shorter experience in a sector depresses wages, and this evolution seems to have been particularly strong for educated workers.

Interestingly, it appears that this trend started with the last major labor market reform in Spain, when employment subsidies were introduced along with employment promotion contracts that are supposed to reduce unemployment among the young but came with the cost of a surge in temporary contracts. Shorter tenures are not necessarily bad, especially when firing costs are too high, and a neither is a decline in the college premium. But one would have expected the US story to be even more true in Spain, as industry adapts faster than workers and its fast modernization would have outpaced the supply of skills from the workforce. Apparently not with those particular labor market reforms.

Lending to the borrower from hell

As usual, there were quite a few good papers (and some bad ones) at the ASSA meetings in San Francisco. Over the next days, I will write about some of them. Note that if you presented a paper and do not have some version up on the web, I will not write about it.

People puzzle these days why banks could have been so stupid to lend so much to risky borrowers. This is not the first time this happens, witness how Argentina could quickly borrow again after each of its numerous defaults. But the risk taking by banks seems much larger than previous seen. Not so. Mauricio Drelichman and Hans-Joachim Voth report on the proverbial borrower from hell, Phillip II of Spain, who accumulated debt up to 50% of his country's GDP and defaulted several times. Why was he still getting loans?

The obvious answer is that he is the king and can offer non-monetary rewards to lenders, such as not getting killed. Or that bankers were irrational, or that the king effectively used his monopoly situation to play the bankers against each other. Not so claim Drelichman and Voth after looking carefully at a large number of lending contracts. In particular, the bankers appear to have formed a very effective coalition through joint lending, cross-posting of collateral and inter-marriage. Whenever the king stopped to pay, he was unable to get any additional funds, as no bank was willing to break ranks. And this had a severe impact on the king as he typically faced large revenue and expense shocks. So he eventually had to settle with the banks, the latter essentially dictating the conditions.

Does this relate to the current situation? Not really, as the Spanish case illustrates a bilateral monopoly game with a weak player (the king). Today, we have a very competitive environment, where banks have been trying to undercut each other and may have overstretched themselves. But one lesson I learned from this paper is that aggregate data may be quite misleading, there is virtue in looking at the detail, the lending contracts in this case.