Does the minimum wage raise employment?

There is an endless literature that studies whether the minimum wage has positive or negative employment effects, spurred in particular by the much discussed Card and Krueger result that the relationship is positive. Most subsequent papers argues for the contrary, both empirically and theoretically.

Fabian Slonimczyk and Peter Skott appear to revive the debate with a theoretical contribution using a model where workers have an incentive to shirk on the job. Suppose there are two types of workers, skilled and unskilled, and two types of jobs, good and bad. When monitoring is imperfect and workers cannot pre-commit not to shirk, firms will threaten dismissal for bad effort, and need to keep wages high. This induces rationing of jobs, and thus some skilled workers end up in bad jobs, and some unskilled workers end up unemployed. This mismatch is particularly bad because there is over-education. Now introduce or increase a minimum wage. As long as it bites and firms prefer low-skill workers in low-tech jobs, it relaxes the no-shirking condition for low-skill workers, and thus increases their employment and wage, with little consequences for high-skill workers. If, however, firms prefer high-skill workers in low-tech jobs, there is an increase in high-skill employment and a decrease in low-skill employment. The key here is that heterogeneous skills create monopsonies and job-skill mismatches.

Slonimczyk and Skott then try to back their results up with some empirics. But the short samples do not lead me to have much confidence in those. It would be interesting to see someone test this theory with better data.

Why volunteer?

Why do people volunteer, or why are they altruistic? I have followed the open source movement, and beyond the sense of doing this for the common good, there certainly is an element of showing off skills, be it just for brownie points or for signaling to potential employers. But such signals are not relevant in other areas of volunteering.

Take volunteer firefighters, who Jeffrey Carpenter and Caitlin Knowles Myers study. They have data on time spent volunteering, altruism measures from the standard dictator game as well as other behavorial measures and conclude that both altruism and social image matter. And the more people get compensation by money, the less the social images matters.

These results are hardly surprising. Volunteer firefighters quite obviously like their work and their utensils. Just see how shiny they keep their trucks and take every opportunity to parade them. But that is good, and this is a way to show to others how altruistic they are, similarly to Shriners in their miniature cars. And once paid, firefighters seem to consider their job like any other, so image is less important to them.

That said, firefighters enjoy quite some social prestige, which is repeatedly reinforced by authorities and media. This applies also to the police force and teachers. I have always wondered whether this was a way to compensate them for low pay. From this study, it seems firefighters are certainly internalizing this trade-off.

Less competition is good for insurance

Competition is best, economists often claim. Except when it is not, for example in the case of natural monopolies, where the duplication of infrastructure is wasteful. THe case can also be made that competition is not as good as one would think in the insurance industry

Giuseppe de Feo and Jean Hindriks explain that adverse selection has worse consequences under competition. Indeed, in a monopoly, the insurance company can make profits on some products which allows to cross-subsidize others. With competition. profits are driven to a minimum, and cross-subsidization is minimal. This is important because cross-subsidies allows to relax the incentive constraint. This provides better coverage for high risks, but lowers participation among low risks.

One aspect that was not mentioned in the paper is that monopolistic insurers, because they have a larger market share, are better able to diversify the individual risk of the insureds. Observationally, this makes them closer to risk-neutral, and thus allows them to offer lower premiums, every else being equal. Of course, they could use their monopoly power to raise premiums, but with smart regulation or threats to entry, this can be prevented and the full social benefit can be obtained.

Why recent tax rebates did not work

There used to be a time, not long ago, where tax rebates were popular. The idea was that putting money in people's pockets would drive them to spend it all and by multiplier magic the economy would grow sufficiently to recoup the lost taxes. And it did not work, as the Ricardian Equivalence would state, people mostly saved it all up for the looming tax increases. The only real impact came from those households where the Ricardian Equivalence would not hold, the cash constrained ones.

Thomas Bishop and Cheolbeom Park argue that the latter are a dying breed, and this is why the 2001 tax rebates in the US failed even more than the previous ones. The reason is that the increased availability of credit card lines reduced the number of households that were borrowing constraint, and those holding credit card debt simply applied their tax rebate against the current debt. The only ones who would spend the tax rebate are those who maxed out their credit card and still want to spend more.

All of this is rather obvious, and we all know these theoretical results since the works of Mark Huggett, Rao Aiyagari and Christopher Carroll. But it bears repeating, because people, and especially politicians, keep ignoring this.

The parental home as unemployment insurance

It is well known that in Spain and especially Italy, people in their twenties and even thirties stay with their parents until they find a job, and they often wait for the "perfect" job. This looks like an unemployment insurance with infinite duration with substantial moral hazard, which has lead to sky high youth unemployment rates in Europe.

Greg Kaplan is documenting that something similar is happening in the United States. Using the NSLY, he finds that many of those who do not attend college return home during unemployment spells, much like college students return home over the Summer. This analysis is very nicely done with an estimated structural model that features a repeated game between children and altruistic parents. In particular, this allows to understand why the savings rate of young people is so low. As they have the option of returning to their parents, they see no need to build up any precautionary savings. This means also that programs like unemployment insurance have little impact for them.

Technocrats vs. Referenda

A policy decision needs to be taken. Do you let technocrats conduct a cost-benefit analysis or do you let people vote on it? Our first intuition would tell us that a referendum is best when people's opinions are widely dispersed, and a cost-benefit analysis is best when not.

All wrong, claim Martin Osborne and Matthew Turner. The reason is that referenda only reveal ordinal information about preferences, whereas cost-benefit analysis also reveals cardinal information: If a majority is only slightly bothered by a policy, but a minority sees huge benefits, social welfare would indicate such a policy should be implemented. A referendum would not allow it, whereas a cost-benefit analysis would. But referenda have the advantage to attract well-informed voters, as uninformed ones typically abstain. A cost-benefit analysis would also sample uninformed ones, which is bad.

Thus: use referenda when there is poor information and there is little dispersion in preferences, whereas use cost-benefit analyses when there is good information and large dispersion in preferences.

A measure of guilt

How do you measure guilt? There is no market price for it, and most of the time it has no measurable expression. One would need some rather particular circumstances to find a way to measure guilt. Hongbin Li, Mark Rosenzweig and Junsen Zhang found it.

During the Cultural Revolution in China, many urban families had to send some of their children to work among farmers. Assignments were to a large extend random, and parents had to choose which child to send. As this send-off was viewed as an unjustified punishment, many parents felt guilt and tried to compensate later in life with transfers, as a marriage gift or other. To get a clean data set, Li, Rosenzweig and Zhang set out to recruit twins and compare those who were separated during this period, as presumably everything else prior should have been identical. And it turns out that those that were sent off received substantially more from their parents, even when they were subsequently better off than their siblings. And this result is robust to all sorts of controls, for example party membership (there was indoctrination on farms, and party members were more likely to gain favors in the system, which parents may want to buy into).

I hope they will be using this data set for other studies. Otherwise, this would have been a tremendous effort for only a proof of concept. Because I see little use for the result beyond that.

Saving pensions with conditional benefits

It is a recognized problem that demographic change is bringing significant problems to pensions systems. People live longer and thus spend a larger share of their life on a pension, which costs a lot (see Greece for a spectacular example). And fewer births per capita imply that fewer working people can support the pensioners. The solutions are thus: lower benefits, increase contributions, raise retirement age, encourage fertility (and increase mortality, but that is politically not feasible).

Alessandro Cigno suggests a clever way to improve the situation that is equivalent to a combination of the above policy changes: make part of the pension benefits contingent upon having children. Clearly, this should increase fertility. However, this is a step back to the time where one would rely on one's own children for old age. Also, I am not sure the fertility incentive is ell timed. Young households are discounting heavily retirement when they make fertility choices, and contemporaneous incentives should have much more bite than some that kick in only decades later.

How to remove tax distortions with revenue neutrality

We all know that tax are usually bad because they distort, and this distortion goes the wrong way for most taxes. But we need them because the government needs some revenue, and some redistribution is fair. In the current context of high fiscal deficits, it would come in real handy if there were a way to overcome these distortions so that economic activity not be hampered by the inevitable increases in taxes. Proposals usually come from luminaries with dubious credentials, but when three established economists come to the rescue, you listen.

OK, I may be overdoing it, but Marco Del Negro, Fabrizio Perri and Fabiano Schivardi have an interesting proposal. The idea is to allow people to buy out future income taxes with a lump-sum payment. This is revenue neutral and removes the distortion, thus increasing the labor supply and then consumption and income. Things are not as simple as they seem. Indeed, the government does not know your ability to generate income ins the future. But it may elicit you to tell the truth by sharing some of the surplus created by the removal of the distortion. Concretely, the government offers a menu of contracts, which all contain a buyout price and a tax reduction, and people self-select optimally by potential income category.

As an example, they propose a $4500 buyout that reduces taxes by 5%. 10% of the population would buy this contract, which seems trivial yet increases GDP by 1%, because it is mostly the high income people ho take advantage of it. And this is Pareto improving. It is easy to see why: I can offer the government the same tax payment I would pay if I were under a proportional or progressive income tax against the ability to work as much as I want without tax consequences. Of course my labor supply will increase, I will earn more, spend more and other will have more income as a consequence and pay more taxes. Everybody wins. Where do I sign up?

Reciprocity in blogging networks

What makes a blog successful? Well, first define success. It can be the number of people reading it, the number of comments on it, or the revenue from advertisements. I do not have benchmarks to compare mine, but I am quite sure my blog does poorly on at least on three of these definitions. Thus, what am I doing wrong?

Alexia Gaudeul and Chiara Peroni may have the answer. They use LiveJournal to study how bloggers, write, comment and interact. The keys to success seems to be for the blogger to comment on other blogs, thus eliciting reciprocal comments. The blogger also needs to reply to comments on his own blog. This sounds like bloggers are only among themselves and form cliques and the one with the most friends wins. Just like in high school. But I think this is all coming from the dataset, which does not record lurkers and other outsiders.

Quite obviously, I am doing everything wrong. I hardly comment on other blogs. I do not continuously follow comments, as I only check them when it is time for another post and rarely follow up. I'll make an effort.

Increasing trade by creating more borders

What is the difference between macroeconomics and international macroeconomics or trade? There is a border. Just splitting an economy in two seems trivial, yet it matters. A lot. There is plenty of empirical evidence that borders matter. They inhibit trade. They allow for purchasing-power-parity deviations to persist. The economic well-being can differ dramatically across a border despite geographic similarities.

Emmanuelle Lavallée and Vincent Vicard note that the number of borders has considerably increased since World War II, with the number of countries going from 72 to 192. Given the border effect, this should be bad. But this has also a important side effect: transactions that were internal become international, thus boosting international trade statistics. Lavallée and Vicard find that measured international trade has increased by 9% solely because of new borders, but actual trade would have been 4% higher without those borders. While this is not negligible, we need to keep in mind that world trade has increased by a factor of 30 during this period.

Timing death with tax changes

One would think that the timing of death is largely exogenous. Think again, and it is not suicide or murder I am talking about. Estate taxation has probably the most volatile tax regulation among all taxes, as it can change dramatically from one year to the next. And these dramatic changes can encourage people to time their deaths.

Marcus Eliason and Henry Ohlsson look at Swedish data and notice that for deaths around the date of a taxation change, there is a notable asymmetry in the reported number of daily deaths, especially for those subject to estate taxation. Of course, it is unlikely that the true time of death was influenced, it is more likely some fudging on death reports happened. I usupect the same happens in other circumstances, like few people are officially born on July 4 in Iran, or May 1 in conservative circles in Europe.

University endowment shocks and resource allocation

According to theory, precautionary savings are accumulated to smooth consumption against income shocks. Households largely conform to this theory, which is best seen by considering that the marginal propensity to consume is quite lower than one. Universities, at least American ones, have endowments that could be used for the same purpose and often have. But the story is quite different when it is the endowment that gets a negative hit, instead of income.

Jeffrey Brown, Stephen G. Dimmock, Jun-Koo Kang and Scott Weisbenner find that universities usually reduce their operational expenses in situations like the current crisis. And according to theory, this makes perfect sense, as their permanent income has dropped. What is interesting is that different type of universities react differently. Support staff always get reduced, but not administrators. Sigh. In top universities, cut-backs are concentrated on student financial aid, in the other ones cuts fall mostly on tenured and tenure-track faculty, trying to substitute them with adjuncts. And, interestingly, when peers suffer heavier endowment losses, universities increase hiring, as it looks like they try to poach on the competition.

Mafia, education, and emigration

The mafia and similar organization are a tumor on an economy. They divert the effort of people to unproductive activities, they upset the rule of law and discourage entrepreneurship. But it is difficult to actually measure the impact of the mafia, because their is no measurement of its activities.

Nicola Coniglio, Giuseppe Celi and Cosimo Scagliusi use difference in the penetration of the mafia in various towns of Calabria, which they measured themselves, to tease out from the data that mafia presence decreases education and increases emigration. Intuitively this makes sense: why you want to get educated if it is not rewarded, i.e., educated people have more income and are more likely to be business owners and thus have to pay a protection fee to the mafia. The only way to avoid this is to emigrate.

More interesting than the obvious is the size of the effect. The historical presence of the mafia in a town decreases the proportion of high school graduates by two percentage points. This is not negligible, as only about a quarter of the population has such a degree.

Expectation-driven business cycles

Are business cycles driven by expectations? Standard business cycle theory would tell you every depends on current fundamentals, but as expectations build on those fundamentals, both should matter. Take a real business cycle model. If people expect a total factor productivity shock to be persistent, they will adjust consumption and investment accordingly. But waht are the relative contributions of current fundamentals and expectations?

Sylvain Leduc and Keith Sill use various surveys on economic expectations and find they matter. That should not surprise too much, if one looks at the 1990 and 2008 recessions in the United States. But expectations are very hard to quantify, plus surveys have significant measurement issues. Still, their VAR gives a clear message.

This makes me wonder how much a business cycle can be "manipulated" by media and authorities. Think about the last crisis, where government and media were claiming we were slipping into the Great Depression. That could only be self-fulfilling. Or how Bush Jr. told Americans to consume after 9/11 to prevent a recession. Or the Soviets showing eternal optimism about their economy. But the latter could not be credible in the long run.