The mysterious rise of absenteeism in Norway

Labor markets have local particularities that are sometimes rather difficult to explain. For example, US workers get little vacation, yet often do not even use it fully, while their European counterparts use all of their much longer off-time. Or, Italians have the right to strike, which they interpret as an obligation in the transport industry, where if in a particular year there are strike days left, they quickly find a reason to be unhappy before New Year. Where these quirks originate is difficult to tell, so it is of particular interest to study one that recently appeared.

Erik Biørn, Simen Gaure, Simen Markussen and Knut Røed absenteeism in Norway has notably increased in the past two decades. Nowadays, 6.5% of hours are lost, and this despite better health and no change in the legal or policy environment. Studying this requires excellent data, which is not available. The authors use data on long-term (more than 16 days) absentees, which should help uncover part of the story. They find that absenteeism rises with age, except for a hump for women in their twenties (pregnancies?), which should not be a surprise. Once adjusted for age, they also find that absenteeism has increased within individuals, and this even more than in aggregate. This means that the aggregate outcome is not due to new and lazy cohorts. Also, workers that had higher tendencies towards being absent have been sorted out of the labor force. Unless the short-term absentees dramatically reverse these results, the puzzle about this rise in absenteeism remains.

Are New Economic Geography models any good?

The New Economic Geography Model pioneered by Paul Krugman has revolutionized our thinking about the location of factors of production, yet there has so far been little empirical support for this theory. Empirical tests suffer from massive endogeneity problems, and simulations seem to replicate very poorly the data, in part because they use very sparsely the data. But combining both approaches coax out their advantages while not revealing too many of their disadvantages. One attempt was by Kristian Behrens, Giordano Mion, Yasusada Murata and Jens Südekum, who estimate a structural model and then simulate border effects.

Eckhardt Bode and Jan Mutl take a somewhat different approach. They take a fully specified structural model, take a Taylor expansion around the empirical steady-state, and then estimate the resulting reduced form. And the model is soundly rejected on US county data, mostly because migration does not vary in the way the model would want. Not imposing theoretical restrictions improves the estimates considerably, which is not reassuring.

Does this mean the NEG models can be dumped now? Not yet. They still gives us good insight, and if they fail on migration, they appear to be holding rather well with regard to the links between wages and good prices. And the empirical methods can certainly be improved, especially regarding spatial autoregression.

My jaw drops at all the jaw dropping

Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis with a previous life as a prominent economic theorist, made a statement a few days ago that raised a surprising amount of controversy on the blogosphere. He said:

Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.

To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.

This lead a few bloggers to questions his sanity: Employment, Interest and Money (I), Angry Bear (I), Economist's View (I, II, III), Nick Rowe (I, II), and even Paul Krugman (I). Surprisingly, Kocherlakota has few defenders: Steve Williamson (I) and only a few comments in the posts mentioned above.

Kocherlakota is clearly taking about a long run. And if the Fed wants to maintain low nominal interest rates, it can only do so, again this is a steady state, by have a negative inflation rate. This is not only the Fisher equation, but also the result of countless monetary models whose optimal monetary policies are the Friedman rule. In fact it is damn difficult to avoid the Friedman rule even in models with price rigidities. And remember, Kocherlakota was taking about the long run, and in the long run, money in neutral. Not superneutral, though, as the Friedman rule shows.

How to solve the Kyoto and Copenhagen climate gridlocks

The Kyoto Protocol to reduce greenhouse emissions has not been widely adopted or followed and the Copenhagen climate summit ended in a fiasco. Why is it that the world community cannot cooperate on an important issue? And even if one doubts about global warning, one has to agree that this is a potentially large issue, and thus at least some coordination is required. People will immediately point out that there is a huge free rider problem, and they are right. As emissions are global, everyone benefits from the efforts of the others but little from one's own. Hence the need for cooperation.

Peter Cramton and Steven Stoft write that this cooperation problem becomes even more difficult depending on what the central coordination mechanism is. The argue that cap-and-trade makes things especially difficult, because it makes objectives of the negotiating parties even more divergent. If the rule of the game is that everybody needs to have individual and binding emission ceilings, then everyone will try harder for low (developed economies) or high (developing ones) emission caps. One solution out of this quagmire is to adopt a global emission ceiling that is enforced through a market-based mechanism, with the sale of pollution permits. We have known for a very long time that prices are very powerful enforcement mechanisms, and in the context of this public-goods game it is even better because it will foster more cooperation in the negotiation of the emission ceiling and lead to an agreement having a better chance of actually happening.

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.

How can very small economies survive?

I find very small countries fascinating. They are link small scale representations of the economies we usually study, to a scale that would correspond to an experiment we would want to perform. But these very small countries are not perfect replicas of the larger ones. Because of their size, they are less diversified, need more per capita overhead for governing, their capital accounts are more vulnerable, but they can play very well with tax competition.

Patrice Pieretti, Skerdilajda Zanaj and Benteng Zou, fittingly based in Luxembourg, set up a linear, small open economy where government set tax rates (and thus productivity enhancing public amenities) and household firms locate à la Hotelling around the country border. The result is that there are three possible paths, as so often in dynamic systems: the economy either collapses, explodes or finds its way towards a steady-state along a saddle path.

But do we really learn something from this exercise? The entities here are really P.O. box firms that can move from one country to the next on a whim, except that each firm takes a worker with it. What if there are moving costs? Concave production? People who stay in the country when capital leaves? I bet you would easily find multiple, stable equilibria, some with low taxes, low returns and ovecrowding, some with high taxes, high returns and high amenities. And now things become really interesting and more realistic.

Why road pricing is so difficult to impose

As an economist, don't you hate it when a policy that should so obviously be enacted is either perverted by special interests in the legislative process or immediately dismissed as politically unfeasible? The problem is often that politicians are economic laymen yet believe that they know best. Or they do not think about the common good. Anyway, congestion pricing is one policy that makes perfect sense to an economist, but that is often rejected by policy makers because it would be unpopular. And this despite the success of the congestion charge in London. Why this negative attitude?

Bruno De Borger and Stef Proost look at the political economy of congestion pricing. They observe that in the successful cases, revenue was used for public transportation. Also, there was a majority opposed ex-ante, but no majority to revert ex-post. De Borger and Proost claim this is consistent with people being uncertain about outcomes, which means they would also be against experiments. Thus, I conclude that politician need to show leadership and impose congestion pricing.

The economics of piracy in Somalia

Piracy off the shores of Somalia has come to the front news after a few spectacular cases, prompting an international response, mostly in the form of military surveillance on the waters, which has not prevented pirates from extending their hunting grounds. But some people have argued that this patrolling is just treating a symptom. Short of establishing a lawful state in Somalia, which has proven impossible so far, providing alternative livelihoods for the pirates would work better.

Sarah Percy and Anja Shortland doubt this would work. They claim a stable state and economic growth would actually help piracy. Indeed, piracy is a business and any business becomes more difficult in unstable conditions. The way to think about it is that pirate get income from piracy, and they invest locally. The better the return on that investment, the more you want to conduct piracy. Naval operations are useful here because they raise the costs of operations of pirates, but they imply also that attacks are more likely to turn violent, in particular for hostages. But I digress. Another in which local stability would be detrimental is that the whole region may be destabilized, not only Somalia.

An alternative would be to buy off the pirates and turn them into coast guards who enforce fishing rights. This deters them from piracy and would allow the fishing industry to come back to life. But this could also backfire by creating a better trained and equipped pirate force. This is a really difficult situation. Percy and Shortland think things will improve once the stakes for insurance companies and shipping companies become higher: ransoms are getting larger, and violence is becoming more commonplace. At some point they will start intervening with more conviction.

The AEA is missing a golden opportunity

The American Economic Association is asking its membership to approve a drastic restructuring of its dues. There are two reasons for this. One, the AEA is swimming in money (despite last year's fiasco with the Economists calendars) and would have difficulties maintaining its non-profit status with fiscal authorities. Two, by default members get hard copies of the journals and need to opt out to reduce their membership fee. By making the default membership without journals, the AEA hopes to save on printing costs and thus can lower the average membership fee even more.

I will vote against the change not because I dislike a decrease in the fee, but because I believe the AEA has missed here a tremendous opportunity of putting its journals in open access. This is a society with a sound financial basis that could set an example for the rest of the publishers by showing that good research should not be gated. Would this be a money losing proposition? I do not think so, first because the AEA will always have good income from its meeting registrations, and second because it would not need to maintain anymore a whole infrastructure to keep outsiders away from its journals. The AEA could probably cancel membership fees altogether and still make it work.

NB: I realize that the Journal of Economic Perspectives was recently partially put in open access. This shows that the AEA is open to the concept.

The strange dynamics of faculty merit pay

In many US universities, faculty performance is rewarded with merit bonuses or increases, the initial idea being to prevent other universities from poaching the best performers. But seeing how this is approached in a very heterogeneous way across institutions, one sometimes wonders whether the merit process is done optimally.

Finn Christensen, James Manley and Louise Laurence had access to much relevant data in a large public university. There, merit pay is distributed in each department by a committee of tenure faculty. The outcome is that about two thirds of all faculty reach the highest merit scale, three fourths among tenured faculty. Now this outcome could be justifiable with additional data, which the authors have for a particular college in this university in the form of various output measures that should matter for evaluation. It turns out that untenured faculty is as productive, but still gets less merit pay. Even worse, it appears that the output measures explain about 10% of the variation in merit.

What is going on? Christensen, Manley and Laurence show theoretically that given the institutional structure, one should not be surprised by these results. I can believe that, and this is probably compounded by compression: as new faculty commands higher pay than old, the old compensate with higher merit. The authors find little evidence of this. Internal politics also certainly play a role, as you want to avoid offending someone who may be determining your merit later. But what is clear is that there is, at least at this place, very little transparency in merit attribution.

Homosexuals and savings

Do homosexuals save more or less than heterosexuals. As gays typically do not have children, one may think that they care less about the future and that this leads to lower savings. This is a prevalent intuition that even brought Hans-Herrmann Hoppe trouble over academic freedom with his administration. But is this idea true?

Brighita Negrusa and Sonia Oreffice claim it is true based on an analysis of the 2000 US census, showing that homosexuals couples accumulate significantly more retirement and social security savings. They save more than heterosexual co-habiting couples, who themselves save more than heterosexual married couples. The same can be concluded from mortgage to house value ratios.

Note that savings are not directly measured in those datasets. retirement and social security savings are inferred from retirement and social security income for retirees, and household wealth is inferred from the share of mortgage payments to the house value. And homosexual couples are also inferred by have to same gender adults in the same household. But even with all the measurement errors involved, the results are pretty clear and should at least give us to rethink some unfounded intuitions.

So why would homosexuals save more? The fact that they have fewer children, which would have accounted for the lack of altruistic bequests, may also mean that they cannot count on support from descendants. This is consistent with unmarried couples (who have less children) saving more than married couples. But why then do homosexual (unmarried, this is the year 2000) couples save more than unmarried heterosexual couples? The authors rule out discrimination on credit markets. An open question.

Women's rights and development

It is sometimes puzzling when someone in power relinquishes it, especially when this person can take advantage of institutions to stay in power. One such case is when males, who were the only ones to have property rights, gave property rights to females. Why would they allow this, given that males had monopoly on votes and government?

Raquel Fernández comes up with an elegant story. The important trade-off is between appropriating all rights to oneself and how descendants, who include daughters, get. Looking at history, there are two major effects. The first is a decline of fertility, which under a patriarchal system allows fathers to bequeath more per son. But this increases the disparity between sons and daughters, and thus reduces the advantage over equal distribution, through the concavity of utility. The second effect comes from the general increase in wealth, with a similar logic.

In both cases the father becomes better off sacrificing some wealth to his wife in order to force sons-in-law to be more generous with his daughters. The prediction is then that lower fertility and more advanced economic development both force earlier adoption of female property rights, something Fernández finds across US states, which have adopted such laws at various times between 1846 and 1920 (and four states still missing by then). And the theoretical prediction is obtained without assuming changes in altruism towards children, which I find remarkable.

The economics of compartments

Science makes progress through interdisciplinarity. Economists have long recognized this by venturing with their methods into other fields, something I have repeatedly documented on this blog. And Economists also borrow techniques from other fields to their advantage.

Fabio Tramontana and Mauro Gallegati looked at the biology literature and stumbled on the concept of compartments. The idea is to attribute populations to bins in such a way that they are rather homogeneous within a bin, define the transitions between the bins and then embed this into a model. Tramontana and Gallegati then proceed to demonstrate this with a model of a firm with linear technology and linear stochastic demand, and the firm needs financing from a bank and may go bankrupt. They assign firms to a whooping three size classes and then simulate something.

There is a clique in Ancona (Italy) that decided in 1995 that representative agent macro was inappropriate. That is correct, depending on the particular question. But subsequently, they decided to ignore all the work that was done on heterogeneous agents and continue to this day to claim that macro is all about representative agents. Yet, the current literature is full of models where agents are heterogeneous and, gasp, categorized in bins. From the top of my head, individuals have been distinguished by age, gender, marital status, employment, education, health, wealth, number of children, and nationality. Firms have been categorized by assets, access to credit, sector, leverage, labor intensity, and age. And I am surely forgetting some.

It looks like Tramontana and Gallegati should be peeking a little bit out of their rather hermetic compartment.

Laws and attitudes: which comes first?

It is said that laws reflect current morals and that laws cannot influence morals. I imagine that it is rather difficult to find more than anecdotal data to test such a hypothesis.

Niklas Jakobsson and Andreas Kotsadam claim to have found the right natural experiment. In January 2009, buying sex became a criminal offense in Norway. The explicit goal of the law was to change the attitude of the people towards buying sex. Looking at Norway and Sweden (where there was no such change on law), they find that attitudes did not change more in Norway than in Sweden, if anything, people become a little more liberal. Save for one case: Oslo. There, prostitution is more visible, thus people were more aware of it and responded the way the lawmakers wanted.

The analysis is based on survey data. It would be interesting to know whether the actual purchases of sexual services were also affected. Indeed, it does not matter much if someone who would not buy sex anyway now has a negative attitude towards it. The paper clearly shows that people who are not close to the problem are not affected. Those that are at the margin of changing a decision are those you would want to affect. And only market data can reveal their choices.

About the state of European higher education

A week ago, I opined about the state of higher education in the United States. My outlook was rather grim. Europe looks better, but still faces challenges and they are largely of its own doing.

Let us first look at what Europe is doing right. Of course, each country is different, but there is a general sense that universities need reform to open up and become more competitive (both in the sense of becoming better and competing more). The most visible part of this reform is the Bologna process, that makes studies comparable and will thus increase competition. Also, as European universities are mostly publicly funded, they tended to be controlled tightly by the main funders. They have gained significant autonomy in several countries, notably Italy and France, allowing to recruit faculty better adapted to their needs. Some countries, notably Germany, have also introduced more flexibility in hiring and pay scales, which has made it possible to hire more "star" faculty who had better conditions in the US.

European universities do not face the fluctuating income of their US counterparts. Funding is pretty much guaranteed not matter what the economic conditions are, which allows for good planning. That said, overall funding is still rather low, as there is little tuition income that can give a university that extra edge for resources.

But European universities have still issues. They are still overcrowded. They are still a far cry from US universities in terms of research, at least in Economics. They try to emulate American universities, but in odd ways. One is that more and more four year undergraduate programs are created where three years would be sufficient. US students still need two years of general education before tackling their major. European students come much better prepared from high school and can specialize right away.

Also Europeans try to emulate the competition between US universities by means of evaluations. It is a good-hearted attempt to make funding depend on performance. But as so often, nothing beats the market system. US universities attract the staff that is best for them, and that is not necessarily measured by the number of publications or citations. For example, faculty that are very good at attracting and advising students carry a market premium that cannot be measured otherwise. And the sad part it that this European evaluitis is expensive and eats a substantial part of the funds to distribute. The solution is to give even broader autonomy to universities. They can hire whoever they want, at the price they want. And they need to deliver a product, education and grants, that is also allocated by a market. That means in particular that the government is also not in the business of allocating students.

PS: a recent development that worries me as well is that technical schools now also get the university label in Europe. That is again imitating the US, and this will drive up the proportion of the population that is university educated. That looks good on paper, but does not change anything in terms of outcomes, except for fooling people that all degrees are equal.