Hires and fires
Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects
Marcus Hagedorn et al.
NBER Working Paper, October 2013
Abstract:
We exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -- the micro effect -- we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively.
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Recent Immigrants as Labor Market Arbitrageurs: Evidence from the Minimum Wage
Brian Cadena
Journal of Urban Economics, forthcoming
Abstract:
This paper investigates the local labor supply effects of changes to the minimum wage by examining the response of low-skilled immigrants’ location decisions. Canonical models emphasize the importance of labor mobility when evaluating the employment effects of the minimum wage; yet few studies address this outcome directly. Low-skilled immigrant populations shift toward labor markets with stagnant minimum wages, and this result is robust to a number of alternative interpretations. This mobility provides behavior-based evidence in favor of a non-trivial negative employment effect of the minimum wage. Further, it reduces the estimated demand elasticity using teens; employment losses among native teens are substantially larger in states that have historically attracted few immigrant residents.
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The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy
Òscar Jordà & Alan Taylor
NBER Working Paper, September 2013
Abstract:
Elevated government debt levels in advanced economies have risen rapidly as sovereigns absorbed private-sector losses and cyclical deficits blew up in the Global Financial Crisis and subsequent slump. A rush to fiscal austerity followed but its justifications and impacts have been heavily debated. Research on the effects of austerity on macroeconomic aggregates remains unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified framework. We do this by first evaluating the validity of common identification assumptions used by the literature and find that they are largely violated in the data. Next, we use new propensity score methods for time-series data with local projections to quantify how contractionary austerity really is, especially in economies operating below potential. We find that the adverse effects of austerity may have been understated.
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Wage Rigidity and Job Creation
Christian Haefke, Marcus Sonntag & Thijs van Rens
Journal of Monetary Economics, forthcoming
Abstract:
Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level data from the CPS to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions. The wage of new hires, unlike the aggregate wage, is volatile and responds almost one-to-one to changes in labor productivity. We conclude that there is little evidence for wage rigidity in the data.
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Wages, Pensions, and Public-Private Sector Compensation Differentials for Older Workers
Philipp Bewerunge & Harvey Rosen
NBER Working Paper, September 2013
Abstract:
We use a sample of full-time workers over 50 years of age from the 2004 and 2006 waves of the Health and Retirement Study to investigate whether workers in federal, state, and local government receive more generous wage and pension compensation than private sector workers, ceteris paribus. With respect to hourly remuneration (wages plus employer contributions to defined contribution plans), federal workers earn a premium of about 28 log points, taking differences in employee characteristics into account. However, there are no statistically discernible differences between state and local workers and their private sector counterparts, ceteris paribus. These findings are about the same whether or not indicators of occupation are included in the model. On the other hand, pension wealth accumulation is greater for employees in all three government sectors than for private sector workers, even after taking worker characteristics into account. As a proportion of the hourly private-sector wage, the hourly equivalent public-private differentials are about 17.2 percent, 13.4 percent, and 12.6 percent for federal, state, and local workers, respectively. We find no evidence that highly-educated individuals are penalized by taking jobs in the public sector, either with respect to wages or pension wealth.
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Explaining the transformation in the US innovation system: The impact of a small government program
Matthew Keller & Fred Block
Socio-Economic Review, October 2013, Pages 629-656
Abstract:
Over the last four decades, the dynamics of innovation in the US economy have shifted. Whereas the development of new technologies was once dominated by large, vertically integrated firms, since the 1980s an increasingly ‘networked’ innovation environment has emerged in which small firms play a central role. But why did this shift emerge? Extant research emphasizes changes in the decision-making calculus of large firms, the rise of private venture capital, legal changes and a variety of subnational development initiatives. In this paper, we demonstrate the critical importance of government innovation programs. We argue that a single small, relatively unknown program — the Small Business Innovation Research (SBIR) program — played a critical role in catalyzing this broader economic transformation. Drawing on programmatic data, employment trends and data on SBIR's intersection with venture capital and federal procurement, we show how SBIR catalyzed a series of cross-cutting institutional mechanisms that supported the growth of small, innovative technology firms. We propose the term ‘social resonance’ to suggest how even small government programs can play an important role in altering large-scale institutional dynamics.
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Minimum wages and youth unemployment
Aspen Gorry
European Economic Review, November 2013, Pages 57–75
Abstract:
This paper constructs a labor search model to explore the effects of minimum wages on youth unemployment. To capture the gradual decline in unemployment for young workers as they age, the standard search model is extended so that workers gain experience when employed. Experienced workers have higher average productivity and lower job finding and separation rates that match wage and worker flow data. In this environment, minimum wages can have large effects on unemployment because they interact with a worker's ability to gain job experience. The increase in minimum wages between 2007 and 2009 can account for a 0.8 percentage point increase in the steady state unemployment rate and a 2.8 percentage point increase in unemployment for 15-24 year old workers in the model parameterized to simulate outcomes of high school educated workers. Minimum wages can also help explain the high rates of youth unemployment in France compared to the United States.
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Macro Fiscal Policy in Economic Unions: States as Agents
Gerald Carlino & Robert Inman
NBER Working Paper, October 2013
Abstract:
The American Recovery and Reinvestment Act (ARRA) was the US government’s fiscal response to the Great Recession. An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments. We examine the historical experience of federal government transfers to state and local governments and their impact on aggregate GDP growth, recognizing that lower-tier governments are their own fiscal agents. The SVAR analysis explicitly incorporates federal intergovernmental transfers, disaggregated into project (e.g., infrastructure) aid and welfare aid, as separate fiscal policies in addition to federal government purchases and federal net taxes on household and firms. A narrative analysis provides an alternative identification strategy. To better understand the estimated aggregate effects of aid on the economy, we also estimate a behavioral model of state responses to such assistance. The analysis reaches three conclusions. First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately. Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years. Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support.
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Second World War spending and local economic activity in US counties, 1939–58
Price Fishback & Joseph Cullen
Economic History Review, November 2013, Pages 975–992
Abstract:
Studies of the development of local economies often point to large-scale Second World War military spending as a source of economic growth, even though spending declined sharply after demobilization. We examine the relationship between war spending per capita and the changes in economic activity in US counties between 1939 before the war and a period several years after the war. In the longer term counties receiving more war spending per capita during the war experienced greater population growth, but growth in per capita measures of economic activity showed little relationship with per capita war spending.
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Daniel DellaPosta
Research in Social Stratification and Mobility, December 2013, Pages 73–95
Abstract:
This article documents heterogeneous economic returns to military service that vary with the individual propensity to serve, even within a relatively privileged sample of mostly white high school graduates. Using a rich set of covariates from the Wisconsin Longitudinal Study, I estimate propensity scores for male respondents’ likelihood of voluntary military enlistment or involuntary draft conscription. Then, I use recently-developed HLM-based methods for causal inference to analyze systematic variation in veteran status’ effect on later earnings as a function of these propensity scores. Among individuals with low propensities for military service — but not among others — veterans suffer large wage penalties. While this pattern applies to both voluntary enlisters and draftees, the timing of the wage penalty differs by mode of military entry. These effects are shown to correlate strongly with differences in educational attainment between veterans and nonveterans with low propensities for military service, suggesting the greater value of opportunities for human capital accumulation in the civilian sphere.
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Skill-biased technological change and homeownership
Alexis Anagnostopoulos, Orhan Erem Atesagaoglu & Eva Carceles-Poveda
Journal of Economic Dynamics and Control, forthcoming
Abstract:
In the United States, the residential housing market went through important changes over the period from the 1970s to the mid-1990s. Although the aggregate homeownership rate was relatively stable during that period, the distribution of homeownership rates by age changed in remarkable ways. While younger households saw substantial declines in homeownership rates, the opposite happened for older households. In this paper, we argue that the skill-biased technological change (SBTC) that began during the 1970s has been an important factor behind the observed change in the distribution of homeownership rates by age. We build a life cycle model in which skills are accumulated on-the-job through experience: learning by doing. Early in life, households have lower levels of skills and therefore lower earnings. SBTC increases the returns to skill, widening the wage gap between young and old ages. As a consequence, it takes more time for young households to become homeowners given frictions in financial markets (e.g. downpayment requirements) and housing markets (e.g. large and indivisible houses), in line with consumption smoothing behaviour. On the other hand, older households that could not afford a house before may now become homeowners, given higher returns to skill. Our analysis confirms this conjecture, namely, that SBTC shifts the distribution of homeownership from the young to the old.
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Patrick Kline & Enrico Moretti
NBER Working Paper, August 2013
Abstract:
We study the long run effects of one of the most ambitious regional development programs in U.S. history: the Tennessee Valley Authority (TVA). Using as controls authorities that were proposed but never approved by Congress, we find that the TVA led to large gains in agricultural employment that were eventually reversed when the program’s subsidies ended. Gains in manufacturing employment, by contrast, continued to intensify well after federal transfers had lapsed -- a pattern consistent with the presence of agglomeration economies in manufacturing. Because manufacturing paid higher wages than agriculture, this shift raised aggregate income in the TVA region for an extended period of time. Economists have long cautioned that the local gains created by place based policies may be offset by losses elsewhere. We develop a structured approach to assessing the TVA’s aggregate consequences that is applicable to other place based policies. In our model, the TVA affects the national economy both directly through infrastructure improvements and indirectly through agglomeration economies. The model’s estimates suggest that the TVA's direct investments yielded a significant increase in national manufacturing productivity, with benefits exceeding the program's costs. However, the program's indirect effects appear to have been limited: agglomeration gains in the TVA region were offset by losses in the rest of the country. Spillovers in manufacturing appear to be the rare example of a localized market failure that cancels out in the aggregate.
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The Effects of Manufacturing on Educational Attainment and Real Income
Caitlin Cullen Donaldson & Suzanne O’Keefe
Economic Development Quarterly, November 2013, Pages 316-324
Abstract:
Economic development agencies seek industries to benefit their local economies. This article investigates how manufacturing composition affects a region’s income and educational attainment using data for individuals and Metropolitan Statistical Areas (MSAs) from 1970 through 2009. The results provide an understanding of the importance of changes in industry composition on the well-being of residents of an MSA. Using fixed-effects regressions, we model individual educational attainment and real income as a function of manufacturing composition, allowing for nonlinearities through squaring manufacturing composition. Across MSAs, high levels of manufacturing are associated with lower educational attainment and higher income; however, higher growth in manufacturing decreases both educational attainment and income.
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Unobserved Heterogeneity and Risk in Wage Variance: Does More Schooling Reduce Earnings Risk?
Jacopo Mazza, Hans van Ophem & Joop Hartog
Labour Economics, forthcoming
Abstract:
We apply a recently proposed method to disentangle unobserved heterogeneity from risk in returns to education to data for the USA, the UK and Germany. We find that in residual wage variation, uncertainty by far dominates unobserved heterogeneity. The relation between uncertainty and level of education is not monotonic and differs among countries.
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The persistence of unemployment at the local area level: Evidence from the US and the UK
Paul Ormerod
Applied Economics Letters, Winter 2013, Pages 28-30
Abstract:
In the 1990s and 2000s, unemployment was seen, both by academic labour market economists and policymakers, as a short-run disequilibrium phenomenon. Policy was aimed at increasing the ‘flexibility’ of the labour market, at removing obstacles to the workings of the market, which would ostensibly restore equilibrium in the labour market. In this article, I examine the correlations over time of relative unemployment rates at the detailed disaggregated level of both US counties and UK local authority areas, using the 1990–2010 period. The United States and to some extent the United Kingdom are held up as examples of the more ‘flexible’ labour markets to which other countries should aspire. But even over a period of 20 years, there is strong persistence in relative unemployment rates at local area levels in both countries, and especially the United Kingdom. This result extends to counties and local authority areas within individual states and regions. Local areas with high (low) unemployment in 1990 are likely to have high (low) unemployment in 2010.
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The Possible Unemployment Cost of Average Inflation below a Credible Target
Lars Svensson
NBER Working Paper, September 2013
Abstract:
If inflation expectations become firmly anchored at a fixed inflation target even if average inflation deviates from the target, the long-run Phillips curve is no longer vertical but becomes downward-sloping, and the tradeoff between average inflation and average unemployment reappears. This seems to have happened for Sweden and possibly for other countries with a credible inflation target. During the 15 years of 1997-2011, inflation expectations in Sweden have been anchored at the inflation target of 2 percent, but average CPI inflation has fallen 0.6 percentage points below the target. In contrast, in Australia, Canada, and the U.K. inflation has been on or very close to the target. The data indicate that the slope of the Swedish long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher during 1997-2011 than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target. For Canada and the U.S., the long-run Phillips curve also seems downward-sloping, but since average inflation has equaled the explicit or implicit target, there is no unemployment cost of undershooting the target.
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Bounds on Average and Quantile Treatment Effects of Job Corps Training on Wages
German Blanco, Carlos Flores & Alfonso Flores-Lagunes
Journal of Human Resources, Summer 2013, Pages 659-701
Abstract:
We review and extend nonparametric partial identification results for average and quantile treatment effects in the presence of sample selection. These methods are applied to assessing the wage effects of Job Corps, United States’ largest job-training program targeting disadvantaged youth. Excluding Hispanics, our estimates suggest positive program effects on wages both at the mean and throughout the wage distribution. Across the demographic groups analyzed, the statistically significant estimated average and quantile treatment effects are bounded between 4.6 and 12 percent, and 2.7 and 14 percent, respectively. We also document that the program’s wage effects vary across quantiles and demographic groups.
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What Workers Want Depends: Legal Knowledge and the Desire for Workplace Change among Day Laborers
Mary Nell Trautner, Erin Hatton & Kelly Smith
Law & Policy, October 2013, Pages 319–340
Abstract:
In this article, we identify legal knowledge as a key difference between workers who desire workplace change and those who do not. Based on surveys with 121 day laborers, we find that not all day laborers are equally dissatisfied with their jobs, despite uniformly difficult working conditions. Some day laborers do not want to make any real changes to the day labor industry, while others desire a range of industry changes, from higher wages to greater government regulation and unionization. A key difference between these workers is their knowledge of employment law: Those who know the law are more likely to desire workplace change.
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Public policy, entrepreneurship, and venture capital the United States
Douglas Cumming & Dan Li
Journal of Corporate Finance, December 2013, Pages 345–367
Abstract:
This paper empirically examines business starts, deaths, venture capital and patents in relation to U.S. public policy. The most consistent evidence in the data shows that lower levels of labor frictions and higher levels of SBIR awards are associated with more business starts and higher levels of venture capital per population. Counter to expectations, the data indicate a positive impact from the homestead exemption only among the bottom quartile homestead exemption states, and otherwise a negative impact. We analyze a variety of other policy instruments and compare the effects of policy in regular times with the financial crisis of 2008-2010.
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Do High Stakes and Competition Undermine Fair Behaviour? Evidence from Russia
Ernst Fehr, Elena Tougareva & Urs Fischbacher
Journal of Economic Behavior & Organization, forthcoming
Abstract:
This paper reports the results of a series of competitive labour market experiments in which subjects have the possibility to reciprocate favours. In the high stake condition subjects earned between two and three times their monthly income during the experiment. In the normal stake condition the stake level was reduced by a factor of ten. We observe that both in the high and the normal stake condition fairness concerns are strong enough to outweigh competitive forces and give rise to non-competitive wages. There is also no evidence that effort behaviour becomes generally more selfish at higher stake levels. Therefore, our results suggest that fairness concerns may play an important role even at relatively high stake levels.
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Earnings Progression and the Workforce Investment Act: Evidence from Washington State
Colleen Chrisinger
Industrial Relations, October 2013, Pages 853–877
Abstract:
This research measures earnings progression among participants in federally funded Workforce Investment Act (WIA) programs in the state of Washington during the period 2001 through 2008, using state administrative data and propensity score-weighted regressions. Unlike previous evaluations that have emphasized earnings levels, this study addresses both earnings progression and levels to assess whether workers are on a path to reaching economic self-sufficiency within a short time after participation. The analysis finds that participants in WIA Adult services had similar earnings progression as people receiving only less-intensive Labor Exchange services.
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The returns to education for opportunity entrepreneurs, necessity entrepreneurs, and paid employees
Frank Fossen & Tobias Büttner
Economics of Education Review, December 2013, Pages 66–84
Abstract:
We assess the relevance of formal education on the productivity of the self-employed, distinguishing between opportunity entrepreneurs, who voluntarily pursue a business opportunity, and necessity entrepreneurs, who lack alternative employment options. We expect differences in the returns to education between these groups due to different levels of control over the use of their human capital. The analysis employs the German Socio-Economic Panel and accounts for the endogeneity of education and non-random selection. Results indicate that the returns to a year of education for opportunity entrepreneurs are similar to the paid employees’ rate of 8.8%, but 3 percentage points lower for necessity entrepreneurs. Pooling the two types of entrepreneurs tends to understate the value of education for opportunity entrepreneurs and may spark misguided hopes concerning necessity entrepreneurs. The results may also partly explain Europe/US differences in average entrepreneurial returns.