The Prospect of Migration,Sticky Wages,and “Educated Unemployment”

An increase in the probability of work abroad, where the returns to schooling are higher than at home, induces more individuals in a developing country to acquire education, which leads to an increase in the supply of educated workers in the domestic labor market. Where there is a sticky wage rate, the demand for labor at home will be constant. With a rising supply and constant demand, the rate of unemployment of educated workers in the domestic labor market will increase. Thus, the prospect of employment abroad causes involuntary “educated unemployment” at home. A government that is concerned about “educated unemployment” and might therefore be expected to encourage unemployed educated people to migrate will nevertheless, under certain conditions, elect to restrict the extent of the migration of educated individuals.     

“ENVIRONMENT”, “NEEDS” AND REAL INCOME COMPARISONS(1)

Conventional measures of national product make no pretence of including everything that affects welfare. As increasing attention is being paid to environmental pollution, the problem of incorporating certain non-economic variables into the analysis of well-being becomes more relevant. The object of this note is to show how a difference in “needs” for, and hence expenditures on, anti-pollutants, which will show up in conventional national accounts comparisons as differences in “tastes”, should be converted into differences in real income.     

On the voluntary provision of “weakest‐link” public goods: The case of private information

We characterize equilibria in a private‐provision public‐good game where individuals are allowed arbitrary contribution levels and the level of the public good equals the least contribution made by an individual. Equilibrium comparative statics are derived for the interim Pareto‐dominant equilibrium. First, improvements in the cost distribution of even only one player benefit all. Second, even with such “weakest‐link” public goods, for which greater similarity of preferences would seem to facilitate coordination, decreased heterogeneity can actually decrease payoffs. Indeed, increasing the riskiness of cost distributions has an ambiguous effect on welfare. Two mechanisms are provided for improving equilibrium payoffs: Technology transfer and cheap‐talk communication. While substantial welfare gains are possible, examples show that (a) technology transfer may be futile if a “regularity” condition is not satisfied and (b) cheap talk may be useless if the language for communication is not sufficiently rich.     

Social evaluations when populations differ in size

Assessments of “social welfare” do not usually take into account population sizes. This can lead to serious social evaluation flaws, particularly in contexts in which policies can affect demographic growth. We develop in this paper a little‐known though ethically attractive approach to correcting the flaws of traditional social evaluations, an approach that is sensitive to population sizes and that is based on critical‐level generalized utilitarianism (CLGU). Traditional CLGU is extended by considering arbitrary orders of welfare dominance and ranges of “poverty lines,” as well as values for the “critical level” of how much a life must be minimally worth to contribute to social welfare. We apply these social evaluation methods to rank Canada across 1976, 1986, 1996 and 2006 and to estimate normatively and statistically robust lower and upper bounds of critical levels over which these rankings can be made.     

Selective immigration policy and its impacts on Canada's native‐born population: A general equilibrium analysis

This paper analyzes the effects of skilled immigration on the wage inequality between different education groups and the welfare of the incumbent population. I use a heterogenous agent overlapping generations model with endogenous discrete college education choice and calibrate it to match the features of 1981 Canadian economy. My quantitative analysis suggests that reducing the skilled immigration rate generates a rise in the growth rate of the wage inequality between college‐educated and non‐college workers. As skilled immigrants are admitted at a lower rate, more natives opt for college education in the economy. My welfare analysis shows that the incumbent young and college‐educated population benefits more from a reduction in the skilled immigration rate. On the other hand, young generations with below college education face welfare losses. My results suggest that skilled immigration contributes positively to the overall welfare in the economy.     

“Love of wealth” and economic growth

In a Ramsey–Cass–Koopmans growth framework it is shown that for an optimum a benevolent social planner cannot have an excessive “love of wealth”. With a “right” “love of wealth” an optimum exists and implies higher long‐run per‐capita capital, income, and consumption relative to the standard model. This has important implications for comparative development trajectories. The optimum implies dynamic efficiency with the possibility of getting arbitrarily close to the golden rule where long‐run per‐capita consumption is maximal. It is shown that the optimal path attains its steady state more slowly. Thus, the beneficial effects of love of wealth materialize later than in the standard model. Furthermore, the economy can be decentralized as a competitive private ownership economy. One can then identify “love of wealth” with the “spirit of capitalism.” The paper thus implies that one needs a “right” level of the “spirit of capitalism” to realize any beneficial effects for the long run.     

Jack of All Trades or a Master of One? Specialization,Trade, and Money*

We consider a model of decentralized exchange where individuals choose the set of goods they produce. Specialization involves producing a smaller set of goods and doing it more proficiently. In doing so, agents reduce production costs, but also reduce the ease of trading their output. We derive the equilibrium degree of specialization and examine how it is affected by underlying fundamentals. Due to the existence of a hold‐up problem, individuals specialize too little relative to the social optimum. Introducing money leads to more specialization relative to barter and increases welfare.     

REPEATED MORAL HAZARD AND CONTRACTS WITH MEMORY: THE CASE OF RISK‐NEUTRALITY*

We consider a repeated moral hazard problem where both the principal and the wealth‐constrained agent are risk‐neutral. In each of two periods, the agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first‐period success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be “too good” to be financed or, similarly, an agent can be “overqualified.”     

Deprivation and the Dimensionality of Welfare: A Variable‐Selection Cluster‐Analysis Approach

We approach the problems of measuring the dimensionality of welfare and that of identifying the multidimensionally poor, by first finding the poor using the original space of attributes, and then reducing the welfare space. The starting point is the notion that the “poor” constitutes a group of individuals that are essentially different from the “non‐poor” in a truly multidimensional framework. Once this group has been identified through a clustering procedure, we propose reducing the dimension of the original welfare space using recent blinding methods for variable selection. We implement our approach to the case of Latin America based on the Gallup World Poll, which contains ample information on many dimensions of welfare.     

Means‐Tested Long‐Term Care and Family Transfers

One of the pervasive problems with means‐tested public long‐term care programs is their inability to prevent individuals who could afford private long‐term services from taking advantage of public care. They often manage to elude the means‐test net through ‘strategic impoverishment’. We show in a simple model how this problem comes about, how it affects welfare and how it can be mitigated.     

ON THE “PRO‐POORNESS” OF GROWTH IN A MULTIDIMENSIONAL CONTEXT

This paper represents a first attempt to bring together the issues of multidimensional poverty and growth “pro‐poorness” assessments. More specifically, we suggest the use of sequential dominance procedures to test the “pro‐poorness” of observed growth spells when poverty is measured on the basis of income and another discrete well‐being attribute. Sequential procedures are also used to obtain graphical tools that are consistent with the spirit of Ravallion and Chen's growth incidence curve and Son's poverty growth curve. Contrary to traditional unidimensional tests, our method makes it possible to take into account the importance of deprivation correlations at the individual level and thus may reverse results observed with the traditional tools used to check the “pro‐poorness” of growth. An illustration of our approach is given using Turkish data for the period 2003–05.     

THE IMPACTS OF “SHOCK THERAPY” UNDER A BANKING CRISIS: EXPERIENCES FROM THREE LARGE BANK FAILURES IN JAPAN*

A bank failure can have various adverse consequences for clients; these adverse impacts differ depending on which bank takes over the failed banks’ operations. In this paper, we show how the new banks’ management strategies are important in mitigating the short‐ and long‐run consequences. We focus on the clients of three large failed Japanese banks and examine their responses in terms of increased bankruptcies and changes in market valuation after the banks’ operations were taken over. The results imply that the choice of “shock therapy” or “soft budget constraints” had dramatically different consequences in resolving the bad loan problems in Japan.     

MODELING MOVEMENTS IN INDIVIDUAL CONSUMPTION: A TIME‐SERIES ANALYSIS OF GROUPED DATA

We characterize the time‐series properties of group‐level consumption, income, and interest rates using microdata. We relate the coefficients of moving average representations to structural parameters of theoretical models of consumption behavior. Using long time series of cross sections to construct synthetic panel data for the United Kingdom, we find that for high‐educated individuals the Euler equation restrictions are not rejected, the elasticity of intertemporal substitution is higher than one, and there is evidence of “excess smoothness” of consumption. Low‐educated individuals, conversely, exhibit excess sensitivity of consumption to past income, and the elasticity of intertemporal substitution is not statistically different from zero.     

ON THE KING-DAVENANT “LAW” OF DEMAND1

“Now there is one law of prices which you must know and understand before you can make the least progress in interpreting the simplest problem. It is known to some economists, I do not say all, for it is most unaccountably neglected or obscured in most treatises on the subject, as Gregory King's Law.”     

Eco‐labelling by a for‐profit certifier: Countervailing power and its consequences

For‐profit certifier's eco‐labelling is common in industries where firms have some “countervailing power” on sharing gains from labelling. We show that the certification standard for an environmental quality is lowered when firms have strong “power.” A certifier with too low bargaining power will prefer to sell to the best offer rather than bargain. This switch in the selling mechanism also thwarts his incentives in setting the standard. This is consequential for evaluating policies. The dimensions and even signs of welfare changes induced by taxes and subsidies depend upon the mechanism used, and ultimately upon firms’ countervailing power.     

The brain drain, ‘educated unemployment’, human capital formation,and economic betterment1

Extending both the ‘harmful brain drain’ literature and the ‘beneficial brain gain’ literature, this paper analyzes both the negative and the positive impact of migration by skilled individuals in a unified framework. The paper extends the received literature on the ‘harmful brain drain’ by showing that in the short run, international migration can result in ‘educated unemployment’ and overeducation in developing countries, as well as a brain drain from these countries. A simulation suggests that the costs of ‘educated unemployment’ and overeducation can amount to significant losses for the individuals concerned, who may constitute a substantial proportion of the educated individuals. Adopting a dynamic framework, it is then shown that due to the positive externality effect of the prevailing, economy‐wide endowment of human capital on the formation of human capital, a relaxation in migration policy in both the current period and the preceding period can facilitate ‘take‐off’ of a developing country in the current period. Thus, it is suggested that while the migration of some educated individuals may reduce the social welfare of those who stay behind in the short run, it improves it in the long run.     

“Opt out” or kept out? The effect of stigma,structure, selection,and sector on the labor force participation of married women in India

Using the 61st and 68th rounds of National Sample Survey data, we investigate the role of stigma, the economy’s structure, potential selection bias, and sectoral differences in explaining the low labor force participation (LFP) of middle and secondary educated women in India relative to low‐ and high‐educated women (the “U‐shape”). Estimating LFP regressions on a sample of prime‐aged married women, we show that, controlling for background characteristics, if a woman’s husband works in a white‐collar job in a region with a high share of blue‐collar jobs, she is less likely to participate in the labor market (stigma). We also find a positive effect of an increase in an index of white‐collar job growth (structure) on married women’s LFP. These effects are present in both rural and urban sectors but are strongest in the rural sector. However, middle and secondary educated women are still found to have substantially lower LFP than low‐ and graduate‐educated women in both sectors. Indeed, over time, the U‐shape persists in the rural sector and deepens in the urban sector. Because unobservables are quite large in the urban sector, we use the method of instrumental variables and find an increasing return at middle levels but stagnation at higher levels.     

STATUS QUO IN THE WELFARE ANALYSIS OF TAX REFORMS

The welfare analysis of tax reforms most often consists of comparing the post‐reform distribution of individual welfare with the pre‐reform distribution or possibly that obtained from another reform as if they were completely independent. Such an “anonymous” approach does not take into account “changes” in individual situations, generally the main source of contention in any tax reform debate. This paper proposes a welfare criterion that allows comparison of reforms while taking into account individual status quo—i.e. pre‐reform—situations. This is done by extending standard utilitarian social welfare criteria to the case where individual utilities depend on initial income and income change.     

Variable Specific Factors and the “X-Efficiency Cost” of Protection *

This paper analyzes the effects of protection on X-efficiency using a general equilibrium Ricardo-Viner model with variable sector-specific effort. As in earlier models, it is found that protection only reduces effort if the income effect is sufficiently strong. It is also shown that, provided the correct compensated import demand curve is used, all welfare effects attributable to changes in effort are captured in the standard “triangle” measure of deadweight loss. Moreover, any protection-induced fall in effort will reduce the overall cost of protection, suggesting that policy-induced “X-inefficiency” may be beneficial.     

Vertically Integrated North–South Trade and the Redux Model

The paper uses the framework of Obstfeld and Rogoff's Redux model to study the impact of monetary shocks on exchange rate, terms of trade, and welfare in the context of a North–South trade. The authors show that a relative Northern monetary expansion can depreciate or appreciate its currency depending on whether the consumption elasticity of money demand and the degree of monopolistic distortion are low or high enough. This shock has asymmetric effects on welfare in such a way that “beggar‐thyself” or “beggar‐thy‐neighbor” effects always occur.