Fluctuations in convex models of endogenous growth, II: Business cycle properties

Using ideas from the endogenous growth literature, we present a model of the endogenous determination of productivity growth based on individual worker decisions about human capital investment. We calibrate a version of the model to match long run growth facts from the US and study the business cycle properties of this model. This approach offers improvements along several dimensions over standard exogenous growth methodologies. Most importantly, our stochastic endogenous growth model generates much greater serial correlation in output growth and labor supply volatility relative to its real business cycle counterpart. We conclude that using the extra discipline of reproducing the trend productivity growth features of the data endogenously constitutes an important missing component from the real business cycle approach.     

Fluctuations in convex models of endogenous growth, I: Growth effects

Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies finding a positive relationship, while others find a negative one. Our objectives are to understand how fundamental uncertainty affects the long run growth rate and to identify important factors determining this relationship in a convex endogenous growth model. Qualitatively, we show that the relationship between volatility in fundamentals (or policies) and mean growth can be either positive or negative. The curvature of the utility function is a key parameter that determines the sign of the relationship. Quantitatively, an increase in uncertainty always increases the growth rate in our calibrated models. Though the changes we find are nontrivial, they are not large enough by themselves to account for the large differences in growth rates observed in the data. We also find that differences in the curvature of preferences have very substantial effects on the estimated variability of stationary objects like the consumption–output ratio and hours worked. For this reason, we expect that the models considered in this paper will provide the basis of sharp estimates of the curvature parameter.     

A quantitative theory of the gender gap in wages

This paper measures how much of the gender wage gap over the life cycle is due to the fact that working hours are lower for women than for men. We build a quantitative theory of fertility, labor supply, and human capital accumulation decisions to measure gender differences in human capital investments over the life cycle. We assume that there are no gender differences in the human capital technology and calibrate this technology using wage–age profiles of men. The calibration of females assumes that children involves a forced reduction in hours of work that falls on females rather than on males and that there is an exogenous gender gap in hours of work. We find that our theory accounts for all of the increase in the gender wage gap over the life cycle in the NLSY79 data. The impact of children on the labor supply of females accounts for 56% and 45% of the increase in the gender wage gap over the life cycle among non-college and college females, while the rest is due to the exogenous gender differences in hours of work.     

Dynamic conditional score models of degrees of freedom: filtering with score-driven heavy tails

This article extends the quasi-autoregressive (QAR) plus Beta-t-EGARCH (exponential generalized autoregressive conditional heteroscedasticity) dynamic conditional score (DCS) model. For the new DCS model, the degrees of freedom parameter is time varying and tail thickness of the error term is updated by the conditional score. We compare the performance of QAR plus Beta-t-EGARCH with constant degrees of freedom (benchmark model) and QAR plus Beta-t-EGARCH with time-varying degrees of freedom (extended model). We use data from the Standard and Poor’s 500 (S&P 500) index, and a random sample of its 150 components that are from different industries of the United States (US) economy. For the S&P 500, all likelihood-based model selection criteria support the extended model, which identifies extreme events with significant impact on the US stock market. We find that for 59% of the 150 firms, the extended model has a superior statistical performance. The results suggest that the extended model is superior for those industries, which produce products that people usually are unwilling to cut out of their budgets, regardless of their financial situation. We perform an application to compare the density forecast performance of both DCS models. We perform an application to Monte Carlo value-at-risk for both DCS models.     

A tale of two states: Maharashtra and West Bengal

In this paper we study the decline of West Bengal relative to Maharashtra, historically two of the most important states of India. In 1960, West Bengal's per capita income exceeded that of Maharashtra, the third richest state at the time. By 1993, it had fallen to just 69 percent of Maharashtra's per capita income. We employ a “wedge” methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the output and factor market sources of the divergent economic performances. Our diagnostic analysis reveals that a large part of West Bengal's development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets between the manufacturing sector and the other sectors of the economy. We also present evidence on the labor market, the manufacturing sector, and public infrastructure that suggest a systematic worsening of the business environment in West Bengal during this period.     

Inequality trends for Germany in the last two decades: A tale of two countries

In this paper we first document inequality trends in wages, hours worked, earnings, consumption, and wealth for Germany from the last twenty years. We generally find that inequality was relatively stable in West Germany until the German reunification, and then trended upwards for wages and market incomes, especially after about 1998. Disposable income and consumption, on the other hand, display only a modest increase in inequality over the same period. These trends occurred against the backdrop of lower trend growth of earnings, incomes and consumption in the 1990s relative to the 1980s. In the second part of the paper we further analyze the differences between East and West Germans in terms of the evolution of levels and inequality of wages, income, and consumption.     

A tale of two unions: divergent platforms and their constituencies

ABSTRACT

The median voter theorem has regularly been used in economics to represent the behaviour of teachers unions. Little empirical work, however, tests whether this framework is a good fit for teachers unions. We examine voting behaviour in union representative elections between the National Education Association and the American Federation of Teachers and find evidence of divergent constituencies. We investigate whether the median voter explains the outcomes of elections in 1977–1979. If both teachers unions select the platform desired by the median voter, there should be no systematic differences in voter preferences for unions. We find that these unions were fundamentally different and attracted distinct voting coalitions. The main implication of this study is that researchers should consider these two unions, and their effect on districts, as distinct.     

The tale of the tails: Canadian income inequality in the 1980s and 1990s

Abstract.  We present new evidence on levels and trends in after-tax income inequality in Canada between 1980 and 2000. We argue that existing data sources may miss changes in the tails of the income distribution, and that many of the changes in the income distribution have been in the tails. For this reason, we turn to an alternative source. In particular, we construct data on after-tax and transfer income using Census files augmented with predicted taxes based on information available from administrative tax data. Using these data, we find that Canadian after-tax inequality levels are substantially higher than has been previously recognized, primarily because income levels are lower at the bottom of the distribution than in commonly used survey data. We also find larger long-term increases in after-tax income inequality and far more variability over the economic cycle. This raises interesting questions about the role of the tax and transfer system in mitigating both trends and fluctuations in market income inequality.     

A tale of two traditions: Pierre Force's Self-interest before Adam Smith

Abstract

The paper compares different strands of New Keynesian Economics with regard to Keynes' original work. Two issues are analysed in detail. First, the explanations provided by Keynes and New Keynesians of nominal and real wage behaviour. Second, the different theories concerning the ability of flexible nominal wages in assuring full employment. It is argued that, although involuntary unemployment is a central problem both in Keynes' and New Keynesians' views, referring to the role of nominal and real wages in explaining unemployment, New Keynesians theories present important features that differ, sometimes substantially, from the concepts developed by Keynes in his General Theory.     

The relation between the average complexity of high-tech products and their diversity: An empirical test of evolutionary models

What is the relation between the average level of complexity that characterizes a product's technology, and the degree of diversity of that technology across rival firms? Evolutionary theories of innovation and technical advance are consistent with either a direct or an inverse relation. The issue thus becomes an empirical one. This paper uses a unique database containing detailed quantitative data on the specifications of 12 high-tech product groups for the U.S., Japan and selected European countries, for 1982, for both products and processes. It is found that the more complex the technology, the less diverse is the technology of rival firms that produce the product. This is consistent with the following evolutionary process: Economies of scale and scope inherent in high-level technologies require firms who adopt them to dispose entirely of older technologies, in order to remain competitive; at the same time, older, simpler technologies continue to exist and permit wide diversities among firms who pursue “niche” market strategies.     

A tale of two Italian cities: brand-level milk demand and price competition

We apply the BLP random coefficient logit model demand model to fluid milk sales data from two north-south Italian cities: Turin and Naples. By virtue of their location and socioeconomic differences, these cities provide a natural experiment for contrasting consumer choices and retail market power related to milk physical and marketing characteristics. Results reveal that, regardless of location, consumers negatively value price increases, fat content and ultra-high temperature (UHT) treatment. However, location matters with respect to brand and type of milk purchased. While in Turin (the higher-income region) demand for the leading manufacturers’ brands is the most price inelastic, in Naples consumers have the lowest price elasticities in case of cheaper milk, often small manufacturer or private label brands. Unlike previous studies, we do not find price elasticities for private labels to be consistently lower (or markups to be higher) compared to manufacturer brands, indicating that private labels have reached maturity in these markets. Further, while demand for fresh milk is more price inelastic in Turin, it is more inelastic for UHT milk in Naples. Likewise, markups and Lerner indexes are higher for fresh milk in Turin and for UHT in Naples corresponding to the more inelastic demands under Bertrand price competition.     

UK's stock market reaction to Brexit process: A tale of two halves

We examine the UK's stock market reaction to 27 events associated with the likelihood of Brexit. Though the overall market reactions to these events is negative, a dissection of these events into the pre and post Brexit referendum events unearth interesting facts. In particular, we find that the market reaction is negative and significant to the events leading up to and including the announcement of Brexit results. This negative reaction is not confined to the day of announcement of the outcome of Brexit referendum only rather it spans over the events that enhanced the likelihood of the Brexit in the pre-Brexit referendum period. However, our results show a positive market reaction to events that occurred after the Brexit referendum. These findings suggest that initially market reacted negatively to the Brexit; however, as the UK's future economic relations with EU started to take a shape, the market started to see the positive side of Brexit. Consistent with this notion, our cross-sectional analysis shows a positive market reaction for the firms that are engaged in foreign sales and that much of the negative market's reaction relates to the firms that openly stated the negative effect of Brexit on their operations. Finally, we do not find evidence of market reaction to UK firms depending on European labor force; however, we do find significantly positive stock market reaction to the firms involved more in international trade. An important caveat of our study is that our reported results are sensitive to the choice of market index.     

Intelligence, Human Capital, and Economic Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach

Human capital plays an important role in the theory of economic growth, but it has been difficult to measure this abstract concept. We survey the psychological literature on cross-cultural IQ tests and conclude that intelligence tests provide one useful measure of human capital. Using a new database of national average IQ, we show that in growth regressions that include only robust control variables, IQ is statistically significant in 99.8% of these 1330 regressions, easily passing a Bayesian model-averaging robustness test. A 1 point increase in a nation’s average IQ is associated with a persistent 0.11% annual increase in GDP per capita.     

The role of human and social capital in growth: extending our understanding

Human capital, institutions and social capital are now all recognisedas significant factors of growth. They have largely been studiedseparately, and although they present sufficient common characteristicsto be conceptualised as one main category distinct from physicalcapital, it may still be more important to focus on the linksbetween their specific sub-categories. Direct links with incomemay be spurious, as there appears to be a ‘web of associations’between the sub-categories, which would benefit from furtherempirical investigation. This paper reviews the literature onhuman capital, institutions and social capital, extracting threesub-categories of human capital (human skills capital, stock-of-knowledgeand entrepreneurship) and two of social capital (low- and high-rationalisation).Specific areas are then suggested for further empirical study.     

Heterogeneity vs. externalities in technological competition: A tale of possible technological landscapes

The article presents a stochastic interaction model based on Gibbs random fields to analyze technological competition in a population of heterogeneous adopters with local or global externalities. The relationships between both heterogeneity and externalities and imperfect and asymmetric information are first emphasized. When local externalities and heterogeneity coexist, the technological landscapes of the industry are then shown to depend on the relative influence of these two parameters, with a phase transition: technologies coexist either in approximately equal market shares when heterogeneity is high enough or with one of the technologies only surviving in technological niches when local externalities dominate. Niches do also spontaneously appear: technological options survive in economic space due to the existence of some amount of heterogeneity among agents. On the contrary, when global externalities are added, pure standardization almost always occurs. We finally argue that different public policies should be designed so as to fit with different technological landscapes.     

A tale of two countries: Directed technical change,trade and migratory movements

We propose a North-South model that reconciles trade and production strategies, flows of innovators and the path of economic divergence, or convergence, between countries. We explain the mechanisms behind these forces and show how the technological and economic gaps can be reversed if southern countries stop imitating northern goods and, instead, produce complementary goods. Such a strategy of complementarity on production yields the necessary incentives to innovators to engage in research in southern countries, which enhances the catching-up process between countries. It is also shown that migratory movements of unskilled labor between countries are also relevant to understand the dangers and benefits of different trade strategies for economic growth. This paper suggests a positive (negative) correlation between technological innovation in the North (South) and the level of substitutability in production, while under complementarity, technological innovation catches up in the South, therefore fostering the economic catching up process. A positive correlation between inflows of skilled and unskilled labor and substitutability of production between countries is also verified.     

A tale of two states: asymmetries in the UK small,value and momentum premiums

This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs.     

A Knowledge-Based Economy: New Directions of Macromodelling

Development of “new economies” leading to economies mostly based on knowledge implies the construction of new long-term macroeconometric models. They should incorporate the impacts of new technologies being endogenized, as well as human capital. The paper discusses several issues related to the extension of the notion of production function. They cover first of all the measurement and explanation of total factor productivity (TFP), the role of domestic and foreign R&D expenditures, as well as educational expenditures. The discussion is extended to include proposals to construct new submodels explaining the sections of research and education and also the ICT industries.

Dynamics of social trust and human capital in the learning process: The case of the Japan garment cluster in the period 1968–2005

This paper examined the ways and the extent to which human capital and social trust are associated with the learning process of a manager in making operations decisions through experience. To this end, using a data set originally and purposively constructed by the author, I investigated the development and transformation of the garment industry cluster region of Kojima, Japan. The major findings through statistical estimations are as follows. (1) In the cluster development stage, the social trust of an enterprise and its manager's experiences in firm operations could be regarded as forming a complementary association. (2) In the stage following cluster development, however, a manager's human capital as accumulated through schooling and personal experience, instead of social trust, become complementary.     

Valuing recreational water clarity and quality: evidence from hedonic pricing models of lakeshore properties

This study extends the economics literature on the relationship between recreational water quality and residential property pricing by separately testing the relationships between both water clarity and quality and the price of lakeshore residential properties in Ontario, Canada. Our econometric approach includes objective measures of both attributes: Secchi disk readings for water clarity and phosphorus concentrations for water quality. Econometric results presented in this study suggest that a one-metre improvement in water clarity results in an 8 per cent residential property price premium, while a one standard deviation improvement in water quality boosts lakeshore residence prices by 32 per cent.