Post Keynesian Theories of Crisis

Post Keynesian economics has two complementary theories of crisis that were used to predict the 2007 crisis and diagnose its causes: Minsky's financial instability hypothesis and Godley's stock‐flow‐consistent approach. Both theories take a monetary perspective on capitalism and argue that the dynamics of private debt caused the crisis. As well as explaining the crisis and enabling its occurrence (though not precise timing) to be predicted, both theories imply that the current recovery will be short‐lived because the underlying cause of the last crisis has not been addressed by subsequent economic policy.     

The Savanna Principle

Why do microeconomic theories (such as decision theory and game theory) often fail to predict human behavior despite their mathematical elegance and deductive rigor? I suggest that such empirical failures stem from the theory's misconception of how the human brain functions. Drawing on evolutionary psychology, I propose the Savanna Principle, which posits that a hypothesis about human behavior fails to the extent that its scope conditions and assumptions are inconsistent with the ancestral environment, and its experimental corollary, that the Savanna Principle holds (and the hypothesis fails) to the extent that the conditions of the experiment resemble the ancestral environment. I suggest that the Savanna Principle and its corollary might together explain the relative empirical failure of noncooperative game theory and public choice theory, and the relative success of network exchange theory and competitive price theory tested in double auction markets in experimental economics. Copyright © 2003 John Wiley & Sons, Ltd.     

Housing tenure and labor market impacts: The search goes on

We develop two search-theoretic models emphasizing firm entry to examine the Oswald hypothesis, the idea that homeownership is linked to inferior labor market outcomes, and compare their predictions to three extant theories. The five models have surprisingly different predictions about the labor market at both the aggregate and micro levels. Using a suitable instrumental variable strategy, we estimate both micro and aggregate level regression models of wages and unemployment and compare the estimates to those predictions. We find that while homeowners are less likely to be unemployed, they also have lower wages, all else equal, compared to renters. In addition, higher regional homeownership rates are associated with a greater probability of individual worker unemployment and higher wages. The outcome of a horserace between our new search-theoretic models is mixed—the wage-posting model predicts observed unemployment impacts while a bargaining variant does a better job explaining observed wages and aggregate labor market outcomes. Overall, we conclude that firm behavior is important for understanding the labor market impacts of homeownership. Because this is the case, regional homeownership rates are not good instruments for individual tenure choice in empirical work. And while individual homeowners may have inferior labor market outcomes as compared to renters, from the viewpoint of society, higher homeownership rates may result in greater job creation and overall production, among other benefits.     

The ‘recession-push’ hypothesis reconsidered

The relationship between unemployment and self-employment has been studied extensively. Due to its complex, multifaceted nature, various scholars have found a large array of different results, so that the exact nature of the relation is still not clear. An important element of the relation is captured by the recession-push hypothesis which states that in times of high unemployment individuals are pushed into self-employment for lack of alternative sources of income such as paid employment. We make two contributions to this literature. First, we argue that official unemployment rates may not capture the ??true?? rate of unemployment as it does not include ??hidden?? unemployed who are out of the labour force. Therefore, we propose a new method where the ??recession-push?? effect relates not only to the (official) unemployed but also to the inactive population. Second, we argue that the magnitude of the recession-push effect is non-linear in the business cycle, i.e. the effect is disproportionally stronger when economic circumstances are worse. We provide empirical support for our hypotheses by estimating an econometric model on Spanish data.     

Paying to queue: a theory of locational differences in nonunion wages

Traditional theories of the effect unions have on nonunion wages are difficult to reconcile with firm and worker mobility. We show how differences in nonunion wages can persist in a two-city search model. Nonunion wage differences across cities are driven by transition rates into the union sector. Should union queues form in the nonunion sector, union power decreases nonunion wages as workers are willing to take lower wages to line up for union jobs. However, if queues are formed in the unemployed sector, union power increases nonunion wages as nonunion firms pay premiums to induce workers to leave the queue.     

The unemployed and trade union membership

During the 1980s it has been the unions’ policy to organise and represent the unemployed. This article analyses why members have or have not retained their membership on becoming unemployed. A main finding is that unions are not perceived as catering for the unemployed. Union influence over the member's future employment may nevertheless encourage retention.     

Training the hard core unemployed through positive reinforcement

Operant conditioning, because it lets trainees learn a new task's component behaviors at their own pace, is especially well-suited to training the hard-core unemployed–better than the “conventional” methods we are using today. It requires no special equipment, personnel, or spatial accommodations. And management can predict, limit, and control the cost of the training program.     

Regional migration in Spain: the effect of personal characteristics and of unemployment,wage and house price differentials using pooled cross-sections

We present an empirical model of individual migration using time-series of cross-sections from the Spanish Labour Force Surveys 1987–1991. Personal characteristics not only have an important direct effect on migration decisions but also alter the effect of regional variables. We find that the estimated probability of migration for the unemployed not registered, who are known for certain not to receive benefit, is higher than that of the employed which in turn is higher than that of the unemployed registered, which includes all the benefits recipients. An important finding is that the effect of regional unemployment on migration is positive for the unemployed not registered but is important and negative for those registered.     

Assessing Ricardian Equivalence

This paper reviews the literature on Ricardian equivalence. This hypothesis may be interpreted as a generalization to the short and the long run of the theories that put no weight on the real effects of public policies on aggregate demand. We argue that Ricardian equivalence relies on both the permanent income hypothesis and the fulfillment of the intertemporal government budget constraint. The theoretical literature emphasizes several reasons for departures from this hypothesis. However, the empirical literature is inconclusive. When Ricardian equivalence is tested in a life–cycle framework the hypothesis is usually rejected, while when the empirical analysis is based on optimizing models, it is usually accepted.     

Intergenerational Mobility in Britain: Evidence from Unemployment Patterns

Recent papers have examined the intergenerational transmission of well-being by looking at the relationship between parents' and children's income. However, by concentrating on those who are working these studies exclude some of the very poorest in society, the unemployed. In this paper we extend the empirical work on intergenerational welfare in the UK by looking at the links between fathers' and sons' unemployment histories. Using an approach which takes account of both incidence and intensity of son's unemployment, we provide further evidence showing that parental background is an important determinant of a child's future welfare. A son whose father was unemployed 20 years earlier is almost twice as likely to be unemployed as a son whose father was not unemployed. Furthermore, this dependency remains significant after controlling for a range of son's characteristics including education, ability and family composition.     

Employed and Unemployed Job Seekers and the Business Cycle

The job search literature suggests that on‐the‐job search reduces the probability of un employed people finding jobs. However, there is little evidence that employed and unemployed job seekers are similar or apply for the same jobs. We compare employed and unemployed job seekers in their individual characteristics, preferences over working hours, job‐search strategies and employment histories, and identify how differences vary over the business cycle. We find systematic differences which persist over the business cycle. Our results are consistent with a segmented labour market in which employed and unemployed job seekers are unlikely to directly compete with each other for jobs.     

Stock volatility and trading

Both, rational and behavioral models predict that stock and market volatility affect trading by investors. Tax-induced trading hypothesis predicts that investors increase realization of capital losses short term and capital gains only long term as volatility increases. Behavioral models predict that disposition biases of holding on to losers and disposing of winners intensifies with volatility. We document that market and stock volatility influence stock trading. Evidence on trading in response to rise in market volatility supports tax-loss harvesting hypothesis – abnormal trading of losers increases and winners decreases. However, evidence on trading patterns conditional on individual stock volatility is in support of both tax-loss-harvesting and behavioral models: trading in both losing stocks (tax-loss-harvesting hypothesis) and winning stocks (disposition effect hypothesis) increases with rise in stock volatility.     

Temporary layoffs and split population models

This paper develops and estimates a split population model for the duration of temporary layoffs in the German labour market; the population being split according to whether a layoff is temporary or permanent. A flexible piecewise constant hazard is employed and the recall propensity is used to condition the duration of a temporary layoff. The distinction between factors that influence the recall propensity and factors that influence the duration of a temporary layoff is shown to be of empirical significance. The results of the paper are used to evaluate implicit contract and search theories of temporary layoffs. The paper suggests that implicit contracts can explain the behaviour of unemployed workers with high worker–firm attachment whilst search can explain the behaviour of workers with low worker–firm attachment. Copyright © 2004 John Wiley & Sons, Ltd.     

Boon or bane? Others' unemployment,well-being and job insecurity

The social norm of unemployment suggests that aggregate unemployment reduces the well-being of the employed, but has a far smaller effect on the unemployed. We use German panel data to reproduce this standard result, but then suggest that the appropriate distinction may not be between employment and unemployment, but rather between higher and lower levels of labour-market security, at least for men. Men with good job prospects, both employed and unemployed, are strongly negatively affected by regional unemployment. However, insecure employed men and poor-prospect unemployed men are less negatively, or even positively, affected. There is however no clear relationship for women. We analyse labour-market inequality and unemployment hysteresis in the light of our results.     

Does subsidised temporary employment get the unemployed back to work? Aneconometric analysis of two different schemes

Subsidised employment is an important tool of active labour market policies to improve the reemployment chances of the unemployed. Using unusually informative individual data from administrative records, we investigate the effects of two different schemes of subsidised temporary employment implemented in Switzerland: non-profit employment programmes (EP) and a subsidy for temporary jobs (TEMP) in private and public firms. Econometric matching methods show that TEMP is more successful than EP in getting the unemployed back to work. Compared to not participating in any programme, EP and TEMP are ineffective for unemployed who find jobs easily anyway or have a short unemployment spell. For potential and actual long-term unemployed, both programmes may have positive effects, but the effect of TEMP is larger.     

How does the benefit effect vary as unemployment spells lengthen?

This paper investigates how the effect of income while unemployed on the probability of an individual leaving unemployment varies with the length of time that the individual has been unemployed. We examine this question in the context of a variety of alternative econometric models. We extend the Proportional Hazards model with unrestricted baseline hazard to one in which there are unrestricted effects of a subset of the explanatory variables and also consider models that can be estimated as series of binary response models. The proportional hazard restrictions are rejected for the sample of British unemployed men analysed and in the binary sequence framework Logit and Probit models based on symmetric distributions dominate (in likelihood terms) the Extreme Value form model implied by extension of the Proportional Hazards formulation. Logit models with a flexible form for the duration dependence which also incorporate unobserved heterogeneity in a flexible way are estimated. The results for all formulations indicate a rapidly declining effect of unemployment income as a spell lengthens, with no significant effect for the long-term unemployed. The preferred specifications which allow for omitted heterogeneity indicate no significant effect after about 5 months, and this result is robust to the inclusion or exclusion of previous labour-market experience variables and to the choice of mixing distribution.     

Social networks and labor market transitions

We study the influence of social networks on labor market transitions. We develop the first model where social ties and job status coevolve through time. Our key assumption is that the probability of formation of a new tie is greater between two employed individuals than between an employed and an unemployed individual. We show that this assumption generally generates negative duration dependence of exit rates from unemployment. Our model has a number of novel testable implications. For instance, we show that a higher connectivity among unemployed individuals reduces duration dependence and that exit rates depend positively on the duration of the last job held by the unemployed worker.     

Testing constancy of the error covariance matrix in vector models

In this paper a Lagrange multiplier test of the hypothesis that the covariance matrix of a multivariate time series model is constant over time is considered. It is assumed that under the alternative, the error variances are time-varying, whereas the correlations remain constant over time. Under the parameterized alternative hypothesis the variances may change continuously as a function of time or some observable stochastic variables. Small-sample properties of the test statistic are investigated by simulation. The assumption of constant correlations does not appear overly restrictive.     

Individual differences in implicit theories of leadership ability and self‐efficacy: Predicting responses to stereotype threat

Extending research on implicit theories to the leadership domain, we examined how individual differences in belief about the malleability of leadership ability influenced responses to stereotype threat. The study consisted of two time periods. At time 1, we assessed individual differences in implicit theories of leadership ability and self‐efficacy for leadership. At time 2, we activated a stereotype threat in a high‐stakes environment. Results revealed that women reported lower self‐evaluation after a stereotype threat when they had low self‐efficacy and believed leadership ability to be fixed (entity theory) rather than malleable (incremental theory). Results are discussed in terms of how implicit theories generate a network of allied cognitions and emotions that subsequently predict stable patterns of behavior.