Demographic change, human capital and welfare

Projected demographic changes in the U.S. will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current cohorts who will be retired when the rate of return is low. This paper argues that adding endogenous human capital accumulation to the standard model dampens these forces. We find that this adjustment channel is quantitatively important. The standard model with exogenous human capital predicts welfare losses up to 12.5% (5.6%) of lifetime consumption, when contribution (replacement) rates to the pension system are kept constant. These numbers reduce to approximately 8.7% (4.4%) when human capital can endogenously adjust.     

Growth, income distribution, and fiscal policy volatility

The relationship between income distribution and economic growth has long been an important economic research subject. Despite substantial evidence on the negative impact on long-term growth of inequality in the literature, however, there is not much consensus on the specific channels through which inequality affects growth. The empirical validity of two most prominent political economy channels - redistributive fiscal spending and taxes, and sociopolitical instability - has recently been challenged. We advance a new political economy channel for the negative link between inequality and growth, a fiscal policy volatility channel, and present strong supporting econometric evidence in a large sample of countries over the period of 1960-2000. Our finding also sheds light on another commonly observed negative relation between macroeconomic volatility and growth. We carefully address the robustness of the results in terms of data, estimation methods, outlier problem, and endogeneity problem that often plague the standard OLS (ordinary least squares) regression.     

Capital markets integration, growth and income distribution

The paper considers a two-country model of overlapping generation heterogenous economies with intergenerational transfers carried out in the form of bequest and investment in human capital. We examine in competitive equilibrium the transitory and long-run effects of capital markets integration. First, we explore how the regime of public education affects the dynamics of the integrated economy. Second, we study the effects of capital markets integration, in equilibrium, on the intragenerational income distribution in both the host and investing country.     

Competition, human capital and income inequality with limited commitment

We develop a dynamic model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up and non-competitive covenants, affect the incentive to accumulate human capital. When contracts are not enforceable, high barriers lower the outside value of ‘skilled workers’ and reduce the incentive to accumulate human capital. In contrast, low barriers can result in over-accumulation of human capital. This can be socially optimal if there are positive spillovers. A calibration exercise shows that this mechanism can account for a sizable portion of cross-country income inequality.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.     

Education cost, intergenerational mobility, and income inequality

Using a modified version of the Maoz and Moav [Maoz, Y. D. and Moav, O., 1999. Intergenerational mobility and the process of development. Economic Journal 109(458) 677-697] model, we show that the dynamics of income inequality and intergenerational mobility, and the effects of technological changes on inequality, depend crucially on the share of education cost in income.     

The role of product market regulations in the process of structural change

The sectoral allocation of labor differs considerably across developed economies, even in the presence of similar patterns of structural change. A general equilibrium model that captures the stylized facts of structural change is presented. In this framework, economy-wide product market regulations hinder the development of dynamic sectors such as service industries. This is consistent with the negative cross-country relationship between product market regulations and the service employment share, discussed in the paper. Additionally, the model suggests that higher service prices and rents in regulated economies reduce labor supply, providing a rationale for the negative association between product market regulations and the employment rate previously found in the literature.     

Informal sector, income inequality and economic development

This paper addresses - with the help of numerical simulations - some of the issues relating to income distribution in the context of development of an economy with an informal sector and migration of both low- and high-skilled workers from the rural to the urban area. A major aim has been to see under what conditions we do or do not get an inverted U-shaped curve of income distribution. The paper finds that the tendency always is for the Gini coefficient to rise and then decline. However, once it starts declining, it need not continuously decline; it may rise, then decline, then rise again and indeed rise above the previous peak before starting to decline again and may well end at the end of the simulation at a higher value than at the start. Any case for the redistribution of income is seen to be much stronger at the later stages of development that at earlier stages, even though at later stages, Gini coefficient may be lower than at earlier stages. The policy implications of the findings are considered.     

Credit market imperfections, income distribution, and capital accumulation

Summary. This paper builds a model in which the distribution of income matters for capital formation, and uses it to analyze the effects of a simple policy intended to create a more equal distribution of income on the severity of certain credit market imperfections and, through this channel, capital accumulation. A neoclassical growth model is developed in which some capital investment must be externally financed, and external finance is subject to a standard costly state verification (CSV) problem. In particular, some fraction of the population is capitalists, who have access to risky but high return capital production technologies. Successful capitalists leave bequests to their offspring, thereby permitting them to internally finance some fraction of their own investment projects. However some external finance is also required. This is provided by workers who save out of labor income. As is well known, the greater the capability of capitalists to provide internal finance, the less severe is the CSV problem. Thus bequests mitigate credit market frictions and, in that sense, promote financial market efficiency and capital accumulation. However, they also perpetrate income inequality. The structure is used to show that a policy that taxes the bequests of capitalists, and transfers the proceeds to workers, necessarily reduces the steady state capital stock. Indeed, when this effect is sufficiently strong, these redistributive tax/transfer schemes can reduce the total (wage plus transfer) incomes of workers, as well as their welfare. Thus some simple policies intended to redistribute income can be highly counterproductive.Received: June 3, 1996; revised version: February 4, 1997This revised version was published online in February 2005 with corrections to the cover date.     

Start up costs, limited enforcement, and the hidden economy

This paper examines how much of the difference in the size of the informal sector and in per capita income across countries can be accounted by regulation costs and enforcement of financial contracts. It constructs and solves numerically a general equilibrium model with credit constrained heterogenous agents, occupational choices over formal and informal businesses, financial frictions and a government sector which imposes taxes and regulations on formal firms. The benefit from formalization is better access to outside finance. The quantitative exercises suggest that: (i) regulation costs and not the level of enforcement account for differences in the size of the informal sector between United States and Mediterranean Europe; (ii) for a developing country like Peru, however, contract enforcement and regulation costs are equally important in accounting for the size of the informal sector; and (iii) regulation costs and contract enforcement do not account for most of the income differences observed among countries.     

Urbanization,informal sector,and development

Urbanization is a universal phenomenon in the postwar world, but its qualitative nature is varied across countries. Some nations have experienced urbanization that accompanied skill upgrading, industrialization, and the expansion of the urban formal (modern) sector, but others urbanized without such modernization and underwent the expansion of the urban informal (traditional) sector simultaneously. The question that naturally arises is what are the underlying causes for the differences. The purpose of the paper is to tackle this question analytically based on a dynamic model of urbanization and development.     

Corruption,competition and democracy

This paper presents a model of the interaction between corrupt government officials and industrial firms to show that corruption is antithetical to competition. It is hypothesized that a government agent that controls access to a formal market has a self-interest in demanding a bribe payment that serves to limit the number of firms. This corrupt official will also be subject to a detection technology that is a function of the amount of the bribe payment and the number of firms that pay it. Under quite normal assumptions about the shape of the graph of the detection function, multiple equilibria can arise where one equilibrium is characterized by high corruption and low competition, and another is characterized by low corruption and high competition. Some suggestive empirical evidence is presented that supports the main hypothesis that competition and corruption are negatively related.     

The dynamics of moonlighting in Russia1

This paper uses the Russian Longitudinal Monitoring Survey (RLMS) to analyse the dynamics of moonlighting by the working‐age population. We find that moonlighting is transitory and that a desire to switch jobs expressed in the past is positively related to moonlighting in the present and to actual job changes in the future. We also find that workers who moonlighted as self‐employed in the past represent 26.5 percent of the new self‐employed. These results suggest that moonlighting in Russia can be seen as an effective incubator for setting up new self‐employed businesses, thereby providing long‐term benefits for the economy.     

Sexual orientation,work, and income in Canada

Abstract. We provide the first evidence on sexual orientation and economic outcomes in Canada using confidential data that ask adults a direct question about their sexual orientation. Gay men have 12% lower personal incomes and lesbians have 15% higher personal incomes than otherwise similar heterosexual men and women, respectively. Different labour force patterns can account for some of the income differentials. We also document large differences in educational attainment, childrearing, and urbanicity that generally mirror patterns found in the US. Finally, we show that applying couples‐based approaches common in this literature greatly overstates the magnitudes of gay/straight income gaps.     

Women as agents of change: Female income and mobility in India

Economic globalization will give many women in developing countries access to steady and relatively remunerative employment for the first time, potentially shifting bargaining power within their households and changing the choices that are made for their children. This paper exploits a unique setting — a group of tea plantations in South India where women are employed in permanent wage labor and where incomes do not vary by caste — to anticipate the impact of globalization on mobility across social groups in the future. The main result of the paper is that a relative increase in female income weakens the family's ties to the ancestral community and the traditional economy, but these mobility enhancing effects are obtained for certain historically disadvantaged castes alone. Although the paper provides a context-specific explanation for why the women from these castes emerge as agents of change, the first general implication of the analysis is that the incentive and the ability of women to use their earnings to influence household decisions depends importantly on their social background. The second implication is that historically disadvantaged groups may, in fact, be especially responsive to new opportunities precisely because they have fewer ties to the traditional economy to hold them back.     

Search efficiency,wage dynamics and welfare

Advances in information technology have improved the job-search process in the labor market. We analyze the effects of this improvement by constructing a search-and-matching model with two sectors: a risky sector with firm-specific productivity shocks and a risk-free sector. The risky sector is characterized by a low level of commitment between employers and workers – either party can end the employment relationship. We show that a better job-search process generates more job matches in the risky sector, and this benefits workers by improving their outside options. The effect on employers is subtle: while it is easier to fill vacancies, workers become more expensive. At the same time, the ease of finding new workers makes it harder for employers to keep their wage promises to workers and increases wage volatility. Our paper contributes to the literature by offering a novel explanation for the observed rise in wage volatility.     

Large real exchange rate movements, firm dynamics, and productivity growth

Abstract.  This paper examines the influence of large real exchange rate movements on firm turnover and production scale, and the contribution of these decisions to productivity growth. Our theoretical model predicts that home currency appreciations cause firm closure and reduce surviving firms' exports while boosting domestic sales. The net effect on sales and productivity therefore depends on changes in domestic sales and exports. Taiwanese firm-level data are used to test these predictions. The results show that real currency appreciations lead to scale expansion of surviving firms which in turn raises productivity. Our findings suggest the existence of a significant scale effect.     

Seasonal adjustment,demography, and GDP growth

Seasonal adjustment removes the predictable seasonal variation in GDP. If there is seasonal variation in factor inputs, then seasonal adjustment factors may be correlated with those inputs. This correlation can obscure statistically the importance of those inputs for GDP. This effect is apparent for the demographic composition of the labour force for Canada. Seasonal adjustment also changes the time‐series properties of GDP. Accounting for the seasonal pattern and trend change in demography suggests that the period of reduced volatility in GDP growth for Canada, the ‘Great Moderation,’ can be traced to the changing demographic structure of the labour force.     

The changing role of education in the distribution of earnings and household income

This article draws on income surveys from the last two decades to report on trends in earnings disparities and household income inequality in the Czech Republic. Education has been the main axis of change in this area, having acquired a much greater role in the entire process of collecting and distributing income. First, an increasing influence of education is evident in the personal earnings of employees, returns to education having doubled. Second, in couples, education has an important impact on both women’s employment and their earnings. Third, the importance of marital partners’ education levels on household income grew even more than its effect on earnings.