A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust Without Shedding Jobs

We consider the extent to which U.S. fast-food businesses could adjust to an increase in the federal minimum wage from its current level of $7.25 an hour to $15 an hour without having to resort to reducing their workforce. We consider this issue through a set of simple illustrative exercises, whereby the US raises the federal minimum wage in two steps over four years, first to $10.50 within one year, then to $15 after three more years. We conclude that the fast-food industry could absorb the increase in its overall wage bill without resorting to cuts in their employment levels at any point over this four-year adjustment period. We find that the fast-food industry could fully absorb these wage bill increases through a combination of turnover reductions, trend increases in sales growth, and modest annual price increases over the four-year period. Working from the relevant existing literature, our results are based on a set of reasonable assumptions on fast-food turnover rates, the price elasticity of demand within the fast-food industry, and the industry’s underlying trend for sales growth. We also show that fast-food firms would not need to lower their average profit rate during this adjustment period.     

International portfolio reallocation: Diversification benefits and European monetary union

We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross-section of countries spanning over two sample periods: 1997-2001 and 1997-2005. We find that the strongest drivers are the marginal diversification benefits arising from the pure asset component and the initial degree of underweight. This evidence suggests that global portfolio reallocations over the asset boom and bust period were determined by optimal diversification considerations. We also find that due to economic and monetary union (EMU) the weight assigned by euro area investors to investment in euro area countries increased significantly in equity and fixed income portfolios, with a trade diverting effect against the British bond market.     

Revealed preferences in macroeconomic policy decisions

This paper extends the usual instrument-target framework by directly estimating macroeconomic policy preferences over a number of policy targets using a derived reduced form and then solving the nonlinear optimality conditions for optimal instrument choice. Solving the optimality equations using observations on predetermined variables yields the implicit set of preference weights which induced the observed choices. The derivation format parallels the integrability discussions about consumer preferences implicitly expressed through demand functions. The approach is applied to a simple macro model estimated over the period from 1955 through 1972.     

Human capital and economic development

This paper develops a general equilibrium model of fertility and human capital investment with young adult mortality. Because young adult mortality is negatively related to average young adult human capital, human capital accumulation lowers mortality, inducing demographic transition and industrial revolution. Data confirm that young adult mortality is related negatively to schooling, and the rate of return to schooling, and positively to fertility. The data indicate a negative relationship between TFP growth and schooling accumulation. The model fits the data on country populations, per capita incomes, human capital, total fertility rates, infant mortality, life expectancy and conditional life expectancy.     

Growth and Nongrowth Capital Investments and Future Performance*

Most studies on the impact of capital expenditure on future performance use the aggregate capital expenditure disclosed in the cash flow statement. In this study, however, we distinguish between growth capital investments (that increase production capacity) from nongrowth capital investments (that only maintain or reduce current capacity). For growth capital investments, we document a negative association with year-ahead performance, which becomes positive in the subsequent year. For nongrowth capital investments, we observe a non-negative association with year-ahead performance. For nongrowth capital investments, we document a positive association, suggesting that the divestment is beneficial. That is, firms are likely disposing of nonproductive assets. Our results suggest that disclosing the nature of capital investments is important to better assess the future impact of a firm's investment decisions.     

DO LIES ERODE TRUST?

Does honesty promote trust and trustworthiness? We investigate how being lied to (versus told the truth) in a Gneezy deception game affects behavior in a subsequent trust game with different players. Using a design that controls for potential treatment effects on payoffs, mood, and beliefs about the overall propensity for honesty in the experiment, we find that the specific experience of being lied to significantly erodes trust and trustworthiness.     

Using the gravity equation to differentiate among alternative theories of trade

The simple gravity equation explains a great deal about the data on bilateral trade flows and is consistent with several theoretical models of trade. We argue that alternative theories nevertheless predict subtle differences in key parameter values, depending on whether goods are homogeneous or differentiated and whether or not there are barriers to entry. Our empirical work for differentiated goods delivers results consistent with the theoretical predictions of the monopolistic-competition model, or a reciprocal-dumping model with free entry. Homogeneous goods are described by a model with national (Armington) product differentiation or by a reciprocal-dumping model with barriers to entry. JEL Classification: F10, F12
Equation de gravité et différenciation entre diverses théories du commerce international. La simple équation de gravité fournit une bonne part d'explication des flux de commerce bilatéraux et donne des résultats compatibles avec plusieurs modèles de commerce international. Les auteurs suggèrent que les diverses théories prédisent néanmoins des différences subtiles dans les valeurs de paramètres clés, selon que les biens sont homogènes ou différenciés, et qu'il y a barrières ou non à l'entrée. Le travail empirique des auteurs livre des résultats compatibles avec les prévisions théoriques du modèle de concurrence monopolistique ou du modèle de dumping réciproque avec entrée libre. On décrit les flux de biens homogènes à l'aide d'un modèle de différenciation nationale de produit à la Armington ou par un modèle de dumping réciproque avec barrières à l'entrée.     

Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges

We present an example that compares the effects on earnings of designating a foreign currency forward contract as either a cash-flow or fair-value hedge of a foreign currency denominated receivable. Entities engaging in exchange transactions not denominated in their functional currency frequently enter into foreign currency forward contracts in order to mitigate their foreign exchange rate risk exposure. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge is also known on the date the contract is initiated; whereas the effect on each periods’ earnings from a fair-value hedge cannot be determined until the respective balance sheet dates. Therefore, designating forward contracts as cash-flow hedges may suppress volatility in reported earnings compared to designating forward contracts as fair-value hedges. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is lower when a forward contract is designated as a cash-flow hedge relative to designating it as a fair-value hedge. This suggests foreign currency forward contracts designated as cash-flow hedges are more consistent with the purpose of hedge accounting: to mitigate the effects on earnings of applying different measurement criteria for the hedge and the hedged item.