Education, Work and Wages in the UK

Abstract. This paper is concerned with the relationship between education, wages and working behaviour. The work is partly motivated by the sharp distinction in the literature between the returns to education and the effect of wages on labour supply. Education is the investment that cumulates in the form of human capital while labour supply is the utilization rate of that stock. Yet, variation in education is usually the basis for identifying labour supply models – education is assumed to determine wages but not affect labour supply. Moreover, it is commonly assumed that the private rate of return to education can be found from the schooling coefficient in a log-wage equation. Yet, the costs of education are largely independent of its subsequent utilization but the benefits will be higher the greater the utilization rate. Thus the returns will depend on how intensively that capital is utilized and we would expect that those who intend to work least to also invest least in human capital. Indeed, the net (of tax liabilities and welfare entitlements) return to education will be a complex function of labour supply and budget constraint considerations.
Here we attempt to model the relationship between wages, work, education and the tax/welfare system allowing for the endogeneity of education as well for the correlations between the unobservable components of wages and working behaviour. We use the estimates to simulate the effect of a new UK policy designed to increase education for children from low-income households.     

Environmental Policy in Open Economies and Monopolistic Competition

This paper analyses the implications of international trade for non-cooperative environmental policy in the case of local production externalities. A particular focus is on the potential effects of regulations on the variety of goods and the resulting international spillover caused by trade. A tougher domestic standard negatively affects the utility of the households abroad, since such a policy reduces their variety of imports (due to fewer domestic product inventions) or their consumption of each imported brand (due to higher import prices). Ignoring the negative spillover, non-cooperative governments implement inefficiently strict standards in equilibrium. In contrast to this clear-cut inefficiency result, the impact of international trade on the state of the environment is ambiguous.     

DEALING WITH UNCERTAINTY: ROBUST RULES IN MONETARY POLICY

We argue that in seeking to insure against model uncertainty, monetary policy makers are often ready to trade ex post performance for greater certainty in the outcome. They thus look for rules that although not optimal ex post, have certain properties that qualify them as robust. We apply first, Gul's approach of ‘disappointment’ aversion to describe policy makers' aversion to uncertainty and then define the properties the notion of ‘robustness’ entails. With these two tools we then link the desirability of such robust rules to the degree of policy makers' aversion to uncertainty. We thus show that provided such robust rules exist, a larger degree of disappointment aversion leads to a greater emphasis on robustness in policy implementation.     

Herding in delegated portfolio management: When is comparative performance information desirable?

We address the issue of investors’ asset allocation decisions when portfolio management is delegated to an agent. Contrary to predictions from traditional financial theory, it is shown that investors may not induce their manager to allocate funds to the asset with the highest return. Instead they may herd in their asset allocation decision and induce trade in a particular asset, because another manager is trading in it and despite the presence of a more profitable alternative. Doing so allows investors to write an efficiency-improving relative-performance contract. On the other hand, herding leads investors to design wage contracts strategically, resulting in more aggressive and thus less profitable trade in equilibrium. We show that herding occurs, when the cost of information is high, information precision is low and when managers are sufficiently risk averse. Moreover, when investors can decide whether or not to disclose information about their manager's performance, they will not do so.     

The British low-wage sector and the employment prospects of the unemployed

Are low wages a way for the unemployed to switch to higher-paying jobs? Using data from the British Household Panel Survey, the labour market dynamics of unemployed, low-paid and higher-paid employed men are analysed. Moreover, the respective (un)employment duration and occupational skill level are accounted for. Results show that in general low wages significantly reduce the risk of future unemployment and increase the chances of ascending the salary ladder, especially in the case of long-term unemployment (>360 days). Furthermore, the occupational skill level has a substantial influence on the upward mobility of low-paid jobs: individuals working in the initial period in a low-paid and higher-skilled occupation have on average an 11 percentage points higher probability of entering higher pay compared to when working in a low-paid and low-skilled occupation.     

Abstracts

Quality & Quantity -     

Pension Reform, Capital Markets and the Rate of Return

Abstract. This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre‐funding – for capital markets in Germany. We use a stylized closed‐economy, overlapping‐generations model to compare the effects of the recent German pension reform with those of a more decisive reform that would freeze the current pay‐as‐you‐go contribution rate and thus result in a larger funded component of the pension system. We predict rates of return to capital under both reform scenarios over a long horizon, taking demographic projections as given. Our main finding is that the future decrease in the rate of return is much smaller than often claimed in the public debate. Our simulations show that the capital stock will decrease once the baby‐boom generations enter retirement, even if there were no fundamental pension reform. The corresponding decrease in the rate of return, the direct effect of population aging, is around 0.7 percentage points. While the capital market effects of the recent German pension reform are marginal, the rate of return to capital would decrease by an additional 0.5 percentage points under the more decisive reform proposal.     

Valuing ecosystem goods and services: a new approach using a surrogate market and the combination of a multiple criteria analysis and a Delphi panel to assign weights to the attributes

A new approach to valuing ecosystem goods and services (EGS) is described which incorporates components of the economic theory of value, the theory of valuation (USappraisal), a multi-model multiple criteria analysis (MCA) of ecosystem attributes, and a Delphi panel of experts to assign weights to the attributes. The total value of ecosystem goods and services in the various tenure categories in the Wet Tropics World Heritage Area (WTWHA) in Australia was found to be in the range AUD$188 to $211 million year⁻¹, or AUD$210 to 236 ha⁻¹ year⁻¹ across tenures, as at 30 June 2002. Application of the weightings assigned by the Delphi panelists and assessment of the ecological integrity of the various tenure categories resulted in values being derived for individual ecosystem services in the World Heritage Area. Biodiversity and refugia were the two attributes ranked most highly at AUD$18.6 to $20.9 million year⁻¹ and AUD$16.6 to $18.2 million year⁻¹, respectively.     

Analysis and Forecast of the State of Environmental Protection in Russia

The main purpose of the present study is to analyse the emission dynamics of atmospheric and water pollutants in Russia and cost of their removal in the 1980s and early 1990s, and to forecast them by means of a Dynamic Input–Output Model according to different scenarios of future economic development till 1998. Main results of the work are:– methodological principles have been elaborated for singling out the environmental protection sector within the national economy;– a method has been offered for including the ecological block into a Dynamic Input–Output Model of the Russian economy;– a method of data preparation has been elaborated for the ecological block of the above-named model, the data base which characterizes the ecological situation in Russia has been formed and analysed;– calculations for 1994–1998 have been executed for forecasting the economic and ecological development of Russia using the above-mentioned model and the results obtained have been analysed. The results showed that if the existing tendencies towards low environmental protection capital costs remain the same, then the negative environmental impact will increase. In order to implement ecological programs and international agreements, to increase the proportion of removed pollutants, it is necessary to increase substantially expenditures on purifying water and air resources. The proportion of environmental protection investments in the total amount of the national economy capital costs should increase by up to 12–40% according to different scenarios of the economic development and different purposes of the environmental protection policy.