Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox

While the employment effects of minimum wages are usually reported to be small (suggesting low substitutability between skill types), direct estimates suggest a much larger degree of substitutability. This article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories. An assignment model is applied where skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the United States show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out likewise can be applied to other markets where different quality types are close substitutes, such as the housing market.     

Time dependency of trade union membership

Event-history analysis is used to model the time dependency of two decisions: the decision to join a trade union, and the decision to leave a trade union. We formulate two hypotheses with regard to these two decisions and parametric regression models are used to investigate these hypotheses. The process of joining a trade union can be described by a decreasing rate, using a Weibull. For the process of leaving a trade union, we suggest an increasing rate that decreases after several years, a process best described by a log-logistic model.     

Should Higher Education Subsidies Depend on Parental Income?

In many countries, student grants, tuition fees, and subsidizedloans depend on parental income. This paper examines the efficiencyand distributional effects of such conditioning, and assesseswhether it is optimal practice when the government wants toreduce after-tax income inequality in the most efficient manner.Increasing the mean level of education among the work-forcecompresses wage differentials by level of education and therebythe pre-tax income distribution. Hence, subsidizing educationmay be part of an optimal redistribution policy. However, educationsubsidies mainly benefit high-ability students, limiting theirredistributive virtues. Conditioning education subsidies onparental income may enable the government to reduce inframarginalsubsidies, mainly benefiting high-ability students, while preservingthe marginal subsidy, and thus the favourable effect on themean education level which leads to wage compression.     

Liberalisation of Utilities and Evolving European Regulation

In this article, David Coen and Chris Doyle provide an overview of recent liberalisation and regulatory developments affecting key utility sectors (electricity, gas, postal service, and telecommunications) in the European Union. They examine what kind of competition is suitable in the utilities, and discuss obstacles that lie in the path of competition. They address in detail the institutional design of sector specific regulation. National and supra-national regulatory structures are analysed and these are illustrated by examples drawn from several European countries. In institutional terms, they argue that it is important regulatory regimes have a high degree of flexibilityand speed to allow for the continued evolution of the EU utility sector.     

IS ECONOMIC RECOVERY A MYTH? ROBUST ESTIMATION OF IMPULSE RESPONSES

We estimate the impulse response function (IRF) of GDP to a banking crisis using an extension of the local projections method. We demonstrate that, though robust to misspecifications of the data‐generating process, this method suffers from a hitherto unnoticed bias which increases with the forecast horizon. We propose a correction to this bias and show through simulations that it works well. Applying our corrected local projections estimator to the data from a panel of 99 countries observed between 1974 and 2001, we find that an average banking crisis yields a GDP loss of just under 10% in 10 years, with little sign of recovery. Like the original local projections method, our extension of it is widely applicable. Copyright © 2013 John Wiley & Sons, Ltd.     

FIRM DYNAMICS IN AN URBAN ECONOMY *

We develop a new dynamic general equilibrium model to explain firm entry, exit, and relocation decisions in an urban economy with multiple locations and agglomeration externalities. We characterize the stationary distribution of firms that arises in equilibrium. We estimate the parameters of the model using a method of moments estimator. Using unique panel data collected by Dun and Bradstreet, we find that agglomeration externalities increase the productivity of firms by up to 8%. Economic policies that subsidize firm relocations to the central business district increase agglomeration externalities in that area. They also increase economic welfare in the economy.     

Rhineland exit?

We argue in favor of the shareholder model of the firm because assigning the full surplus of the firm to shareholders provides the best possible social insurance by diversifying firm-specific risks on capital markets. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm’s surplus. In Denmark, workers bear less firm-specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing future job creation.     

Saving and Investing Over the Life Cycle and the Role of Collective Pension Funds

Summary This paper surveys the academic literature on optimal saving and investment over an individual’s life cycle. We start out with a simple benchmark model with separable and smooth preferences, one aggregate risk factor and riskless wage income. Within this simple setting, optimal saving and investment behavior are explored from the perspective of individuals. Subsequently, we investigate various constraints to optimal individual decision making. We discuss how collective pension schemes may help to relieve some of the market incompleteness that arises from these constraints while at the same time introducing new types of constraints. Finally, various extensions to the benchmark setting are analyzed: a more elaborate modelling of human capital, additional risk factors, and other types of preferences. We thank Peter Kooreman for helpful comments on an earlier version and Roel Mehlkopf for research assistance.     

An econometric model of potential output, productivity growth, and resource utilization

This paper specifies a macroeconometric model providing a simultaneous framework for estimating the natural rate of unemployment, the full-employment (FE) labor force and hours of work, the FE productivity growth rate, and the growth path of potential (FE) output during 1960–2000. The estimated output and unemployment gaps are consistent with Okun’s Law. Historical perspective is provided on the expansion of the nineties by comparing it with those of the three previous decades in terms of growth and utilization of potential output. Factors accounting for the growth of potential output, productivity and labor supply are identified and compared.     

Classical and Keynesian unemployment in Austria

The labor market in a macroeconometric model of Austria is used to determine the natural unemployment rate, full-employment (F.E.) output, and the F.E. real wage for 1966–92. Gaps between actual and F.E. variables are examined analytically and historically. Observed unemployment is decomposed into natural, hidden, classical, and Keynesian components. Classical unemployment is associated with the real wage gap, while Keynesian unemployment depends on the output gap. A rise in the natural rate is found to account for almost all of the increase in unemployment between 1966–74 and 1975–81, but an increase in Keynesian unemployment is the major factor in the rise of unemployment between 1975–81 and 1982–92. A fiscal shock to the complete model is found to increase real GDP for a year or two, reducing Keynesian unemployment without an appreciable rise in classical unemployment; the wage gap is eventually increased, however, producing a modest rise in classical unemployment.A lengthier version of this paper was presented at the Annual Meeting of the Austrian Economic Association, Graz, April 14–16, 1993. The generous finacial support of the Jubiläumsfonds of the Austrian National Bank for the research of which this paper is a part is gratefully acknowledged.