CEPR News In focus this week: 27 October 27 Oct 2022 This weekly press briefing highlights some of the latest research reports, discussion papers and other publications from CEPR. It also features some of the latest columns on VoxEU, as well as new blogs/reviews, audio interviews and short films.
Euro-area immigrants earn 30% lower wages than non-immigrants and hold 60% less net wealth A new study by Maarten Dossche et al. documents substantial differences in income and wealth between non-immigrants and immigrants in the euro area. The research shows that differences in wealth are more substantial than differences in wages and income: euro-area immigrants earn on average 30% lower wages than non-immigrants and hold roughly 60% less net wealth. Immigrants are much more likely to be constrained (i.e. accumulate much lower amounts of liquid assets) and their employment is particularly sensitive to the business cycle, meaning they disproportionately lose during recessions when aggregate employment is lower, and strongly benefit from recoveries.
A global recession could be imminent, assuming economies will recover the trend is misleading There are serious concerns that advanced economies are on the brink of a recession, but even pessimists generally agree that economies will eventually converge back to trend. A study by David Aikman, Mathias Drehmann and Mikael Juselius casts doubt on this view. Using a panel of 24 countries from 1970 onwards, the authors show that there is a significant tipping point in recovery dynamics, which depends on the size of the initial contraction: severe contractions have highly persistent effects, whereas smaller contractions do not. This finding holds regardless of whether the contraction follows aggressive monetary tightening to combat high inflation, energy price disruptions or other factors (including financial crises).
Is the post-Covid-19 inflation spike permanent or transitory? A study by Stephanie Schmitt-Grohé and Martín Uribe contributes to this debate by reporting results from a semi-structural empirical model of trend inflation. The model predicts that in the US trend inflation increased by 2.5 percentage points between 2019 and 2021 when estimated on post-war data but by only 0.5 percentage points when estimated on data starting in 1900. It argues that using data from the inflation-spike-plagued first half of the 20th century to estimate trend inflation may be useful for shedding light on the persistence of post-Covid-19 inflation.
Children exposed to war suffer long-term mental health effects: evidence from Germany Using data from Germany during WWII, a study Mevlude Akbulut-Yuksel, Erdal Tekin and Belgi Turan finds that children who experienced more intense bombing were likely to suffer from poor mental health later in life. This effect is greater for the youngest children. These findings are significant as increasing numbers of children are being exposed to armed conflict and violence. The authors stress the importance of scaling up services to children by governments and international organisations such as UNICEF.
What shapes international attitudes toward climate policies Exploring the characteristics and beliefs of over 40,000 people in 20 high- and middle-income countries and their policy preferences, a study by Antoine Dechezleprêtre and colleagues finds that people’s support of a given climate policy is influenced by The policy’s perceived effectiveness in reducing emissions; Perceived distributional impacts on lower-income households; Perceived impact on people’s own households.
Effects of financial sanctions on households and firms in Russia A study by Mikhail Mamonov, Steven Ongena, and Anna Pestova analyses the effects of the sanctions imposed on Russia following the 2014 annexation of Crimea, to show that: The real total revenue of larger firms declined sharply in the years following the sanctions, whereas the effects on small firms were negligible; The real income of richer households declined by several percent, while poorer households enjoy rising real income over the same period; Thus, the sanctions could have had an unintended short-run effect of reducing income inequality.
Buying a house when the market is inflated increases long-term inequality: Evidence from Spain A new study by Hamish Low and Virginia Sánchez Marcos shows the extent to which the variation in house prices over the cycle is an important driver of differences both in living standards and in inequality across otherwise similar homeowners. Households can mitigate these impacts through changing labour supply. The research also finds that men work more in response to higher house prices of purchase, whereas the correlation of house prices and labour supply for women is driven by selection: households where women work more buy more expensive houses.
Parental and child economic outcomes are much more tightly linked than previously believed: Evidence from Denmark A study by Sadegh S. M. Eshaghnia, James Heckman, Rasmus Landersø and Rafeh Qureshi develops new measures that capture the long-run intergenerational transmission of family influence to show that parental and child economic outcomes are much more tightly linked than previously believed. This extends to dimensions of life outcomes such as grades, educational attainment, and crime. The research finds that intergenerational mobility is substantially overstated in traditional approaches, which rely on limited age ranges and do not capture the effect of longer-term lifetime resources. Moreover, the bias is greatest for children growing up in disadvantaged conditions.
Fasting during Ramadan while pregnant could contribute to worse economic outcomes in adulthood A study by Timotej Cejka and Mazhar Waseem finds that the negative impacts of in-utero Ramadan exposure translate into worse economic outcomes in adulthood, reflected in lower earnings and dominated occupation choices of exposed individuals. The authors suggest these persistent effects are driven by lower skills of exposed individuals, although other mechanisms such as health cannot be ruled out.
Removing or weakening borders improves the economic outcomes of nearby regions: Evidence from night-time lights in Ukraine A study by Kristian Behrens uses granular data on night-time lights, manufacturing plants, and border crossings to assess the impact of Russia’s invasion of Ukraine and associated border changes on economic performance. The findings support existing evidence that fewer or weakened borders improve economic outcomes, and the granularity of the data reveals that some of these effects are highly localised.
What drives trust in government? Evidence from a large-scale OECD survey Writing at VoxEU, Monica Brezzi and Valerie Frey analyse results from the inaugural 2021 OECD Survey on Trust in Public Institutions in the wake of the Covid-19 pandemic. The findings show that: Citizens have broadly positive perceptions of government reliability; Higher trust in government is associated with greater confidence in pandemic preparedness; However, governments are seen as falling short in other areas, particularly in relation to long-term challenges, such as climate change, and the inclusion of vulnerable and marginalised groups.
China’s growing service sector could portend a new stage of development A study by Xilu Chen et al. suggests that China’s development process has entered a new stage in which services and the domestic market play a significantly more important role than in the past. If tertiarisation is no mere consequence of rapid income growth but a result of productivity growth in services, the growth process can prove resilient to Baumol’s disease, which has the potential to jeopardise the sustainability of economic growth.
CEPR News EUROPE'S ECONOMIC SECURITY: Navigating Unprecedented Challenges in a Shifting World New Report from CEPR and Bruegel Highlights Urgency for Comprehensive Reassessment of EU Strategy