This week from CEPR: August 06

Thursday, August 6, 2020

Highlights from some of the latest research reports published in the Centre for Economic Policy Research (CEPR) network’s long-running series of discussion papers, as well as some other recent CEPR publications.

Also, links to some of the latest columns on Vox, the Centre’s policy portal, which provides ‘research-based policy analysis and commentary from leading economists’.

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    • New Discussion Papers

    • POST-BREXIT TRADE BARRIERS LIKELY TO INCREASE EARNINGS INEQUALITY IN THE UK: Lower-paid, blue-collar workers likely suffer most   

    Rachel Griffith, Peter Levell, Agnes Norris Keiller           
    CEPR DP No. 15126 July 2020 

    Post-Brexit trade barriers are likely to impact wages and earnings inequality in the United Kingdom. Blue-collar workers are the most exposed to negative consequences of higher trade costs caused by Brexit, because they are more likely to be employed in industries that face increases in trade costs, and are less likely to have good alternative employment opportunities available in their local labour markets. Overall new trade costs have a regressive impact with lower-paid workers facing higher exposure than higher-paid workers. 

    These are among the main findings of a new CEPR study by Rachel Griffith and colleagues, which examines the distributional consequences of post-Brexit trade barriers on wages in the United Kingdom, at the individual and household level. The study focuses on changes in trade barriers associated with a hard ‘WTO rules’ Brexit, as this is the default outcome in the event the UK and EU fail to strike an agreement. Among the findings:  

    • Brexit is likely to lead to increases in the costs of trade between the UK and the EU, which is by far the UK's largest trading partner.
      Industries that are most exposed to new trade costs are clothing and textiles, chemicals, transport equipment and food and drink manufacturers. 
    • These industries are disproportionately likely to employ workers in blue-collar occupations (machine operatives and those in skilled trades).
    • Exposure is highest among older, less educated and male workers.
    • Women are more likely to be employed in non-traded industries that are less exposed to new trade costs.
    • Exposure is also greatest for workers in the middle of the individual earnings distribution, where workers in blue-collar occupations are concentrated.
    • Workers in some high earning occupations (such as managers, professionals and technical workers) are also often employed in highly exposed industries, but these workers typically have better outside options (alternative job opportunities in less exposed industries in their locality).
    • While low earning workers may not themselves be exposed to the increase in trade barriers, they may be indirectly affected through impacts on their partners and thus on household income.
    • Workers in occupations and localities where the demand for their skills is very concentrated will have fewer outside options, and so be more hard hit.
    • The degree of labour mobility across regions, industries and occupations will be key determinants of the distributional impacts of Brexit. The mobility of less educated workers across both regions and sectors in response to trade shocks tends to be low. 

    Workers' location and mobility, as well as their industry, are likely to be important when considering how to mitigate any adverse consequences of any changes in the UK's future trade policy. These results could justify ‘place-based’ policies that target assistance at adversely affected regions.


    Oriol Aspachs, Ruben Durante, Alberto Graziano, Josep Mestres, Jose G Montalvo, Marta Reynal-Querol  
    CEPR DP No. 15118 | July 2020

    In the absence of government intervention, income inequality during Covid-19 would have increased dramatically, mainly due to job losses and wage cuts experienced by low-wage workers. Foreign-born individuals and regions more dependent on tourism would likely have suffered most heavily. Public transfers and unemployment insurance schemes were very effective at providing a safety net to the most affected segments of the population and at offsetting most of the increase in inequality. 

    These are the central conclusions of a new CEPR study by Ruben Durante and colleagues, which studies the evolution of inequality in Spain since the beginning of the COVID-19 pandemic, and its effect on different groups of the population. The authors introduce a new method to track economic inequality in real-time using payroll data managed by banks, and analyse how the wage distribution in Spain evolved between February and May 2020 in the wake of Covid-19. Among the findings: 

    • Payroll data managed by banks are an extremely useful source of information to detect, timely and accurately, changes in the distribution of wages.
    • In absence of the large public scheme activated soon after the beginning of the Covid-19 crisis, inequality would have increased dramatically.
    • The impact of the crisis on inequality is explained mostly by its effect on low-wage workers.
    • Pre-benefits wage inequality has increased significantly among foreign-born individuals and regions that have a heavy economic dependence on touristic activities.
    • Public transfers and unemployment insurance schemes were very effective at providing a safety net to the most affected segments of the population and at offsetting most of the increase in inequality.

    While it is challenging to assess the impact on inequality of fast-unfolding crises like the Covid-19 pandemic, this new method of tracking real-time inequality introduced here can help to rapidly evaluate and tailor appropriate policy responses. ​​​​

    • AGREEMENTS MUST BE KEPT? Residential Leases during Covid-19   

    AGREEMENTS MUST BE KEPT? Residential Leases during Covid-19
    David Genesove, Itai Ater, Eran Hoffmann, Yael Elster
    CEPR DP No. 15102 | July 2020

    The Covid-19 lockdown and associated economic impact have caused significant pressure on the rental market, and the ability for tenants to pay their landlords. While most renters have honoured contracts and paid their rent in full, there is a substantial minority who have not. How much was paid varies in clear ways with the household economic situation, contract provisions and the tenant-landlord relationship.

    These are the main findings of a new CEPR study by David Genesove and colleagues, which studies how a Covid-19 lockdown affected residential lease payments in Israel. Among the findings:

    • Survey data on 1511 Israeli renter households show nearly one in eight households not paying full rent during the lockdown. 
    • These households hold back, on average, a third of their contractually due rent. 
    • Financially fragile households with greater income cuts, and households with leases lacking provisions that effectively provide for damages upon non-payment pay a lower share of contract rent. 
    • So do households with more frequent encounters with their landlord, or longer tenure in the apartment. 
    • Bargaining and relational contracts theories help explain these results

    While we focus on Israel, difficulties in paying rent during the recent crisis have emerged in many countries and these findings are relevant elsewhere. 


    Joseph Stiglitz, Hamid Rashid          
    03 August 2020

    From Latin America’s lost decade in the 1980s to the more recent Greek crisis, there are plenty of painful reminders of what happens when countries cannot service their debts. Writing at Vox, Nobel Laureate Joseph Stiglitz, Chief Economist at the Roosevelt Institute and a former Senior Vice President and Chief Economist of the World Bank, and Hamid Rashid, Chief of Global Economic Monitoring at the United Nations Department of Economic and Social Affairs, argues that a global debt crisis today would likely push millions of people into unemployment and fuel instability and violence around the world, and proposes a multilateral sovereign debt buyback facility which could be managed by the IMF.


    Alexander Ahammer, Martin Halla, Mario Lackner         
    06 August 2020

    One additional mass gathering increased the cumulative number of Covid-19 deaths in affected US counties by 9%. The banning of mass gatherings, a comparably low-cost intervention, is a powerful policy tool in fighting the spread of infection. 

    This is a main finding of a new study by economists at the Johannes Kepler University Linz, which estimates the impact of indoor mass gatherings on Covid-19 mortality in US counties, exploiting data from top-flight basketball and ice hockey games.  


    Ethan Ilzetzki          
    05 August 2020

    Pupils in schools across the UK have lost up to 105 days of education due to school closures during the Covid-19 lockdown and a second wave of the pandemic, likely in the autumn, may disrupt education further. 

    Writing at Vox, Ethan Ilzetzki discusses the latest Centre for Macroeconomics survey, in which the panel predicted that the cost to UK economic growth in the will be minor to moderate. However, the panel was unanimous that school closures will increase inequality, with a large majority of the panel predicting a persistent increase in inequality. The panel also predicted harm to gender equality, with many predicting persistent increases in inequality along gender lines.

    RACE AND THE COVID-19 PANDEMIC: Persistent historical influences of racial segregation are exacerbating Covid-19 mortality rates in the United States

    Graziella Bertocchi, Arcangelo Dimico        
    29 July 2020

    Not only are Black Americans disproportionally affected by Covid-19, but they also started to succumb to it earlier than other groups. Such asymmetric effects can be traced back to racial segregation introduced by discriminatory lending practices in the 1930s.

    Covid-19 pandemic is having a disproportionate impact on African Americans, who are dying at a rate two to three times higher than their population share. A new study by Graziella Bertocchi and Arcangelo Dimico uses a detailed individual-level dataset from Cook County, Illinois, to explore the relationship between Covid-19 mortality and race.

    THE EFFECTIVENESS OF LOCKDOWNS: Learning from the Swedish experience 

    Benjamin Born, Alexander Dietrich, Gernot Müller           
    31 July 2020

    Sweden stands out from its European peers as the only country that did not impose a lockdown in response to the Covid-19 outbreak. A study by Benjamin Born and colleagues constructs a counterfactual lockdown scenario for Sweden lasting from March 18 to May 17. The results suggest the lockdown would have reduced the number of Covid-19 infections by a half and deaths by a third. 


    Jens Südekum, Joel Stiebale, Nicole Woessner          
    30 July 2020


    Robots boost the emergence of superstar firms within European manufacturing, thereby shifting the functional income distribution away from wages and towards profits. This superstar firm pattern is considerably stronger in manufacturing branches in which industrial robots have been on the rise. Technological change seems to be a key driver for the emergence of superstar firms.

    A new study by Jens Südekum and colleagues demonstrates that over the last few decades, there has been a reallocation of market shares in Europe towards highly productive and profitable firms, with notable implications for competition, market power, and the income distribution.


    Eric Hanushek, Lavinia Kinne, Philipp Lergetporer, Ludger Woessmann         
    02 August 2020

    Using data for two million students across 49 countries during 2000–2018, a study by economists at the ifo Center for the Economics of Education looks at levels of patience and risk-taking and its effect on student performance. 

    The results show a positive effect of patience and a negative effect of risk-taking can account for two-thirds of the cross-country variation in student achievement. Among migrant students, patience and risk-taking levels of the students’ countries of origin had remarkably similar effects on educational performance in the host country.


    Marco Le Moglie, Giuseppe Sorrenti          
    01 August 2020

    Writing at Vox, Marco Le Moglie and Giuseppe Sorrenti provide a characterisation of organised crime’s investment in Italy’s legal economy, a country historically plagued by the presence of criminal groups. 

    The results indicate that during periods of economic and social downturn, organised crime may capitalise on the weaknesses of the institutional response to the crisis, consolidating and possibly expanding, its role as an investor in the legal economy


    Paolo Pinotti           
    01 August 2020

    Writing at Vox, Paolo Pinotti summarises new evidence from studies on the causes and consequences of crime in Italy, focusing on recent improvements that address challenges related to the measurement of crime and to the identification of a clear effect of crime on economic outcomes.

    Taken together, these studies provide an overview of topics that are currently at the frontier of empirical crime research – namely organised crime, corruption, and financial crime. It is hard to understate the relevance of these issues from a social, economic, and policy perspective.


    Aniruddh Mohan, Akshay Thyagarajan, Nicholas Muller         
    31 July 2020

    The nexus of economic development and environmental impact is at the core of current policy debates. This is often captured by an ‘environmental Kuznets curve’, an inverted-U shaped relationship between income and pollution levels. 

    Writing at Vox, economists from Carnegie Mellon University argues that, in contrast to conventional approaches, sustainability analysis should focus on the monetary damages of pollution, rather than the physical tonnage of emissions. The study highlights a large divergence in the Kuznets curves based on these two approaches. In addition, it proposes a measure of GDP growth which adjusts for monetary pollution damages.


    Lubos Pastor, Blair Vorsatz       
    30 July 2020

    Active fund managers are widely believed to outperform during market downturns. A study by Lubos Pastor and Blair Vorsatz uses daily returns from United States active equity mutual funds to examine fund performance and investor behaviour in the midst of the Covid-19 crisis. 
    The results show that active equity mutual funds underperform a variety of passive benchmarks, contradicting the popular belief that active managers outperform in downturns. In addition, investors have favoured sustainable funds during the crisis, suggesting that sustainability is now viewed as a necessity rather than a luxury good.


    Leonardo Bursztyn, Ingar Haaland, Aakaash Rao, Chris Roth          
    30 July 2020

    People use justifications, such as the claim that immigrants cause crime, to excuse their anti-immigrant behaviour, even if they do not privately believe them. Prominent public figures such as populist politicians can thus generate waves of anti-minority behaviour by serving as suppliers of excuses.

    A study by Leonardo Bursztyn and colleagues uses two large-scale online experiments to show that when outright racism is stigmatised, people may need justifications for publicly expressing anti-minority views. 

    THE MICROECONOMICS OF CRYPTOCURRENCIES: Insights from a literature review

    Hanna Halaburda, Guillaume Haeringer, Neil Gandal, Joshua Gans       
    29 July 2020

    A study by Hanna Halaburda and colleagues focuses on the microeconomics of cryptocurrencies, specifically on their supply, demand, trading price, and the competition amongst different cryptocurrencies. It summarises the main findings in this literature over the past decade and establishes a base for future research.

    THE GLOBAL SANCTIONS DATA BASE: A new policy tool to assess the effectiveness of economic sanctions

    Gabriel Felbermayr, Aleksandra Kirilakha, Constantinos Syropoulos, Erdal Yalcin, Yoto Yotov          
    04 August 2020

    In recent years, economic sanctions have increasingly become ‘the tool of choice’ in responses to international political challenges related to geo-political conflicts. But are sanctions successful in achieving their purported objectives? And what are the economic costs of sanctions in a world that is increasingly interconnected with global value-chains and multinational enterprises?  

    Writing at Vox, Gabriel Felbermayr and colleagues introduce a new dataset of economic sanctions that covers all bilateral, multilateral, and plurilateral sanctions in the world from 1950 to 2016 that can be utilised to analyse sanctions policies.

    It is the largest database focusing on sanctions in force (i.e. threats are excluded). It distinguishes different types of sanctions, reports the directionality of sanctions and their coverage. The Global Sanctions Data Base (GSDB) also documents the extent to which sanctions have been successful and distinguishes between outcomes.


    Daniel Gallardo Albarrán, Robert Inklaar           
    31 July 2020

    Modern economic growth has improved the lives of millions in an unprecedented way, but its unequal progression across the globe has resulted in high income inequality. Most of the cross-country differences in income levels are typically attributed to differences in productivity rather than to physical or human capital accumulation. 

    Writing at Vox, Daniel Gallardo Albarrán and Robert Inklaar argues that this has not always been the case: physical capital accounted for a much larger fraction of income variation at the beginning of the 20th century. More generally, the results of the study call for a reevaluation of the long-term determinants of relative economic performance over time.

    INTEGRATION AND REFORMS: Close encounters of the European kind

    Nauro Campos, Vera Eichenauer, Jan-Egbert Sturm          
    03 August 2020

    Writing at Vox, ETH Zurich economists discuss new research on European integration, its relationship with reforms and economic growth. The authors finds that integration triggered product market, but neither labour nor financial market, reforms. The results also show that, to understand the effects of reforms on economic growth, sectoral differences are less important than country heterogeneity. 


    Charles Goodhart, Tatjana Schulze, Dimitri Tsomocos           
    04 August 2020

    A decade of near-zero, and even negative, interest rates in advanced economies has both encouraged the continued accumulation of debt and a search for yield in riskier assets, while at the same time eroding bank profitability in the retail business. 

    Writing at Vox, Charles Goodhart and colleagues discuss some of the palliative measures that central banks have taken to offset the erosion of bank profitability, and raises the question of whether, and how, the longer-term implications of the excessive accretion of debt will be handled.


    Philippe Andrade, Erwan Gautier, Eric Mengus           
    04 August 2020

    Households make consumption decisions based on the broad inflation regime that they expect, rather than with regards to the precise inflation forecast. A study by Eric Mengus and colleagues provides new evidence from France on how the inflation expectation channel operates in terms of consumer spending.


    Gianluca Violante interviewed by Tim Phillips, 31 July 2020

    Most high earners bounce back from recessions. But Gianluca Violante tells Tim Phillips that, for the last 50 years, it has been a different story for low earners. 

    HERD IMMUNITY: Who will refuse a vaccine?

    Linda Thunström         

    The scientific community has come together in an unprecedented effort to find a COVID-19 vaccine. However, the success of any vaccine depends on the share of the population that gets vaccinated, and in a middle-of-the-road scenario with central estimates of model parameters, a vaccine will benefit public health by saving many lives but nevertheless may fail to achieve herd immunity. Linda Thunström (University of Wyoming) talks to Tim Phillips about a recent Covid Economics paper reporting on a survey of American attitudes towards vaccination. The results of the survey suggest that 20% of the American population may refuse a COVID-19 vaccine.

    Linda Thunström's Paper can be found in Issue 35 of CEPR's Covid Economics Papers.