This week from CEPR: August 27
Thursday, August 27, 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
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INSIGHTS FROM THE UNITED KINGDOM’S COVID-19 FURLOUGH SCHEME
FURLOUGHING
Abigail Adams, Christopher Rauh, Teodora Boneva, Marta Golin
CEPR DP No. 15194 August 2020
Over 9 million jobs were furloughed in the UK during the Coronavirus pandemic. Women were significantly more likely to be furloughed, male workers routinely flouted furlough rules, and women were less likely to have their salary topped up beyond the 80% subsidy paid for by the government.
These are the among the findings of a new CEPR study by Abigail Adams and colleagues, which documents which UK workers were most likely to be furloughed and analyses variation in the terms on which they furloughed. Among the findings:
- Women were significantly more likely to be furloughed. Inequality in care responsibilities played a key role: mothers were 10 percentage points more likely than fathers to initiate the decision to be furloughed (as opposed to it being fully or mostly the employer's decision) but there is no such gender gap amongst childless workers.
- The prohibition of working whilst furloughed was routinely ignored, especially by men who can do a large proportion of their work tasks from home.
- Women were less likely to have their salary topped up beyond the 80% subsidy paid for by the government.
- Furloughed workers without employer-provided sick pay have a lower willingness to pay to return to work, as do those in sales and food preparation occupations.
- Compared to non-furloughed employees, furloughed workers are more pessimistic about keeping their job in the short to medium run and are more likely to be actively searching for a new job even when controlling for detailed job characteristics.
These results have important implications for the design of short-time work schemes and the strategy for effectively reopening the economy.
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BORDER CONTROLS LIMITED THE SPREAD OF COVID-19 ACROSS EUROPEAN REGIONS
COVID-19 ACROSS EUROPEAN REGIONS: The role of Border Controls
Matthias Eckardt, Kalle Kappner, Nikolaus Wolf
CEPR DP No. 15178 | August 2020
Attempts to constrain the spread of Covid-19 included temporary travel restrictions and border controls within the Schengen area. While such restrictions clearly involve costs, their benefits have been disputed. New evidence suggests that border controls had a significant effect in limiting the spread of the pandemic.
These are the findings of a new CEPR study by Matthias Eckardt, Kalle Kappner and Nikolaus Wolf, which studies the role of border controls in limiting the spread of Covid-19 across European regions. The study uses a new set of daily regional data of confirmed Covid-19 cases from the respective statistical agencies of 18 Western European countries, running from 2nd March to 26th April, to test for treatment effects of border controls. Among the findings:
- Border controls were associated with a 25% reduction in daily cases.
- Border controls mattered only for regions with a substantial number of crossborder commuters prior to the crisis.
- The temporal introduction of border controls was certainly costly, but made an important contribution to contain the spread of Covid-19.
- Better policy coordination at the European level could have generated these benefits at lower economic (and political) costs, for example if based on a closer monitoring of cross-border commuting flows.
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ALCOHOL PURCHASES ARE STRONGLY AFFECTED BY LOCAL ENVIRONMENT: Evidence from the United States
PERSISTENCE IN ALCOHOL CONSUMPTION: Evidence from migrants
Marit Hinnosaar, Elaine M. Liu
CEPR DP No. 15196 | August 2020
How much does regulation and other location-specific factors explain regional differences in alcohol consumption? A new CEPR study by Marit Hinnosaar and Elaine Liu analyses changes in alcohol consumption when households move from one state to another in the United States.
The study finds that about two thirds of the regional differences in alcohol consumption can be attributed to differences in regulation and other location-specific effects, as opposed to household specific characteristics and past experiences. Movers adjust their alcohol purchases towards the destination average as soon as they move. These results suggest that alcohol availability accounts for a large share of the location-specific effect.
MANAGING VOLATILE CAPITAL FLOWS IN EMERGING AND FRONTIER MARKETS IN TIMES OF COVID: New research from IMF economistsReinout De Bock, Dimitris Drakopoulos, Rohit Goel, CFA, Lucyna Gornicka, Evan Papageorgiou, Patrick Schneider, Can Sever |
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The Covid-19 pandemic caused an unprecedented sharp reversal of portfolio flows in emerging and frontier markets, triggering concerns about financial stability and consequently, strong policy responses. New research by IMF economists shows that changes in global financial conditions tend to influence portfolio flows more during surges and reversals than in normal times. Furthermore, stronger domestic fundamentals do not necessarily lead to surges in portfolio flows but help mitigate outflows. Hence, the weaker growth outlook for emerging markets due to Covid-19 will worsen local currency flows, while global financial conditions will affect hard currency flows. |
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COVID-19 AND THE STOCK MARKET: Long-term valuationsDavide Delle Monache, Ivan Petrella, Fabrizio Venditti |
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The fast rebound of US stock prices following the Covid-19 shock has reignited discussions over ‘frothiness’ in stock markets. Writing at Vox, Ivan Petrella and colleagues examine how asset prices are affected by drastic shocks to the real economy, and what factors drive this relationship. The results suggest that, from a longer-term perspective, high asset valuations may reflect more than just investor optimism. The greater expected income, in comparison to government bonds, could be the key as to why investors are continuing to trust in the stock market, irrespective of the turbulent wider economic climate. |
REFORM CHATTER AND DEMOCRACYRabah Arezki, Simeon Djankov, Ha Nguyen, Ivan Yotzov |
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It is often argued that democracy is the least imperfect form of government mainly because of the existence of a ‘self-correcting’ mechanism stemming from voice and accountability embedded in democracies. Using text analysis from about a billion newspaper articles in 28 languages, Rabah Arezki and colleagues show that the intensity of reform chatter increases during economic downturns and that the increase is more significant in democracies. During downturns, democracies appear to benefit disproportionately from changing popular attitudes translating into actual reforms. |
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EXPLAINING THE PERSISTENTLY HIGH RATE OF SUICIDE IN LITHUANIA AND THE BALTIC STATESMariarosaria Comunale |
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Lithuania has very high suicide rates, especially among its male population. A new study by Mariarosaria Comunale sheds light on the factors with the strongest links to suicide rates in the region, which include GDP growth, demographics, alcohol consumption, psychological factors and climate temperature. For Lithuania specifically, other macroeconomic variables (especially linked to the labour market) may also matter. An active labour market might mitigate the adverse effect of unemployment on health. The percentage of rural population is not a key robust factor. |
AFTER POLARISATION: Stable consensus on European mutual assistance is possibleRoel Beetsma, Brian Burgoon, Francesco Nicoli, Anniek de Ruijter, Frank Vandenbroucke |
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Building a large and durable consensus for mutual assistance policies in the European Union is challenging. Even in times of crisis, member states express different preferences, and policies must reckon with democratic politics. A study by Roel Beetsma and colleagues uses new survey findings to suggest that among European countries, there is a durable basis for support for policies of mutual assistance such the Covid-19 induced Recovery Fund. The results find that a majority of packages are supported in all countries, although individual design features have significant effects on public approval. Importantly, it is possible to design packages such that they obtain majority support across all sampled countries, a key condition for success with policies of this kind. |
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THE BENEFITS OF HOME VISITING PROGRAMMES FOR LEFT-BEHIND CHILDREN: Evidence from ChinaJames Heckman, Bei Liu, Mai Lu, Jin Zhou |
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Research has shown that home visiting programmes are effective and relatively low cost compared to other early childhood programmes. A study by James Heckman and colleagues evaluates the impacts of one such programme targeted at left-behind children in rural China, based on the influential Jamaica Reach Up and Learn programme. The authors find that the programme substantially improves child language, cognitive, fine motor, and socioemotional skills, with 90% of these gains come from boosting child skills, and the rest coming from improving the utilisation of existing skills. Growth profiles reveal that China REACH is on track to reach or exceed the growth profiles of the highly successful Jamaica Reach Up programme. |
TRANSATLANTIC TECHNOLOGIES: Why did the ICT revolution fail to boost European productivity growth?Robert J. Gordon, Hassan Sayed |
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The benefits of the ‘ICT revolution’ are readily seen in labour productivity statistics for the United States, but a similar acceleration of productivity growth was not seen in Western Europe. Writing at Vox, Robert Gordon and Hassan Sayed argue that most of the 1995-2005 US productivity growth revival was driven by ICT-intensive industries producing market services and computer hardware. In contrast, the EU10 experienced a 1995-2005 growth slowdown due to a paucity of ICT investment, a failure to capture the efficiency benefits of ICT, and performance shortfalls in specific industries. After 2005 both the US and the EU10 suffered a growth slowdown, indicating that the benefits of the ICT revolution were temporary rather than providing a new permanent era of faster productivity growth. |
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COVID-19 IN EMERGING MARKETS: Escaping the monetary policy procyclicality trapGaston Gelos, Umang Rawat, Hanqing Ye |
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A new study by IMF economists finds strong evidence that emerging markets and developing countries have increasingly been able to conduct countercyclical monetary policy to respond to adverse shocks. This is particularly the case for the current Covid-19 shock where most countries have cut rates. While the initial inflation level is an important determinant of the space to further cut rates, institutional factors (most notably higher central bank transparency) can enhance the ability to conduct countercyclical monetary policy. |
ROBOTS SHOULD BE TAXED, FOR A WHILEJoão Guerreiro, Sérgio Rebelo, Pedro Teles |
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How should public policy respond to the impact of automation on the demand for labour? A study by Pedro Teles and colleagues argues that it is optimal to tax robots in the short run but not in the long run in order to protect current routine workers who cannot acquire non-routine skills, while incentivising those in the future to acquire non-routine skills. |
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THE ECONOMICS OF SKYSCRAPERS: Oversized vanity projects or economic rationale?Gabriel Ahlfeldt, Jason M. Barr |
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Are huge buildings and skyscrapers built to satisfy oversized egos rather than serving economic purposes? Should policymakers to control vertical growth? Writing at Vox, Gabriel Ahlfeldt and Jason M. Barr argue that economic fundamentals are strong predictors of building heights. Height competition can lead to extremely tall buildings that aim at pre-empting rivals, but these are the exception rather than the rule. In regulating heights, policymakers should focus on balancing the positive and negative externalities associated with tall buildings. The vast majority of tall buildings – even if they appear out of scale given contemporary perceptions – have a solid economic case. If the history of height is any guide, the future direction for their economics is only upwards. |
SUSTAINABILITY PREFERENCES UNDER STRESS: Mutual fund flows during Covid-19Robin Döttling, Sehoon Kim |
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A new study by Robin Döttling and Sehoon Kim explores how retail investors’ preferences for socially responsible investments respond to market distress, as revealed within mutual fund flows during the Covid-19 pandemic. The results suggest that funds with the highest sustainability ratings experience sharper declines in flows. This suggests that there tends to be a shift away from sustainability among retail investors’ preferences in the face of an economic shock, highlighting a source of fragility in the increasingly popular socially responsible investment market. |
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ONLINE MARKET INTEGRATION AND EUROPEAN POLICYNestor Duch-Brown, Lukasz Grzybowski, André Romahn, Frank Verboven |
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Does the internet make international markets more integrated? And if not, what can we expect from recent EU policies that promote the Digital Single Market by banning restrictive distribution agreements such as geo-blocking? Writing at Vox, Frank Verboven and colleagues shed light on these questions using detailed data for consumer electronics markets. The evidence indicates that online distribution channels are not more integrated than traditional bricks-and-mortar channels. Preventing geo-blocking practices would promote integration in the form of reduced international price differences, but this would mainly have distributional effects from consumers in low-income countries to those to high-income countries. |
HOW INTERNATIONAL TRADE DISCIPLINES THE INTERNAL CAPITAL MARKET AND REDUCES THE CONGLOMERATE DISCOUNTSebastian Doerr, Dalia Marin, Davide Suverato, Thierry Verdier |
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Conglomerate firms are seen to be more productive than single-product firms, but this appears to be at odds with findings in the finance literature that multi-segment firms trade at a discount and have lower Tobin’s Q than single-product firms, because internal capital markets misallocate funds across divisions within firms. Writing at Vox, Dalia Marin and colleagues develop a novel theory of misallocation within firms (rather than between firms) due to managers' empire building. Introducing an internal capital market into a two-factor model of multi-segment firms, the authors show that more open markets impose discipline on competition for capital within firms, which explains why exporters exhibit a lower conglomerate discount than non-exporters. Testing the model with data on US companies, the authors establish that import competition reduces mis-allocation within firms. A one standard deviation increase in Chinese imports lowers the conglomerate discount by 32% and over-reporting of costs by up to 15%. |
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THE PSYCHOLOGY AND ECONOMICS OF EXCLUSIONAlex Imas, Kristóf Madarász |
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Protectionism, nationalism, left- and right-wing populism are on the rise all over the world. Understanding the underlying psychology driving such attitudes may be key for economics and political science. This study by Alex Imas and Kristóf Madarász tests the premise that the value a person attaches to consuming an object or possessing an attribute increases in others' unmet excess desire for it, terming this behaviour as mimetic dominance seeking. The results document a powerful psychological force shaping exchange. This force impedes trade and generates a motive for social exclusion. On the basis of two experiments designed to provide direct evidence of this behaviour, it finds that mimetic dominance leads to a reluctance to trade and a direct preference for objects that become scarcer, with the latter generating a motive for exclusion. |
REWIRING SUPPLY CHAIN NETWORKS: Evidence from JapanHiromitsu Goto, Yuji Fujita, Wataru Souma |
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A study by Yuji Fujita and colleagues investigates the Japanese supply chain network at the firm level and discusses its dynamics, resilience, and robustness. It shows that the network can be characterised by a ‘walnut’ structure, with an intricately connected centre surrounded by upstream and downstream components. Despite the maturity of the Japanese economy, the network is actively changing, with fast-growing firms becoming more connected and slow-growing firms moving to the periphery. Fully understanding this structure will be crucial in making supply chain networks resilient to pandemics in the future. |
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VAT REDUCTION AS UNCONVENTIONAL FISCAL POLICY IN GERMANY: Fast but heterogeneous pass-through in the fuel marketFelix Montag, Alina Sagimuldina, Monika Schnitzer |
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To combat the consequences of the Covid-19 pandemic, the German government unveiled an unprecedented stimulus package on 3 June which, among other policies, includes a temporary reduction of value-added tax rates between July and December 2020. The aim of this policy is to temporarily lower prices and stimulate consumption through higher inflation expectation. A new study by Monika Schnitzer and economists from LMU Munich presents the first estimates of the pass-through rate for a major sector of the economy. It shows that for retail fuel, pass-through was fast, substantial, but incomplete, with pass-through rates depending on the competiveness of the relevant market. This has implications for successful unconventional fiscal policy: while high pass-through is a necessary condition for unconventional fiscal policy to work, targeting this policy to competitive markets could significantly increase its cost-effectiveness. |
OPTIMAL PATENT POLICY FOR PHARMACEUTICALS: Balancing innovation and access to new drugsTanja Saxell, Tuomas Takalo, Olena Izhak |
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There is a fundamental trade-off between incentives to develop new drugs and access to cheaper medicines. How should patent rights be designed in the pharmaceutical industry to optimally balance this trade-off? Writing at Vox, Tanja Saxell and colleagues suggest that longer patent terms are an inefficient way of promoting the development of new drugs since they also increase incentives for challenging patents. Government policies should make patents shorter-lived, but broader in scope. |
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A NEW EXPLANATION FOR WAGE STAGNATION
Liwa Rachel Ngai interviewed by Tim Phillips, 21 August 2020
Low-skilled workers are concentrated in sectors with fast productivity growth, so why isn't their pay rising? Rachel Ngai tells Tim Phillips that one explanation is in how low-skilled workers are reallocated between different sectors.
A GREEN COVID RECOVERY: Getting the prices right
Estelle Cantillon
As governments start to consider the recovery from Covid-19, Estelle Cantillon, Université libre de Bruxelles, explains how achieving green goals can go hand in hand with rebuilding economies. Some sectors heavily affected by the pandemic, such as transport, tourism and energy, were already heading towards or overdue for structural change anyway, so this is an opportunity to accelerate that move forward. Encouraging this green recovery is not only about budget and spending it is also about revenue, and measures such as putting a firm price on carbon and making government help conditional can be used as leverage in sectors that have previously been reluctant to become greener.