This week from CEPR: December 5th

Thursday, December 5, 2019

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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    Tarun Ramadorai, Federica Zeni    
    CEPR DP No. 14155 | 29 November

    Firms' carbon abatement actions depend greatly on their beliefs about climate regulation. What’s more, both informational frictions and reputational concerns can amplify responses to climate regulation, increasing its effectiveness.
    These are among the conclusions of a new CEPR study by Tarun Ramadorai and Federica Zai, who use data from the Carbon Disclosure project to measure firms' beliefs about climate regulation, their plans for future abatement, and their current actions on mitigating carbon emissions. Among the findings: 

    • In the five years prior to the Paris announcement, firms’ actions on carbon abatement and their beliefs about climate regulation both gradually reduced.
    • But firms’ actions and beliefs both adjusted sharply around the announcement of the Paris climate change agreement in 2016, with the size of these responses depending on whether or not firms pre-announce plans for carbon emissions reduction.

    • LONG-TERM ECONOMIC BENEFITS OF MASS EDUCATION IN THE GLOBAL SOUTH

    THE GREAT CONVERGENCE. SKILL ACCUMULATION AND MASS EDUCATION IN AFRICA AND ASIA, 1870-2010
    Ewout Frankema, Marlous Van Waijenburg       
    CEPR DP No. 14150 | 25 November

    A new CEPR study by Ewout Frankema and Marlous Van Waijenburg explores the long-term relationship between skill accumulation and mass education in 50 economies in Asia and Africa. The analysis uncovers three major stylised facts:  

    • In the late 19th century, skill premiums in Africa and Asia were very high relative to the levels that had dominated in West European societies since the late Middle Ages
    • In this period, skill premiums were on average about twice as high in Africa than in Asia.
    • Most significantly, the findings reveal a dramatic and universal ‘free-fall’ in wage premiums for all occupations in the long 20th century, and finds that on the eve of the 21st century, skill premiums in most African and Asian countries had largely converged with levels that had been common in Western Europe for centuries.

    The forces of globalisation, de-skilling, and changes in (colonial) labour market policies had rather diverse and ambiguous effects on the skill premium trends. But the authors argue that there is only one factor that is powerful enough to explain the universality and structural nature of the decline: the rapid growth in school attainment rates between 1870-2010, which raised the total supply of educated workers that could specialise in obtaining specific sets of skills for which local demand rose everywhere, albeit with varied intensity.

    While such a 'great convergence' in skill premiums is not a sufficient condition for Schumpeterian growth by itself, the growing availability of affordable skills is a necessary condition. The findings, therefore, shed a more optimistic light on the long-term economic gains of mass education in the global South than standard growth research has hitherto done.

    Figure 2: Skill-premium for carpenters, c. 1900 (in %) 


    • PUTTING WORKERS ON CORPORATE BOARDS BOOSTS FIRMS’ INVESTMENT: Evidence from Germany   

    LABOUR IN THE BOARDROOM
    Simon Jäger     
    CEPR DP No. 14151 | 26 November

    A new CEPR study by Simon Jäger analyses the effects of a mandate allocating a third of corporate board seats to workers (shared governance), using a reform in Germany that abruptly abolished this mandate for certain firms incorporated after August 1994 but locked it in for the older cohorts. Among the results:  

    • In sharp contrast to the conventional view – that increasing labour's power reduces owners' capital investment – granting formal control rights to workers raises capital formation. 
    • The capital stock, the capital-labour ratio, and the capital share all increase.
    • Shared governance does not raise wage premia or rent sharing. 
    • It lowers outsourcing, while moderately shifting employment to skilled labour. 
    • Shared governance has no clear effect on profitability, leverage or costs of debt. 

    Overall, the evidence is consistent with richer models of industrial relations in which shared governance raises capital by permitting workers to bargain over investment or by institutionalising communication and repeated interactions between labour and capital.

    Figure 1: One-Third Worker Representation on Supervisory Board



    FISCAL POLICY CANNOT SAVE THE EUROPEAN CENTRAL BANK

    Daniel Gros, Angela Capolongo        
    03 December 2019

    The European Central Bank (ECB) is running out of options for addressing its twin problems of low inflation and negative interest rates, leading some, including outgoing President, Mario Draghi, to call on fiscal policy measures to be used. 

    CEPS researchers Daniel Gros and Angela Capolongo argue that a fiscal expansion would actually be ineffective in raising interest rates or inflation for any length of time. Not only would the effect be temporary, but the scale of expansion needed to effect any substantial change would be unfeasible.  


    FROM LOCAL TO GLOBAL: A unified theory of public basic research 

    Hans Gersbach, Ulrich Schetter, Samuel Schmassmann         
    28 November 2019

    Global investments in basic research are too low, too heavily concentrated in industrialised countries, and not sufficiently targeted towards high-tech industries. 

    These are among the conclusions of Hans Gersbach and colleagues, who argue that greater international coordination of basic research could improve welfare through higher aggregate investments, and a more efficient distribution of basic research investments across countries and industries.


    THE EFFECTS OF POPULATION AGEING: More automation, reduction in GDP per capita and lower labour income share 

    Henrique Basso, Juan F Jimeno        
    29 November 2019

    A new study by Henrique Basso and Juan Jimeno argues that due to a trade-off between innovation and automation, lower fertility and population ageing are likely to generate more automation, but also lead to a reduction in GDP per capita growth and the labour income share.  


    WHY STUDENTS TAKE UP SMOKING AND DRINKING: Analysing risky health behaviour in the United States 

    Tiziano Arduini, Alberto Bisin, Onur Ozgur, Eleonora Patacchini         
    27 November 2019

    Studying smoking and alcohol use in a school environment in the United States, a new study by Eleonora Patacchini and colleagues finds that addiction and peer effects are more than twice as important as the effect of individual preferences in shaping risky behaviour, and that students take into account the amount of time they have left in the school system.


    CHILE’S INSURGENCY AND THE END OF NEOLIBERALISM

    Sebastian Edwards          
    30 November 2019

    In a few decades, Chile experienced dramatic economic growth and the fastest reduction of inequality in the region. Yet, many Chilean citizens feel that inequality has greatly increased. Such feelings of 'malestar' triggered the violent social unrest of October 2019. 

    Writing at Vox, Sebastian Edwards explains this seeming paradox by differentiating ‘vertical’ (income) inequality from ‘horizontal’ (social) inequality. He argues that the neoliberalism that created Chile’s economic growth is no longer effective and that the country may be headed towards adopting a welfare state model.


    THE AGGREGATE AND DISTRIBUTIONAL EFFECTS OF FINANCIAL GLOBALISATION: Insights from IMF economists

    Davide Furceri, Prakash Loungani, Jonathan D. Ostry          
    02 December 2019


     

    Free trade has contributed to a ‘great convergence’ of emerging market countries toward incomes in industrialised nations in recent decades; it is less clear whether free mobility of capital across national boundaries has conferred similar benefits. 

    Writing at Vox, Jonathan Ostry and International Monetary Fund (IMF) colleagues present evidence suggesting that the gains in average incomes have been – at best – small, while increases in income inequality and the decline in the labour share of income have been significant. The authors argue that financial globalisation thus poses far more difficult equity-efficiency trade-offs than free trade and should be at the centre of debates about how to make globalisation inclusive.


    THE CHINA SHOCK AND EMPLOYMENT IN PORTUGUESE FIRMS: The role of labour market regulations

    Lee Branstetter, Brian Kovak, Jackie Mauro, Ana Venâncio        
    01 December 2019

    China’s rise as an export powerhouse has affected labour markets across the Western world, but the effects appear to differ dramatically across countries. Research by Lee Branstetter and colleagues reveals that Portuguese firms faced considerable pressure from rising Chinese imports in their key European export markets. The impact of this pressure was profoundly shaped by Portugal’s evolving labour market rules and practices.

    In the late 1990s, worker protections were so strong and rigid that firm adjustment to Chinese competition primarily took the form of firm exit. In the 2000s, the increasing prevalence of temporary contracts provided firms with another margin of adjustment as competition with Chinese imports intensified – and employees working under these contracts bore the brunt of adjustment in the years preceding the global financial crisis. 


    AN ARGUMENT FOR OCCUPATIONAL HUBS IN THE UNITED STATES: Improved worker welfare and revitalisation of small cities 

    Esteban Rossi-Hansberg, Pierre-Daniel Sarte, Felipe Schwartzman         
    29 November 2019

    The increasing concentration of high-wage, cognitive non-routine occupations in larger cities in the United States, such as doctors, lawyers and researchers, has not always benefited workers in other occupations.

    Writing at Vox, Esteban Rossi-Hansberg and colleagues suggest that a policy of city- and occupation-specific transfers could improve welfare for all workers and also allow the revitalisation of smaller cities. The policy would lead to every occupation having its own affordable and enjoyable hub.


    LACK OF AVAILABLE FINANCE HAS CRIPPLED FIRMS AND REDUCED BUSINESS DYNAMISM IN TURKEY 

    Ufuk Akcigit, Yusuf Emre Akgündüz, Seyit Mümin Cilasun, Elif Ozcan-Tok, Fatih Yılmaz        
    27 November 2019

    A new study by Ufuk Akcigit and colleagues argues that Turkish firms have faced higher interest rates or have been unable to find enough credit post-2012. Consequently their ability to put pressure on market leaders has been limited, causing a decline in business dynamism.  


    STABILISING STABLECOINS: A pragmatic regulatory approach

    Luciano Somoza, Tammaro Terracciano         
    03 December 2019

    Policy-makers are concerned about the stability of private digital currencies and protecting the consumers who use them. Writing at Vox, Luciano Somoza and Tammaro Terracciano propose locking stablecoins into an ETF-like structure with restrictions on basket composition. Stablecoin providers would then be functionally similar to ETF sponsors, and stablecoins would become a new vehicle for traditional fiat currencies. 

    This column is a lead commentary in the VoxEU Debate ‘The Future of Digital Money'


    TAKEAWAYS FROM THE DG ECFIN’S ANNUAL RESEARCH CONFERENCE 2019 

    Marco Buti, Philipp Jaeger, Karl Pichelmann         
    03 December 2019

    European Commission economists Marco Buti, Philipp Jaeger and Karl Pichelmann summarise the proceedings of DG ECFIN’s Annual Research Conference 2019, which focused on some of the most pertinent challenges economic policy-makers face today: (i) bringing productivity to people and places; (ii) making markets work for all, not just the few; (iii) future-proofing fiscal policies when going green and digital; and (iv) safeguarding Europe’s role in the global economy.

    SYSTEMIC CONSEQUENCES OF OUTSOURCING TO THE CLOUD

    Jon Danielsson, Robert Macrae          
    02 December 2019

    Financial institutions are increasingly outsourcing information technology to the cloud, motivated by efficiency, security, and cost. 

    Writing at Vox, Jon Danielsson and Robert Macrae argue that the consequence is likely to be short- and medium-term stability at the cost of the increased likelihood of catastrophic systemic events. Cloud providers are systemically important and should be regulated as such.


    WHEN JUDGES BEHAVE LIKE POLITICIANS: Electoral sentencing cycles in North Carolina 

    David Abrams, Roberto Galbiati, Emeric Henry, Arnaud Philippe          
    28 November 2019

    In North Carolina, judges are elected and forced to rotate between districts; this leads them to behave like politicians in pandering to what they perceive as electors’ preferences, which can result in unequal treatment of otherwise similar cases. 

    These are among the findings of a new study by David Abrams and colleagues, who argue that in determining the optimal system to appoint judges, the prospect that elections may cause unequal treatment of otherwise similar cases should be taken into account. 



    HOW THE MOBILE INTERNET CHANGED POLITICS

    Sergei Guriev interviewed by Tim Phillips, 22 November 2019

    The mobile internet, promises to give us access to information anywhere, 24 hours a day. So how has it influenced trust in governments, politics, and politicians? Sergei Guriev tells Tim Phillips about how, all over the world, 3G has reduced trust in government and aided the rise of populism. 



    THE ECONOMIC IMPACT OF FINANCIAL INTEGRATION

    Sebnem Kalemli-Özcan 28 November 2019

    Sebnem Kalemli-Özcan explains how financial integration, an important part of ongoing globalisation processes, leads to efficient allocation of capital and promotes investment and growth.

    One of the key topics in Sebnem Kalemli-Özcan’s research is financial integration — the links between financial markets through cross-border capital flows or foreign participation in domestic financial markets. Kalemli-Özcan explains how financial integration, an important part of ongoing globalization processes, leads to efficient allocation of capital and promotes investment and growth. “If you look at emerging markets, a lot of their growth is financed with capital flows,” says the economist. “So financial integration helps developing countries tremendously.” Still, capital flows are fickle, particularly for emerging markets. This is one among several reasons for the ongoing debate around the costs and benefits of financial integration.


    THE CHALLENGES FACING CHINA

    Joe Stiglitz 27 November 2019

    Nobel laureate Joe Stiglitz offers his thoughts on economic growth in Africa, inequality in China, and the other key economic questions of our time.

    The Nobel laureate economist discusses how an activist government is needed to tackle problems like climate change. Stiglitz also gives his thoughts on economic growth in Africa, inequality in China, and the other key economic questions of our time.

    This video originally appeared on the INET website