This week from CEPR: February 28

Thursday, February 28, 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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    • WAGE BARGAINING AND LOCAL VARIATION: How Italian provinces could boost earnings and employment by following the flexible example of their German counterparts

    CEPR DP No. 13545: Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces
    Tito Boeri, Andrea Ichino, Enrico Moretti and Johanna Posch
    22 February 2019

    If Italy were to adopt Germany’s system of local wage bargaining, aggregate employment and earnings would increase by 11.04% and 7.45%, respectively. That is the conclusion of a new CEPR study, which compares the local and aggregate effects of collective bargaining in the two countries.

    Italy and Germany have similar geographical differences in firm productivity – with the North more productive than the South in the former; and the West more productive than the East in the latter. But the two countries have adopted different models of wage bargaining: Italy sets wages based on nationwide contracts that allow for limited local wage adjustments; while Germany has moved toward a more flexible system that allows for local bargaining.

    The new research finds that, as a consequence, Italy exhibits limited geographical wage differences in nominal terms and almost no relationship between local productivity and local nominal wages, while Germany has larger geographical wage differences and a tighter link between local wages and local productivity.

    While the Italian system is successful at reducing nominal wage inequality, it also creates costly geographical imbalances. In Italy, low productivity provinces have significantly higher non-employment rates than high productivity provinces, because employers cannot lower wages, while in Germany the relationship between non-employment and productivity is significantly weaker.

    In Italy, the relationship between real wages and productivity is negative, with lower real wages in the North compared with the South, since the latter has low housing costs but similar nominal wages. Thus, conditional on having a job, Italian workers have higher purchasing power in the South, but the probability of having a job is higher in the North.

    The researchers conclude that the Italian system has significant costs in terms of forgone aggregate earnings and employment because it generates a situation where workers queue for jobs in the South and remain unemployed while waiting. The findings are relevant for several other European countries with systems similar to Italy's.

    Figure 8: Real wages


    • BRAVE BOYS AND PLAY-IT-SAFE GIRLS: Experimental evidence of gender differences in willingness to guess

    CEPR DP No. 13541: Brave Boys and Play-it-Safe Girls: Gender Differences in Willingness to Guess in a Large Scale Natural Field Experiment
    Nagore Iriberri and Pedro Rey-Biel
    21 February 2019

    A new CEPR study finds gender differences in willingness to guess using approximately 10,000 multiple-choice mathematics tests. For half of the questions in these tests, both wrong answers and omitted questions are scored 0; while for the other half, wrong answers are scored 0 but omitted questions are scored +1.

    The research finds that female participants leave significantly more omitted questions than male participants when there is a reward for omitted questions. This gender difference, which is stronger among high ability and older participants, hurts female performance as measured by the final score and position in the ranking.

    In a subsequent survey, female participants showed lower levels of confidence and higher risk aversion, which may explain this differential behaviour. When both are considered, risk aversion is the main factor explaining the gender differential in the willingness to guess. A scoring rule that is gender-neutral must use non-differential scoring between wrong answers and omitted questions.


    • TACKLING BIODIVERSITY LOSS: The need for a perspective from economic and environmental history

    CEPR DP No. 13544:  Economic Development and Biodiversity
    Thomas van Goethem and Jan Luiten Van Zanden
    22 February 2019

    The loss of biodiversity is one of the biggest threats to the sustainable future of humankind, and the process is largely driven by economic and demographic changes. That’s why it needs to be studied more systematically by economic and environmental historians, as only they have the expertise to unlock the historical sources documenting the historical evolution of species and can analyse the drivers behind the decline of recent years.

    That is the core message of a new CEPR study. The researchers note that the models used to simulate these processes in the past – such as the Globio3 model – and theoretical notions about an environmental Kuznets curve have not been tested against the historical record. We really do not know what happened to biodiversity in the historical period, and what was driving it, although there are of course various hypotheses to direct research. 

    The kind of research that is needed cannot focus on only one country or region in the world, the study concludes: International cooperation between environmental historians and historical ecologists is required to address these issues in a systematic and global way.


    Figure 1. National diversity index, 1900-2015, based on species abundance of 58 species (mammals, birds, fish) (1900 =1)

     



    BREXIT AND THE IRISH BORDER ISSUE: The current impasse and a possible way out

    Fabrizio Marongiu Buonaiuti, Filippo Vergara Caffarelli
    20 February 2019

    The border between the Republic of Ireland and Northern Ireland has become a central issue in the Brexit negotiations between the UK and the EU. In a new study, Fabrizio Marongiu Buonaiuti and Filippo Vergara Caffarelli examine the proposals put forward by the two negotiating parties, and suggest two remedies that could make the European Commission’s initial ‘backstop’ proposal – whereby Northern Ireland would remain in the European customs union while the rest of the UK would be excluded from it – acceptable to the UK.

     

    THE MISSING ENGLISH MIDDLE CLASS: Evidence from 60 million death and probate records

    Neil Cummins
    24 February 2019

    The twentieth century’s ‘Great Equalisation’ of wealth in England stalled in mid-century, according to CEPR research by Neil Cummins. His study, which analyses a newly constructed dataset of 60 million English death and probate records from 1892 to 2016, shows that the proportion of people with any significant wealth at death rose from 10% in the 1890s to 40% by 1950 and has since stagnated up to 2016.

    Despite the large declines in the wealth share of the top 1%, from 73% to 20%, the median English person died with almost nothing throughout. All changes in inequality after 1950 involve a reshuffling of wealth within the top 30%. This left the nation’s social and political fabric vulnerable to the protest vote of many in 2016 to leave the EU, following the austerity induced by the financial crisis.

     

    CENTRAL BANK TONE MOVES ASSET PRICES: Evidence from the prevalence of negative words at European Central Bank press conferences

    Maik Schmeling, Christian Wagner
    22 February 2019

    Changes in the tone of central bank communications have a significant effect on asset prices, according to CEPR research by Maik Schmeling and Christian Wagner. Tone captures how the central bank frames economic fundamentals and its monetary policy. When tone becomes more positive, share prices increase and more so for shares with high systematic risk, whereas credit spreads and volatility risk premia decrease.
     
    The study focuses on the European Central Bank (ECB), which was the first central bank to hold press conferences after policy meetings and thus offers the longest history for the analysis, with 209 press conferences between 1999 and 2017. The researchers first show that ECB tone captures how the ECB frames its policy decisions and its assessment of economic fundamentals. Next, they document a strong link between ECB tone and equity prices such that a more positive tone is associated with increasing stock prices and vice versa.
     
    The researchers quantify tone by identifying negative words and evaluate each statement’s tone by assessing the prevalence of negative words. First, they verify that tone indeed captures how the ECB frames macroeconomic fundamentals, by showing that phrases such as ‘global imbalances’, ‘disorderly correction’, ‘excessive deficit’ and discussions about fundamentals that, for example, ‘remain weak’ are among the most important drivers of tone. Then, they explore how asset prices respond to changes in tone revealed at ECB press conferences.

     

    THE EURO: A tale of 20 years and the priorities going forward

    Marco Buti, Maya Jollès, Matteo Salto
    19 February 2019

    The global financial crisis exposed weaknesses in the architecture of Europe’s economic and monetary union (EMU). While reforms have been made, the job is not yet complete. In particular, there is a need to rebuild trust and overcome the creditors/debtors divide. These are the central messages of Marco Buti and colleagues at DG Economic and Financial Affairs, writing at Vox on the euro’s next frontier. 

    The launch of EMU in 1999 was a considerable challenge and a historic milestone. The first decade of its existence firmly established the euro as a credible construction. But from 2008 onwards, the economic and financial crisis in Europe laid bare the weaknesses of its initial construct. Some assumptions behind EMU’s institutional setting had to be reconsidered and, in the following years, considerable efforts were made to strengthen EMU.

    To bridge competing visions on the way forward, mutual trust has to be rebuilt. To move to a genuine EMU, the economists argue that we need to restore what John Rawls called the ‘veil of ignorance’ under the consideration that the creditors (and debtors) of today are not necessarily the creditors (and debtors) of tomorrow. This will require policy authorities to develop a vision of the common interest and a low discount rate in the decision-making. The upcoming campaign for the European Parliament election is an opportunity for a mature debate on the euro’s next frontier.

     

    MONETARY POLICY COMMUNICATIONS: New US evidence of their effects on households’ inflation expectations 

    Olivier Coibion, Yuriy Gorodnichenko, Michael Weber
    22 February 2019

    The communications policies of central banks could become significantly more powerful if they could reach the general public. But this will require new approaches to breaking through households’ ‘veil of inattention’ when it comes to inflation and monetary policy.

    That is the conclusion of a new CEPR study by Olivier Coibion, Yuriy Gorodnichenko and Michael Weber. Their research uses large-scale randomised controlled trial of US households to study how different forms of communication influence people’s inflation expectations. Reading the Federal Open Market Committee statement has about the same average effect on expectations as being told about the Federal Reserve’s inflation target. Reading a news article about the same statement cuts the effect by half. 

    Since the 1990s, central banks have become dramatically more open and transparent, but these new communications strategies have not succeeded in reaching the general public. The new results demonstrate that when households are presented with the types of information central banks commonly release, they revise their views much as central bankers would expect them to.

     

    SHORT-TIME WORK: Evidence from 20 countries

    Reamonn Lydon, Thomas Y. Mathä, Stephen Millard
    19 February 2019


     

    Providing subsidies to firms to reduce the number of hours worked by each employee instead of reducing the number of workers acts as a fiscal stabiliser in Europe, reducing the fall in employment brought on by a recession. That is the conclusion of research on short-time work schemes in Europe by Reamonn Lydon, Thomas Mathä and Stephen Millard.

    Between 2010 and 2013, short-time work schemes were used by 7% of firms, employing 9% of workers in the region. The new study uses data from the European Central Bank to show that firms used the schemes to offset negative shocks and retain high-productivity workers. High firing costs and wage rigidity increase the use of short-time work, which in turn reduces the fall in employment brought on by a recession.

     

    FIRMS’ OFFSHORING DECISIONS: Evidence from Denmark of the role of regulations and immigration networks

    Simone Moriconi, Giovanni Peri, Dario Pozzoli
    24 February 2019

    The offshoring decisions of firms depend on the size of entry costs in target countries. But the institutional and policy determinants of these costs have received little empirical attention.

    New research by Simone Moriconi, Giovanni Peri and Dario Pozzoli analyses data on 2,000 Danish manufacturing firms to explore how costs of entry affect offshoring decisions. Higher levels of labour market rigidity, credit risk and corruption all lower the probability of offshoring to a given country, while immigrant networks within the firm increase the likelihood of offshoring to their home countries.


     

    REAL EXCHANGE RATES FOR ECONOMIC DEVELOPMENT

    Martin Guzman, José Antonio Ocampo, Joseph Stiglitz
    21 February 2019

    Both currency intervention and capital account regulations can be used effectively to maintain competitive exchange rates and dampen effects of boom-bust cycles in external financing and terms of trade, thereby promoting growth and stability. That is the conclusion of a new study by Martin Guzman, José Antonio Ocampo and Joseph Stiglitz.

    This research argues that there are theoretical foundations for policies that guarantee competitive and stable real exchange rates. When there are constraints on the available set of policy instruments, the complementary use of competitive exchange rates with export taxes for traditional export sectors would result in effectively multiple real exchange rates.

     

    REFORM REVERSAL IN FORMER TRANSITION ECONOMIES OF THE EUROPEAN UNION: New evidence

    István Székely, Melanie Ward-Warmedinger
    23 February 2019

    Social norms have not always been strong enough to outweigh the opportunistic behaviour of politicians seeking short-term windfall gains by reversing policy reforms in former transition economies of the European Union. External anchors, while helping to protect reforms, cannot replace domestic ones. These are the conclusions of a study by István Székely and Melanie Ward-Warmedinger.

    While there is a large body of research on the political economy of reforms, surprisingly little is known about reform reversal. Based on an investigation of reform reversals in former transition countries, the new research argues that once reforms are introduced, self-enforcing social norms and social learning should catch up with the new reality to create domestic anchors. But social norms have not always been strong enough.


     

    THE PUBLIC AND PRIVATE MARGINAL PRODUCT OF CAPITAL

    Matt Lowe, Chris Papageorgiou, Fidel Pérez Sebastián
    20 February 2019

    Contractual connections between banks can pose significant liquidity risks to banks during a crisis. What’s more, safety net policies, including ‘lender of last resort’, may lead banks to be less cautious in their management of liquidity risk. 

     These are among the findings of new analysis of the Great Depression in the United States by Charles Calomiris and colleagues. They describe how important contractual contagion occurred at that time, which significantly worsened the failure risk of banks by increasing liquidity risk. The findings call for regulatory policies that take account of potential contractual contagion, and that require minimum prudential capital and liquidity buffers to take liquidity risks into account.


     

    DEATHS FROM INFECTIOUS DISEASE IN THE UNITED STATES 1900-1948: Evidence of racial inequality

    James J Feigenbaum, Christopher Muller, Elizabeth Wrigley-Field
    18 February 2019

    Southern US cities had the highest mortality rates from infectious diseases in the first half of the twentieth century. This was primarily because they had greater shares of black residents, who suffered extreme risks from infectious disease in cities in all regions. That is the central finding of new research by James Feigenbaum, Christopher Muller and Elizabeth Wrigley-Field.

    The mortality rate of non-Hispanic white Americans in midlife has been rising since the beginning of the twenty-first century, in contrast to the national decline in deaths from infectious disease witnessed during the previous century. The new study reviews the fall in infectious mortality in US cities across regions and racial groups.


     

    PRIVATE HOUSEHOLDS AS SOURCES OF INVENTION AND INNOVATION: US evidence

    Javier Miranda, Nikolas Zolas
    18 February 2019

    Private households have often been disregarded as sources of invention and innovation, but evidence has begun to emerge of this sector’s importance. New research by US Census Bureau economists Javier Miranda and Nikolas Zolas examines data from the US Patent and Trademark Office and the US Census Bureau to describe patented household innovations.

    The study estimates that in between 2000 and 2011, patented household innovations generated a revenue flow of $1.7 billion, and calls for further efforts to understand the economic role of household innovations. US household inventors are predominantly male, white, and US-born.

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    LEADERSHIP AS A DRIVING FORCE OF HISTORY: Evidence from the Forty-Eighters in the American Civil War

    Christian Dippel, Stephan Heblich
    19 February 2019

    The expelled leaders of the 1848-49 revolutions in German lands – the Forty-Eighters – had a notable impact on locals’ beliefs and Union Army enlistment in the US towns where they settled. That is the central finding of research by Christian Dippel and Stephan Heblich, which provides evidence of how individuals can have a powerful impact on social norms.

    The importance of leadership in effecting social change is well recorded in history, but the specific role that leaders play in coordinating behaviours is less understood. This study uses the case of the Forty-Eighters to analyse the impact individuals with ‘inherent’ leadership ability have in their networks. The Forty-Eighters went on to play a substantial role in increasing Union Army enlistments in their new home towns.


     

     

    COMPACT CITIES: Evidence on the economic effects of density

    Gabriel Ahlfeldt, Elisabetta Pietrostefani
    22 February 2019

    A new study by Gabriel Ahlfeldt and Elisabetta Pietrostefani provides an overview of the effects of urban density on wages, productivity, innovation, rent, vehicle miles travelled, pollution reduction, average speed and other economic outcomes. 

    Most countries pursue policies that implicitly or explicitly aim at promoting ‘compact urban form’, but so far these policies have not been well-grounded in evidence. The researchers summarise the state of knowledge on the economic effects of density on various economic outcomes. It concludes that densification policies may lead to aggregate welfare gains, but there may be regressive distributional consequences.


     

    GENDER BIAS IN MATHEMATICS

    Paola Giuliano interviewed by Tim Phillips, 22 February 2019

    Why do girls do less well than boys in school math tests? Paola Giuliano of UCLA explains to Tim Phillips that, for many girls, the problem starts at home.