This week from CEPR: January 20

Thursday, January 20, 2022

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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    FUELING ORGANIZED CRIME: The Mexican War on Drugs and Oil Thefts
    Giacomo Battiston, Gianmarco Daniele, Marco Le moglie, Paolo Pinotti
    CEPR DP No. 16914 | January 2022

    A new CEPR study by Giacomo Battiston, Gianmarco Daniele, Marco Le moglie and Paolo Pinotti finds that the War on Drugs launched by the Mexican President Felipe Calderón in 2007 pushed drug cartels into a new illegal activity – large-scale oil thefts – achieved by tapping the underground pipelines of Pemex, the state-owned petroleum company. Cartels increased operations in municipalities with oil pipelines, contributing to a wider spread of criminal activity across the country. While this expansion did not result in an increase in homicides in these areas, the entry of drug cartels has caused a decline in schooling among under-15s, impacting socio-economic development. Among the findings: 

    • Oil thefts started to emerge shortly after the War on Drugs started, and grew exponentially over the following decade. The number of taps increased from a few hundred per year in the period before 2007 to around four thousand in 2014, and 15 thousand by 2018, with the value of stolen oil ranging between 1-2 US$ billion per year.
    • This escalation was associated with numerous explosions of tapped pipelines as well as gasoline shortages across the country, making oil taps a major national problem. 
    • Municipalities that the presidential candidate's party marginally won at the local elections in 2007-2009 exhibit a larger increase in illegal oil taps over the following years, compared to municipalities in which the presidential candidate's party marginally lost the elections. 
    • Recent decades witnessed a growing fragmentation of criminal groups. Younger and smaller cartels, who still have lower profit margins from drug-trafficking, had certain comparative advantage in other criminal sectors, such as large-scale oil thefts.
    • After 2007, cartel presence increased relatively more in areas with pipelines compared to neighbouring municipalities without pipelines, driven entirely by challengers in the drug market entering new municipalities where they face no competition from other cartels. 
    • The specialisation of challengers into different criminal sectors may have attenuated competitive pressures in drug-trafficking and, consequently, reduced violent confrontations between cartels. Supported by the fact that a greater presence of cartels in pipeline municipalities after 2007 does not impact local homicide rates.   
    • At the same time, the entry of drug cartels brings a decline in schooling for children aged less than 15 years. This is an outcome that typically responds very quickly to changes in socio-economic conditions, including the presence of criminal groups.

    The research suggests that targeted government crackdowns may spill over not only to other geographical areas but also to other criminal sectors, and even initiate a new criminal business that did not exist previously. It also shows that the expansion of drug cartels into new geographical areas does not necessarily translate into higher violence.

    Figure: The Mexican War on Drugs, homicides, and illegal oil taps 


    • POOR, FEMALE STUDENTS FACE GREATEST BARRIERS TO SUCCESS: Evidence from Australia 

    GENDER, INCOME, AND NUMERACY TEST SCORES
    Jaai Parasnis, Molly Paterson, Michelle Rendall CEPR DP No. 16895 | January 2022

    Gaps in educational achievement between children have significant and long-lasting consequences for several aspects of an individual’s social and economic outcomes over their lifetime. Gender gaps in numeracy open up early (8-9 years old) and rather than closing over the school years, increase to (14 – 15 years old). Household income has an independent effect on numeracy scores, but more worryingly, it interacts with gender, leading to a double disadvantage for girls from lower-income households.

    These are the main findings of a new CEPR study by Jaai Parasnis, Molly Paterson and Michelle Rendall, which uses evidence from Australia to show the interrelationship between socioeconomic gaps based on early-life household income, and the gender gap in numeracy. Among the findings: 

    • Between ages 8-15, boys have a distinct advantage in numeracy scores over girls, which widens over time. 
    • By age 15, poorer female students are doubly disadvantaged. This disadvantage does not arise because of differences in socioeconomic status between boys and girls but because the effect of a lower socioeconomic background on test scores is significant only for girls.  
    • Mother's education and labour force status play an important role in the emergence of gender gaps, at both ends (top and bottom) of the income distribution.  
    • Early life circumstances continue to impact student's achievement well into adolescence and these exacerbate gender gaps, thus demonstrating the importance of targeted early interventions to address gaps in key skills acquisition for the modern economy. 

    The research suggests that early interventions are likely to have the greatest impact, as by ages 14-15, inequalities are already manifesting between students. It is doubly important to focus on poorer, female students, as they are most at risk of being left behind.


    • RAISING THE MINIMUM WAGE IMPROVES WELFARE BUT COULD LEAD TO SIGNFICANT JOB LOSSES: Evidence from Germany     

    OPTIMAL MINIMUM WAGES
    Gabriel Ahlfeldt, Duncan Roth, Tobias Seidel
    CEPR DP16913 | January 2022

    The European Commission recommends an adequate minimum wage of 60% of the median wage. Yet more ambitious proposals are being considered across Europe to increase the minimum wage to exceed 70% of the median wage, in a bid to reduce wage inequality. 

    A new CEPR study by Gabriel Ahlfeldt, Duncan Roth and Tobias Seidel uses evidence from Germany to explore which minimum wage level maximises employment or welfare. The authors caution how such ambitious minimum wage policies may achieve a reduction in wage inequality, yet will likely cause significant job loss. Among the findings: 

    • While employment effects remain small up until about 50% of the national mean wage, they build up at an increasing rate at higher levels. 
    • The German minimum wage, set at 48% of the national mean wage, has increased aggregate worker welfare by about 2.1% at the cost or reducing employment by about 0.3%.
    • The welfare-maximising federal minimum wage, at 60% of the national mean wage, would increase aggregate worker welfare by 4%, but reduce employment by 5.6%.
    • An employment-maximising regional wage, set at 50% of the regional mean wage, would achieve a similar aggregate welfare effect and increase employment by 1.1%. 
    • The desirability of any minimum wage will depend on the considered relative level and the social welfare function.

    The research suggests that ambitious minimum wages are implemented in small steps, under careful evaluation of short-run employment effects so that potential tipping points can be detected in time. 

    Figure: Minimum wage bite and change in 10th pct. regional wages

    Notes: Note: Unit of observation is 4,421 municipality groups. The 10th percentile wage refers to the 10th percentile in the distribution of individuals within a workplace municipality, re-weighted to the residence using commuting flows. Wage and employment data based on the universe of full-time workers from the BeH. 



    REVISING THE EUROPEAN FISCAL FRAMEWORK, PART 1: Rules

    Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni, Charles-Henri Weymuller             
    14 January 2022

    Writing at Vox, Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni and Charles-Henri Weymuller present a proposal to strengthen the European fiscal framework based on two elements: a revision of the fiscal rules, and a plan to create a European Debt Agency to absorb the debt accumulated during the pandemic. The authors propose setting a ceiling on the growth rate of primary spending, to be revised over three-year intervals, targeting debt reduction over a ten-year horizon.

     

    REVISING THE EUROPEAN FISCAL FRAMEWORK, PART 2: Debt management

    Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni, Charles-Henri Weymuller                
    15 January 2022

    In part 2 their proposal to strengthen the European fiscal framework, authors Leonardo D'Amico, Francesco Giavazzi, Veronica Guerrieri, Guido Lorenzoni and Charles-Henri Weymuller focus on the debt management aspect of their proposal to strengthen the European fiscal framework. They argue for moving a portion of national debts under the umbrella of a European Debt Management Agency, with the aim of reducing debt costs for the whole Union and helping the operations of the ECB in debt markets. 


    WORKING FROM HOME HAS SIGNIFICANTLY IMPACTED THE CORPORATE REAL ESTATE MARKET: Evidence from France  

    Antonin Bergeaud, Jean Benoit Eymeoud, Thomas Garcia, Dorian Henricot               
    18 January 2022

    A study by Antonin Bergeaud, Jean Benoit Eymeoud, Thomas Garcia and Dorian Henricot shows how an increase in remote working since the pandemic has significantly impacted the French corporate real estate market. The research finds that in regions more exposed to telework, the pandemic prompted higher vacancy rates, less construction, and lower prices. In the short run, the drop in corporate real estate prices and associated uncertainty may constrain corporate financing capacity through the collateral channel. Reduced office-space demand also creates imbalances on the supply-side that the market will need to absorb. Indications are that the shift to teleworking will endure.


    POST-CORONA BALANCED BUDGET FISCAL STIMULUS: The case for shifting taxes onto land

    Michael Kumhof, Nicolaus Tideman, Michael Hudson, Charles Goodhart              
    08 January 2022

    Writing at Vox, Michael Kumhof, Nicolaus Tideman, Michael Hudson and Charles Goodhart propose a tax reform that shifts taxes away from productive labour and capital, where they reduce incentives to work and save, and onto land, where they do not distort any such incentives

    Land’s share in economies’ nonfinancial assets equals between 40% and 60%, and in the US currently equals over 50%. This constitutes a very large base for a non-distortionary tax. The research suggests that a 5-percentage point or larger increase in the tax rate on the value of US land, excluding buildings and equipment situated on the land, balanced by decreases in the tax rates on incomes from labour and from buildings and equipment (and in the limit by their complete elimination), would increase output by 15% to 25%.


    CHINA’S PATH TO BECOMING A TECHNOLOGICAL INNOVATION POWERHOUSE: Innovation versus imitation

    Michael König, Zheng (Michael) Song, Kjetil Storesletten, Fabrizio Zilibotti                
    14 January 2022

    China is aiming to become a technological innovation powerhouse by 2050, with Premier Li Keqiang recently announcing an increase in R&D investments by 7% for the next five years – but greater R&D investment is no guarantee of success. Writing at Vox, Michael König, Zheng (Michael) Song, Kjetil Storesletten and Fabrizio Zilibotti examine the effects of R&D investments by Chinese firms on aggregate productivity and growth to show that:

    • Despite pervasive distortions in the allocation of labour and capital, innovation plays an important role in the growth process of China
    • The productivity of innovation could be substantially enhanced by reducing distortions in the Chinese economy
    • Further stimulating R&D expenditure is neither necessary nor sufficient to sustain high growth. There is even a risk of too much of a good thing. Improving institutions and making sure that the more productive firms do R&D (e.g. by alleviating credit constraints) is no less important.

    COMBINING ENVIRONMENTAL AND FISCAL SUSTAINABILITY: A new climate facility, an expenditure rule, and an independent fiscal agency

    Luis Garicano             
    14 January 2022


     

    The EU’s current fiscal framework has failed to fully deliver on both its goals: ensuring long-term discipline and facilitating a countercyclical fiscal stance. Writing at Vox, Luis Garicano MEP argues that the political difficulties of agreeing on a comprehensive Stability and Growth Pact reform can be side-stepped by allowing the Pact to remain in place while attracting countries into a parallel system. 

    The author proposes the establishment of a new European Climate Investment Facility to provide grants and loans to fight climate change until 2050, when the Union must reach net zero emissions, and an independent European Fiscal Agency to assess the good standing of member states to access this new facility.


    THE CLIMATE IMPACT OF THE ACADEMIC JOB MARKET – TIME FOR A RETHINK?

    Alberto Prati, Olivier Chanel, Morgan Raux              
    12 January 2022

    Each year, the ‘international job market for economists’ involves over 1,000 junior candidates and several hundred recruiters from all over the world meeting for short pre-screening interviews at annual congresses in Europe and in the US, thus generating a momentous and avoidable global hypermobility. Writing at Vox, Alberto Prati, Olivier Chanel and Morgan Raux argue that it is time to reassess this unsustainable recruitment system and estimates the carbon footprint of alternative systems. 


    MINIMUM WAGES OR PAYROLL TAXES COULD HARM THE ONLINE GIG ECONOMY

    Christopher Stanton, Catherine Thomas                 
    15 January 2022

    Writing at Vox, Christopher Stanton and Catherine Thomas explore the effects of counterfactual policies on worker and employer surplus. They finds evidence of significant bid tailoring by workers depending on their application order and shows that employers are highly sensitive to wage bids received on past job postings. Ultimately, it shows that traditional labour market regulations, such as minimum wages or payroll taxes, are likely to harm both the demand and supply side in the online gig economy.



    TIME USE AND GENDER IN AFRICA: The changing nature of work for women

    L Ngai interviewed by Tim Phillips, 18 January 2022

    As an economy develops, more women take jobs outside the home. To what extent is this change happening in Africa, what factors slow this transformation down, and what could encourage it?
    Read more about this research and download the free DP:
    Dinkelman, T and Ngai, L. 2021. 'Time Use and Gender in Africa in Times of Structural Transformation'. CEPR