This week from CEPR: January 9th

Thursday, January 9, 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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    THE GLOBAL IMPACT OF BREXIT UNCERTAINTY   
    THE GLOBAL IMPACT OF BREXIT UNCERTAINTY 

    Tarek Hassan, Stephan Hollander, Laurence van Lent, Ahmed Tahoun     
    CEPR DP No. 14253 | 28 December

    The impact of Brexit-related uncertainty extends far beyond UK or even European firms: US and international firms most exposed to Brexit uncertainty have lost a substantial fraction of their market value and have also reduced hiring and investment. 

    This is a central finding of a new CEPR study by Tarek Hasan and colleagues, which measures the impact of Brexit on firms in the UK and around the world, identifying which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. Among the findings:   

    • International and UK firms overwhelmingly expect negative direct effects from Brexit. 
    • Most prominently, firms expect difficulties from regulatory divergence, reduced labour mobility, limited trade access and the costs of post-Brexit operational adjustments. 
    • This negative sentiment is recognised and priced in stock markets but has not yet significantly affected firm actions.
    • Ireland’s Brexit risk is even larger that the UK’s. 
    • ‘Brexit winners’ in the UK most often simply point out they are currently not much affected by the prospect of Brexit. 
    • Firm policies in the face of rising Brexit uncertainty shows consistently lower investment rates and reduced hiring. 

    The results of the study suggest that the greater rupture between the UK and the European Union, the larger these direct effects (including post-Brexit adjustment costs) will be. The authors conclude that when Brexit is enacted, the consequences for investments and employment may well be larger than those associated with Brexit uncertainty alone. 

    Figure 1: Mean BrexitRisk by Country

     


    • EXPOSURE TO SCHOOL SHOOTINGS HAS BIG EFFECTS ON MENTAL HEALTH OF LOCAL YOUTH: Evidence from use of antidepressants

    LOCAL EXPOSURE TO SCHOOL SHOOTINGS AND YOUTH ANTIDEPRESSANT USE
    Maya Rossin-Slater, Molly Schnell, Hannes Schwandt, Sam Trejo, Lindsey Uniat       
    CEPR DP No. 14238 | 22 December

    Local exposure to fatal school shootings increases youth antidepressant use by 21.4% in the following two years. This is one of the central findings of a new CEPR study by Hannes Schwandt and colleagues, which examines the effects of 44 school shootings on youth antidepressant use in the United States. Among the findings:   

    • In the two years following a fatal school shooting, the monthly number of antidepressant prescriptions written to individuals under age 20 is 21.4% higher in the shooting-exposed relative to the reference areas. 
    • These effects are smaller in areas with a higher density of mental health providers who focus on behavioural, rather than pharmacological, interventions.
    • The study finds no effects of non-fatal school shootings on youth antidepressant use. 
    • The results show no effects of fatal school shootings on antidepressant use among adults.

    While over 240,000 students in the United States experienced a school shooting in the last two decades, the impacts of these events on the mental health of surviving youth is clearly important. This study, the largest analysis of the impacts of school shootings on youth mental health to date, is critical both for informing cost-benefit analyses of policies aimed at reducing gun violence and for designing programmes to help mitigate the effects on survivors. 

    Figure 1: Effects of School Shootings on Youth Antidepressant Use 


    • GENDER PAY TRANSPARENCY LAW REDUCES WAGE DISCRIMINATION WITHIN FIRMS: Evidence from Denmark  

    DO FIRMS RESPOND TO GENDER PAY GAP TRANSPARENCY?
    Morten Bennedsen, Elena Simintzi, Margarita Tsoutsoura, Daniel Wolfenzon      
    CEPR DP No. 14237 | 22 December

    Wage transparency laws can reduce the gender pay gap by slowing wage growth for male employees and causing an increase in the hiring and promoting of women within firms. These are the central findings of a new CEPR study by Morten Bennedsen and colleagues, which investigates the effect of pay transparency on gender pay gap and firm outcomes.
     
    The study, which uses evidence from a 2006 legislation change in Denmark that required firms to provide gender disaggregated wage statistics, shows that after the law passed:

    • Wages of male employees grow 1.67% slower than wages of male employees in control firms. 
    • Wages of male employees grow 1.67% slower than wages of male employees in control firms. 
    • Male employees experience slower wage growth relative to female employees. 
    • Companies subject to the regulation are more likely to hire and promote more women. 
    • There is a reduction in firm productivity and in the overall wage bill, leaving firm profitability unchanged. 

    The results of the study indicate that firms with higher gender pay inequality close the gender gap more aggressively, perhaps due to the fact that transparency leads to an increase in accountability in these firms. 


    • UK LABOUR MARKET SHRINKING IN AREAS MOST AFFECTED BY BREXIT UNCERTAINTY   

    UNRAVELLING TRADE INTEGRATION: Local Labour Market Effects of the Brexit Vote

    Beata Javorcik, Benjamin Kett, Layla O'Kane, Katherine Stapleton       

    CEPR DP No. 14222 | 20 December

    A new CEPR study finds that areas in the UK that are more exposed to the threat of future tariffs on their exports to the European Union have decreased online hiring, relative to the regions that were less exposed, during the period since the referendum result. Among the findings: 

    • Potential future tariff exposure led to a 1.9% decrease in job postings. 
    • Both skilled and unskilled job adverts were affected, with unskilled job adverts experiencing a slightly greater relative decline.
    • This effect was distinct from the impact of exchange rate depreciation, uncertainty about future immigration policy and the importance of financial services in the region. 
    • The relative decline in online hiring in tariff-exposed regions occurred during periods of increased uncertainty and more Google searches for terms related to Brexit and trade policy. 

    The authors conclude that the threat of future trade barriers caused by the Brexit referendum has been an important factor in affecting the hiring decisions of UK firms. The evidence also indicates that a retreat from trade integration, as opposed to increased integration, appears to have negative consequences within local labour markets. 

    Figure 1: Monthly online job postings 

    Note: The vertical red dotted line identifies June 2016, the month of the Brexit referendum 


    • POLITICIANS DETERMINE BAILOUTS FOR BANKS TO MAXIMISE THEIR VOTE-SHARE: Evidence from Italy    

    TOO MANY VOTERS TO FAIL: Influencing and Political Bargaining for Bailouts

    Linda Marlene Schilling               

    CEPR DP No. 14243 | 24 December

    A new CEPR study by Linda Marlene Schilling provides a novel theory on the interaction between the political economy and corporate finance, to show that banks not only exploit but also cause bailouts when bank creditors are also voters in an upcoming election. 

    The results of the study show that after a bank failure, bank creditors hold the governing politician accountable by increasing their vote share depending on the granted bailout. Non-creditor voters, on the other hand, punish by lowering their vote-share since the bailout is financed via taxation. 

    The study shows that bank's capital structure acts as a tool to impact the electoral vote and thus the bailout by changing the relative group size of voters who favour as opposed to voters who object the bailout. The creditors' anticipation of high bailouts, in return, allows the bank to reduce funding costs today, thus maximising revenues.

    Figure 1: As debt financing increases, more creditors have a claim on the recovery value given default. The additional bargaining power, however, increases the bail-out by the threat of economic voting, and the total value to be recovered (including the bailout) increases. 



    BEWARE OF TECH BUBBLES: Lower long-term earnings of the dot-com bubble generation

    Johan Hombert, Adrien Matray | 05 January 2019

    High salaries and the opportunity to work with exciting new technologies attract many graduates to jobs in the tech sector, but their long-term earnings may end up being lower as new tech emerges, according to research by Johan Hombert and Adrien Matray. 

    Their research finds that high-skilled French workers who started their careers in the tech sector during the late 1990s dot-com boom ended up earning 7% less than workers who started careers outside ICT; the former's accumulated human capital may have depreciated faster. 


    CREDIT BOOMS AS A PREDICTOR OF FUTURE ASSET RETURNS

    Josh Davis, Alan Taylor  | 02 January 2020

    A new study by Alan Taylor and Josh Davis finds that credit booms tend systematically to predict poor returns in the near future for equities in absolute terms, and relative to bonds. An investor who had tilted their portfolio allocations based on a credit boom signal would have been able to improve portfolio performance. The results suggest that credit growth signals can be a useful input for a tactical asset allocation strategy, alongside such tried and tested signals as momentum and value.  


    BANKS AND GOVERNMENT BONDS: A love story

    Orkun Saka  | 06 January 2020

    European banks have been criticised for holding too much domestic government debt during the Eurozone crisis, intensifying the doom loop between sovereign and bank credit risks. Writing at Vox, Orkun Saka explores a 'good' reason for some banks holding sovereign debt: an informational advantage that particular banks have regarding sovereigns. This seems to have had a role in the fragmentation of European government bond markets.  


    TRADE LIBERALISATION INCREASES BOTH INCOMES AND INEQUALITY: Evidence from low- and middle-income countries

    Erhan Artuc, Guido Porto, Bob Rijkers  | 06 December 2020

    A study by World Bank economists Erhan Artuc and Bob Rijkers uses data from 54 low- and middle-income countries to show that in most cases, trade liberalisation increases both incomes and inequality. Their results show that most of these trade-offs resolve in favour of liberalisation; despite exacerbating income disparities, trade liberalisation creates overall social welfare gains. 


    SERVICES TRADE POLICIES AND ECONOMIC INTEGRATION: New evidence for developing countries

    Bernard Hoekman, Ben Shepherd | 03 January 2020

    Policies towards imports and exports of services are typically much more restrictive than tariffs on imports of goods, in particular in professional services and telecoms; developing countries tend to have higher services trade restrictions. 

    These are among the findings of a new study by Bernard Hoekman and Ben Shepherd, which analyses recently released regulatory policy data for 2016. The authors use machine learning methods to recreate to a high degree of accuracy the OECD’s Services Trade Restrictiveness Index to generate new estimates of services trade barriers for 23 developing countries. 


    LOW-SKILLED OCCUPATIONS BENEFIT CONSIDERABLY FROM WORKING IN MORE R&D-INTENSIVE FIRMS

    Philippe Aghion, Antonin Bergeaud, Richard Blundell, Rachel Griffith | 02 January 2020


     

    More R&D-intensive firms pay higher wages on average, and in particular workers in certain low-skilled occupations benefit considerably from working in more R&D-intensive firms.

    These are the findings of a new study by Philippe Aghion and colleagues, which highlights one channel through which firm features feed through into the wages of workers in low-skilled occupations, namely, the interplay between a firm's innovativeness and the complementarity between the (soft) skills of workers in low-skilled occupations and the firm's other assets. 


    DISCRIMINATION AGAINST JOB APPLICANTS OF NORTH AFRICAN ORIGIN: Evidence from the French public and private sectors

    Pierre Cahuc, Stéphane Carcillo, Andreea Minea, Marie-Anne Valfort  | 03 January 2020

    Correspondence studies are often used to detect discrimination on the part of recruiters, but they do not inform us about decisions at the interview and job-offer stages. 

    Investigating a correspondence study in France, Marie-Anne Valfort and colleagues initially found that individuals of North African origin are strongly discriminated against in the French private sector, while they are treated equally in the public sector. 

    Yet survey results indicate that both public and private sector employers express discriminatory preferences and beliefs against North African candidates, and wages of young unskilled North African males are lower than those of their French compatriots in both sectors. These findings suggest that correspondence studies should be complemented with other investigation methods.


    ARE LABOUR MARKETS POLARISING IN WESTERN EUROPE? 

    Daniel Oesch, Giorgio Piccitto | 04 January 2020

    The consensus view in economics is that labour markets are polarising as jobs are created in high-skilled and low-skilled occupations but disappear in mid-skilled ones. 

    A study by Daniel Oesch and Giorgio Piccitto demonstrates empirical evidence against the polarisation theory in Western Europe. Their results show that between 1992 and 2015, job growth in Germany, Spain, Sweden, and the UK was strongest in top-end occupations and, except in the UK, weakest in low-end occupations. 


    DEVELOPING A POLICY REGIME TO SUPPORT THE FREE FLOW OF DATA: A proposal by the T20 Task Force on Trade, Investment and Globalization

    Fukunari Kimura  | 07 January 2020

    While national governments are already implementing various economic policies related to data flows in the real world, there is not yet a consensus on how economists should approach the topic. 

    Writing at Vox, Fukunari Kimura outlines a framework recently proposed by the T20 Task Force on Trade, Investment, and Globalization that classifies data flow policy into five categories and allows the appropriateness of policy from the viewpoint of economics to be discussed. Kimura argues that as a result, it becomes possible to achieve policy harmonisation in some areas and to identify others where harmonisation cannot easily be achieved. 


    TRADE FROM SPACE: Shipping networks and the global implications of local shocks

    Inga Heiland, Andreas Moxnes, Karen-Helene Ulltveit-Moe, Yuan Zi | 07 January 2020

    The expansion of the Panama Canal that was completed in 2016 increased world real income by $20 billion, finds a study by Karen-Helene Ulltveit-Moe and colleagues. They use new evidence from satellite data to examine the impact of this improvement to one link of the world's container shipping network on worldwide trade. The results also point to how shipping satellite data can be used within the field of international trade.