This week from CEPR: July 09

Thursday, July 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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    • New Discussion Papers


    • WOMEN’S ABSENCE FROM WORK FOLLOWING THE ARRIVAL OF THEIR FIRST CHILD HAS LONG-RUN NEGATIVE WAGE IMPLICATIONS

    WORKPLACE PRESENTEEISM, JOB SUBSTITUTABILITY AND GENDER INEQUALITY
    Ghazala Y. Azmat, Lena Hensvik, Olof Rosenqvist       
    CEPR DP No. 14982 | July 2020 

    Following the arrival of the first child, women's absence rates from work soar and become less predictable due to the greater frequency of their own sickness and the need to care for sick children. This increased absence in the workplace hurts women's wages, not only indirectly and gradually, through a slower accumulation of human capital, but also immediately, through a direct negative effect on productivity in unique jobs (i.e. jobs with low substitutability). 

    • These are among the findings of a new CEPR study by Lena Hensvik and colleagues, which examines the effects of workplace presenteeism, job substitutability and gender inequality. Among the findings:  
    • Unlike parental leave and part-time employment, which allow the employer to anticipate the absence of the worker, temporary work absence, often due to own sickness or caring for sick children, is unpredictable. 
    • Temporary unpredictable absence is particularly harmful for both workers and firms in jobs (or job-firms) where there is a scarcity of close substitutes at the workplace.
    • Women's likelihood of holding jobs with low substitutability decreases substantially relative to men's after the arrival of the first child.
    • This gap persists over time, with important long-run wage implications.

    The study highlights that the parenthood wage penalty for women could be reduced by organising work in such a way that more employees have tasks that, at least in the short run, can be performed satisfactorily by other employees in the workplace. In this way, firms can help reduce gender inequality in the workplace.


    • INCREASED AUTOMATION IN MANUFACTURING FIRMS LEADS TO AN OVERALL DECLINE IN EMPLOYMENT AND WAGES: Firm-Level Evidence from France   

    COMPETING WITH ROBOTS: Firm-Level Evidence from France
    Daron Acemoglu, Claire Lelarge, Pascual Restrepo 
    CEPR DP No. 14971 | July 2020

    Manufacturing firms that adopt robots reduce their labour share and share of production workers and increase their productivity, but also expand their operations and employment. Yet, this is more than offset by significant declines in their competitors' employment. Overall, even though firms adopting robots expand their employment, the market-level implications of robot adoption are negative.

    These are the central findings of a new CEPR study by Daron Acemoglu, Claire Lelarge, Pascual Restrepo, who use data from French manufacturing firms between 2010-2015, to study the firm-level implications of robot adoption. Among the findings: 

    • Out of 55,390 firms in the sample, 598 adopted robots between 2010 and 2015, but these firms account for 20% of manufacturing employment and value added. 
    • Firms adopting robots experience significant declines in labour share and the share of production workers in employment, and increases in value added and productivity. 
    • Automation substitutes capital for tasks previously performed by labour, reducing the labour share of value added and increasing value added per worker in the process.
    • Firms adopting robots expand their overall employment. However, this expansion comes at the expense of their competitors (as automation reduces their relative costs). 
    • Firm-level effects do not correspond to the overall impact of automation because firms that adopt such technologies reduce their costs and expand at the expense of competitors.

    Overall, the study finds that the impact of robot adoption on industry employment is negative. The impact of robots on overall labour share is also greater than their firm-level effects because robot adopters are larger and grow faster than their competitors. While the higher productivity from automation tends to increase labour demand, its displacement effect may outweigh this positive impact and may lead to an overall decline in employment and wages.


    • GLOBALISATION AND NATIONALISM: Retrospect and Prospect 

    GLOBALISATION AND NATIONALISM: Retrospect and Prospect
    Maurice Obstfeld    
    CEPR DP No. 14990 | July 2020

    The post-war Bretton Woods system John Maynard Keynes helped to create evolved from views based on ‘national self-sufficiency’ to a balanced middle ground between market forces and governments' desires for domestic economic stability. The subsequent gradual erosion of that balance in favour of the market has helped produce discontent over globalisation and more nationalism in politics. 

    This is the central argument of a new CEPR paper by Maurice Obstfeld, who explores how recent events have highlighted areas of conflict between economic integration with the outside world and the demands of domestic electorates. Historically, the tradeoffs have always become sharper in periods of crisis, such as the present. After reviewing the U-shaped progress of globalisation since the nineteenth century, this paper reconsiders John Maynard Keynes's views on "national self-sufficiency" in the early 1930s. Among the findings: 

    • Nationalism’s rise (evident in countries such as the US, UK, India and more) connects inseparably to globalisation, if for no other reason than globalization’s capacity to confront a country’s residents with the outside world through trade, immigration, and media. 
    • The current trend, however, endangers a post-war structure of international economic linkages and institutions whose architects were convinced both that nationalistic policies helped bring on global depression and war and that global economic cooperation could promote prosperity and peace.
    • Causes are familiar: stagnant median wage growth coupled with growing inequalities, including between workers at different skill or education levels and between thriving urban regions and smaller towns; deindustrialization and an attendant loss of higher-paying middle-skill jobs; in many cases, corruption; and sharper cultural divides, sometimes linked to immigration, but not really separable from disorienting economic shifts and dislocation.
    • Among voters embracing nationalist politicians, a sense of national decline and expropriation often prevails, with ‘the nation’ typically defined in fairly narrow terms that may evoke nostalgia for a mythical past.
    • Regional economic decline has reinforced voters’ migration toward populist-nationalist parties, driven by past de-industrialization, high unemployment, lower incomes, and lower education levels. Uneven impacts and recoveries from the financial crisis deepen the divide between metropolitan and more sparsely populated areas, heightening voter resentment in the latter.
    • The US retreat from its traditional championship of a non-discriminatory and rule-based trading order is especially significant, in view of the key global convening and coordination role that the US has played up to now, and which it now seems prepared to abandon. But as Europe reacts to US actions, to its own internal dynamics, and to other external events such as China’s drive to expand its global influence, it, too, will play a big role in the future of globalisation.

    Enhanced multilateral cooperation in key areas offers the hope of supporting globalisation while better meeting voters' aspirations. Despite daunting political obstacles to global cooperation these days, collective action challenges in areas like climate, cybersecurity, and health - alongside economic policy - are only becoming more pressing over time.



    THE RISKS TO A RAPID RECOVERY: Views from top UK economists

    Ethan Ilzetzki        
    06 July 2020

    The UK economy will recover to its pre-pandemic trend within five years or less, no worse than past UK recessions. 
    This is a central conclusion of the latest report from the Centre for

    Macroeconomics survey, which reveals that despite the UK economy suffering its worst recession in centuries, with national income declining and unemployment rising at unprecedented rates, the panel is optimistic of a relatively fast-paced recovery. 

    Panellists emphasised that these predictions depend on the government effectively containing the spread of the virus and not reverting to austerity policies following the pandemic. The panel was split on the biggest risks to the pace of recovery, with firms’ productive capacity, scarring effects of unemployment, and a slow demand recovery cited as prominent concerns.


    NEWS MEDIA SOWED DISTRUST IN SCIENTIFIC EXPERTS DURING THE PANDEMIC: Evidence from the United States 

    Jean-Pierre Dube, Andrey Simonov, Szymon Sacher, Shirsho Biswas        
    06 July 2020

    Televised news networks in the United States have offered strikingly different coverage of the Covid-19 pandemic, the exposure risks, and the benefits of social distancing measures recommended by health experts. Channels including CNN and MSNBC have broadcast dire warnings about the spread of disease throughout the early months of the pandemic, other channels, including Fox News have repeatedly downplayed the risks, often with accusations of ‘weaponising fear’. 

    Writing at Vox, Jean-Pierre Dube and colleagues devises an empirical strategy to test for a causal effect of news viewership on compliance with social distancing. The study finds a large effect of local Fox News viewership on local compliance, with a persuasion rate of up to 26%. These findings present a worrisome aspect of US news media and its ability to sow viewer distrust in scientific experts and scientific evidence, potentially generating an additional source of media power

    Regardless of the accuracy and reliability of the scientific evidence, there is cause for concern if many US households turn to televised news as their second opinion when the scientific community presents evidence that is inconsistent with viewers’ personal beliefs. This distrust could have dire consequences for the ability of leaders to generate public support for policies that rely on scientific evidence to improve the health and wellbeing of their constituents


    ENFRANCHISEMENT AND ELECTED POLICE CHIEFS PROMOTE BETTER TREATMENT OF MINORITY GROUPS: Evidence from the 1965 Voting Rights Act

    Giovanni Facchini, Brian Knight, Cecilia Testa        
    07 July 2020

    Following the United States Voting Rights Act (VRA) of 1965, which enfranchised black voters, black arrest rates fell in counties that were both covered by the legislation and had a large number of newly enfranchised black voters. There were no corresponding patterns for white arrest rates. These findings indicate that voting rights, when combined with elected, rather than appointed, chief law enforcement officers (CLEOs), can lead to improved treatment of minority groups by police. 


    ‘COVID DOMINANCE’: Pandemic shocks and fiscal-monetary policies in the euro area

    Yothin Jinjarak, Rashad Ahmed, Sameer Nair-Desai, Weining Xin, Joshua Aizenman        
    06 July 2020

    There is an importance relationship between prevailing market factors and the dynamics of the Covid-19 pandemic across the euro area. Writing at Vox, economists from the University of Southern California present evidence to suggest that during the pandemic, adjustments in euro area credit default swap spreads diverge substantially from levels implied by theoretical models. Mortality outcomes and fiscal announcements account for a proportion of this divergence. 

    These results also imply ‘COVID dominance’, whereby the widening spreads can lead to unconventional monetary policies that primarily aim to mitigate the short-run distress of the worst economic outcomes, temporarily pushing away concerns over fiscal risk. 


    SUPPRESSING COVID-19 WITH A COMBINATION OF SOCIAL DISTANCING AND CASE DETECTION

    Stefan Pollinger       
    05 July 2020

    Writing at Vox, Stefan Pollinger argues that eradicating Covid-19 is possible through a combination of efficient case detection and social distancing, which would allow the pandemic to be eliminated at low additional economic and health costs. A simple function of observables, the study shows the optimal policy is easily implementable, but it raises important privacy concerns. Is it time to have a serious political discussion about these concerns? 


    GREEN STIMULUS, JOBS AND THE POST-PANDEMIC GREEN RECOVERY: Efficient in the long-term 

    David Popp, Francesco Vona, Joëlle Noailly        
    04 July 2020


     

    While green stimulus packages are useful to reorient the economy and direct it onto a green trajectory in the longer run, they are less effective in restarting the economy quickly. 

    These are the central conclusions of a new study by Joëlle Noailly and colleagues, which analyses the impact of past green fiscal stimulus on employment. Focusing on the American Recovery and Reinvestment Act after the Global Crisis, the study finds that that the green stimulus was particularly effective in creating jobs in the long run, but not in the short run. 

    For policymakers in countries committed to reducing emissions, these results imply that green investments may be particularly effective at reorienting the economy and directing it onto a green path during the post-Covid-19 pandemic recovery.


    THREE STRIKES AGAINST THE FED: And recommendations for change 

    Willem Buiter        
    03 July 2020

    The US Federal Reserve – the world’s most important central bank – is not in a good place. Writing at Vox, Willem Buiter outlines 3 flaws in the operating practices of the Fed: 

    1. Its refusal to adopt negative policy rates 
    2. The build-up of significant credit risks through non-transparent (quasi-)fiscal actions 
    3. Stress testing analysis which fails to account for the severity of the COVID-19 crisis. 

    The study proposes a number of ways forward, including a symmetric policy rate around zero, a temporary ban on dividend payments, new equity issuance, and conducting a comprehensive stress test of the financial system.


    THE NEIGHBOURHOOD EFFECT OF REFORMS AFTER CRISES 

    Simeon Djankov, Dorina Georgieva, Hibret Maemir        
    03 June 2020

    Countries reform when their neighbours have reformed too, especially in the aftermath of economic crises. Previous crisis episodes have generated improvements in the law and administration of registering property, trading across borders, protecting investors and resolving bankruptcy. Writing at Vox, Simeon Djankov and World Bank economists Dorina Georgieva and Hibret Maemir explain that the current period of post-Covid-19 recovery is propitious for regulatory reform, politicians can learn from each other in their efforts to revive the economy.


    MACROPRUDENTIAL POLICY AND COVID-19: Restrict dividend distributions to significantly improve the effectiveness of the countercyclical capital buffer release

    Manuel A. Muñoz        
    03 July 2020

    According to the evidence, banks in the euro area are particularly reluctant to cut back on dividends during economic recessions. That is, the bulk of the adjustment in the face of negative shocks that hit bank profits is borne by undistributed net income. 

    Writing at Vox, Manuel Muñoz argues that this pattern can notably exacerbate the impact of a negative supply shock such as the Covid-19 pandemic on bank lending and economic activity. Using a macro-banking DSGE model calibrated to quarterly data of the euro area economy, he concludes that restricting dividend distributions has the potential to significantly improve the effectiveness of the countercyclical capital buffer release in ensuring that banks keep funding households and firms during the Covid-19 crisis


    THE LAND OF ARTISTIC BEAUTY AND RACIAL INEQUALITY: A study of the United States since 1850

    Karol Jan Borowiecki, Christian Møller Dahl       
    02 July 2020

    Black Americans have been underrepresented in the nation’s creative industries since the end of slavery. Writing at Vox, economists from the University of Southern Denmark argue that the implications of that marginalisation extend beyond career choices into homes and neighbourhoods, as cities with thriving arts sectors also lead in job creation, innovation, and trade. 

    The authors recommend that financial support for black artists be pursued in a systematic way, with policies that provide emerging black artists with access not only to relevant artistic networks, but also to supply-related organisations such as gallerists and publishers.


    THE IMPACT OF MACHINE LEARNING AND AI ON THE UK ECONOMY

    David Bholat        
    02 July 2020

    Machine learning and artificial intelligence (AI) are at the heart of current transformations that some commentators have dubbed the ‘Fourth Industrial Revolution.’ The Bank of England, CEPR and Imperial College recently organised a virtual event to discuss how machine learning and AI are changing the economy and the financial system, including how central banks operate. 

    Writing at Vox, David Bholat summarises key topics discussed during the event and introduces videos recorded by some of the presenters, including Stuart Russell, Alan Manning, and the Bank of England’s Chief Data Officer, Gareth Ramsay.


    HOW BANKS AFFECT INVESTMENT AND GROWTH: New evidence

    Thorsten Beck, Robin Döttling, Thomas Lambert, Mathijs van Dijk         
    02 July 2020

    The creation of liquidity lies at the centre of much of a bank’s operations. A new study by Thorsten Beck and colleagues from Erasmus University provides evidence that banks' liquidity creation is associated with higher economic growth across countries and industries, with important non-linear effects. Results suggest that in the new ‘knowledge economy’ banks will have a more limited role, compared to other types of financial intermediaries and markets.


    DID INTERSTATE HETEROGENEITY IN BRAZIL FACILITATE ITS POSITION AS THE EPICENTRE OF THE COVID PANDEMIC?  

    Luan Borelli, Geraldo Goes      
    01 July 2020

    A study by economists from the Institute for Applied Economic Research (IPEA) argues that the great differences between states in Brazil, together with difficulties in political coordination, may have shaped the consequences which has resulted in its position as the epicentre of the coronavirus pandemic, recently reaching 50,000 fatalities. 

    Examining at five states, (São Paulo, Amazonas, Ceará, Rio de Janeiro and Pernambuco) the study investigates whether certain differences in the states’ intrinsic characteristics may have influenced the dynamics of the local epidemic. 

    The results indicate that disregarding the importance of such heterogeneities and not taking them into account to coordinate containment policies may amplify both the severity of the economic recession and the number of infected and deaths resulting from the epidemic.


    BANK INSIDERS IMPEDE EQUITY ISSUANCES IN TIMES OF CRISIS

    Martin Götz, Luc Laeven, Ross Levine         
    07 July 2020

    A study by Luc Laeven and colleagues shows that ownership structure is an important determinant of a bank’s new stock issuance during a crisis. US banks with greater insider ownership are found to have had significantly less common stock sales following the onset of the 2008 Global Crisis.

    Banks with more equity tend to lend more, create more liquidity, have higher probabilities of surviving crises and if they do, they tend to recover faster. The degree to which a bank issues new stock to replenish bank equity in response to a crisis is therefore crucial.


    STATE OWNERSHIP WILL GAIN IMPORTANCE AS A RESULT OF COVID-19

    Carolina Abate, Assia Elgouacem, Tomasz Kozluk, Jan Stráský, Cristiana Vitale        
    07 July 2020

    In response to the Covid-19 crisis, governments are taking equity stakes in financially distressed companies, potentially risking market distortions. Using micro-level evidence for OECD members, a study by OECD economists shows that in countries where state-owned enterprises are subject to the same market forces as their competitors, they perform on par with private firms. 

    Additionally, the authors analyse OECD product market regulation indicators to gain insights into areas of corporate governance that would benefit from reforms. They recommend governments impose strict recovery plans on the firms benefiting from state interventions, set clear conditions for exit from state ownership, and rely on independent advisory to ensure sound valuations of investments and divestments


    TEMPORARY LAYOFFS AS A MEASURE OF FIRMS’ FORECAST OF THE FUTURE

    Arash Nekoei, Andrea Weber       
    01 July 2020

    Temporary layoffs have exploded during the Covid-19 pandemic. Writing at Vox, Andrea Weber and Arash Nekoei analyse temporary layoffs in Austrian data to show that the share of temporary layoffs contain useful information about employers’ forecasts of the future of their businesses.

    The results shows that the temporary layoff share among layoffs indicates employers' forecast about the future of their businesses almost in real time: a higher temporary layoff share implies a more positive forecast about firm recovery, and increases the likelihood of recall both for temporary and permanent layoffs, while reducing future layoff likelihood. 

    Most recalls happen around the communicated recall date, and workers wait for it: they are more selective, search less, and are thus less likely to exit unemployment before the recall date. If not recalled, this wait is costly due to negative duration dependence, the employment prospects of those who are still unemployed after the recall date are dire: selection can lead to lower wages, if not a permanent exit from the labour market.


    FISCAL DISCIPLINE AND BUDGETARY ANALYTICAL CAPACITY: The case of the euro area

    Yuliya Kasperskaya, Ramon Xifré         
    01 July 2020

    In the aftermath of crises, the state of public finances typically regains prominence in policy agendas, as happened in the aftermath of 2008 and most recently the Covid-19 crisis in early 2020. 

    A new study by Yuliya Kasperskaya and Ramon Xifré advances the hypothesis that three properties of the budgetary setup – reliability of projections, openness to scrutiny, and transparency – facilitate the exercise of the ‘budgetary analytical capacities’ of the government, legislature, and the wider public. 

    The study constructs an index of such capacities from the OECD Survey on Budget Practices. For the period 2012-2016, a simple measure of fiscal discipline is correlated with the index and is not correlated with other standard political-economy variables that are generally used to explain fiscal discipline


    THE EFFECTS OF PARALLEL TRADE OF DRUGS IN EUROPE

    Pierre Dubois, Morten Sæthre         
    04 July 2020

    Differences in regulated pharmaceutical prices within the European Economic Area create arbitrage opportunities that pharmacy retailers can access through parallel imports. For prescription drugs under patent, parallel trade affects the sharing of profits among an innovating pharmaceutical company, retailers, and parallel traders. 

    Writing at Vox, Pierre Dubois and Morten Sæthre discuss recent findings showing that in a country which does not regulate pharmacy retailers’ margins, retailer incentives to bargain lower wholesale prices play a significant role in fostering parallel trade penetration, and that banning parallel imports would benefit manufacturers.



    TO EACH ACCORDING TO THEIR NEEDS

    Kaushik Basu interviewed by Tim Phillips, 03 July 2020

    Kaushik Basu's time as World Bank chief economist inspired him to think radically about how to change the way the global economy works. He tells Tim Phillips about why public ownership and profit-sharing may be essential, and what we can still learn from Karl Marx.