This week from CEPR: July 23

Thursday, July 23, 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’.

**** You can sign up to our journalist mailing list here

**** Journalists can also apply for access to CEPR's Discussion Paper series via email


     

    • New Discussion Papers


    • THE REGIONAL ECONOMIC COST OF BREXIT: Sizeable, uneven, and concentrated in Leave voting regions   

    MEASURING THE REGIONAL ECONOMIC COST OF BREXIT: Evidence up to 2019
    Thiemo Fetzer, Shizhuo Wang       
    CEPR DP No. 15051 July 2020 

    New regional data finds that the economic costs of the Brexit-vote are sizeable and far from evenly distributed across the United Kingdom. Almost half of the UK’s regions appear to be Brexit-vote losers, having lost on average 8.54 percentage points of output in 2018. Those hit hardest appear to be districts who largely supported Leave in 2016, with concentrations of reduced output in regions with high manufacturing activity and relatively low levels of human capital. 

    These are the central findings of a new CEPR paper by Thiemo Fetzer and Shizhuo Wang, which provides some first insights into the regional economic impact of Brexit to date. Among the findings:

    • The results confirms existing work that has estimated that by 2018, Brexit has cost the UK economy at least two percent of real output.
    • The economic costs of the Brexit-vote are sizeable and far from evenly distributed across the UK. 
    • Among 382 districts, at least 168 districts appear to be Brexit-vote losers, having lost, on average 8.54 percentage points of output in 2018 compared to their respective synthetic controls. 
    • Economic losses are increasing in districts who supported Leave in 2016 
    • Economic losses are concentrated in districts with notable employment or gross-value added activity in manufacturing
    • Losses are also concentrated in districts with a resident population with relatively low levels of human capital. 

    In sum, the Brexit-vote induced economic divergence across regions is already exacerbating regional economic inequalities that became so apparent in the 2016 EU referendum vote patterns. Further, there is some evidence suggesting that the regional economic impact of Covid-19 may exacerbate the regional economic impact of the Brexit-vote to date.


    • INCARCERATED OFFENDERS COMMIT MORE CRIMES AND ARE LESS LIKELY TO FIND EMPLOYMENT THAN THOSE PLACED ON PROBATION, WITH LARGE EFFECTS ON YOUNG OFFENDERS    

    INCARCERATION VERSUS PROBATION? Long-run evidence from an anticipated reform.
    Camille Hémet, Bastien Michel  
    CEPR DP No. 15047 | July 2020

    Incarcerated offenders commit more crimes and have weaker ties to the labour market than those placed on probation. The effects are particularly strong among young offenders.

    A new CEPR study by Camille Hémet and Bastien Michel explores the long-term crime- and labor-market-related effects of incarceration relative to probation using a large-scale reform of the Danish legislation, whereby a custodial sentence (jail time) was replaced by a non-custodial one for most drunk-driving crimes. The study reaches several conclusions

    • The first key finding is that stakeholders anticipated the consequences of the reform as significant selection is observed in the nature of the cases tried before and after the reform. A group of offenders who should have been tried before the reform were tried after and, as a consequence, avoided prison.
    • The identity of the individuals who had their case postponed was not random and wealthier defendants, for instance, were more likely to have their trial put off until after the reform.
    • compared to non-custodial sentences, custodial ones do not necessarily have an impact on the number of reoffenders but can increase the average number of crimes they commit. this increase was not driven by drunk-driving crimes but by other crimes and, in particular, property crimes.
    • compared to non-custodial sentences, custodial ones significantly weaken offenders’ labour market attachment as they decrease both their probability of having a job and their total income.
    • the negative effects on offenders’ labour market attachment seem to precede the rise in their criminal activities.
    • These results are primarily driven by young offenders and, in particular, those who had a job at the end of the year preceding their crime and had the most to lose from being incarcerated. 

    These findings suggest that economic precariousness is an important mechanism explaining subsequent criminal behaviour, and that incarceration can remain a harmful experience, even in the context of relatively soft incarceration conditions in Danish open prisons. 


    • LACK OF ACCESS TO DAY CARE DURING LOCKDOWNS MAY HAVE SEVERE DETRIMENTAL LONG-RUN HEALTH AND BEHAVIORAL EFFECTS ON CHILDREN: Evidence from Sweden    

    THE EFFECTS OF DAY CARE ON HEALTH DURING CHILDHOOD: Evidence by Age
    Gerard van den Berg, Bettina Siflinger  
    CEPR DP No. 15036 | July 2020

    A new study by Gerard van den Berg and Bettina Siflinger examines the effects of day care exposure on behavioural problems and mental health as well as on various aspects of physical health, at various ages during childhood. The study exploits variation in day care exposure by age generated by a major day care policy reform in Sweden, to estimate cumulative and instantaneous effects on child health at different ages. 

    The results show sizeable beneficial cumulative impacts of day care on behavioural and mental health at primary school ages, and substitution of the incidence of infections from primary school ages to low ages. The evidence suggests that the main beneficiaries of day care are in low socio-economic households. Day care usage affects health care utilization and leads to a moderate reduction in health care costs.

    Beyond the impact on cognitive abilities, including school marks and the level of education. day care can also affect the health and non-cognitive abilities of children, and those outcomes may have impacts over the full life span as well.



    MASK MANDATES AND OTHER LOCKDOWN POLICIES COULD HAVE SIGNIFICANTLY REDUCED THE SPREAD OF COVID-19 IN THE UNITED STATES 

    Victor Chernozhukov, Hiro Kasahara, Paul Schrimpf         
    15 July 2020

    If the United States had on 1 April 2020 universally mandated that employees of public-facing businesses use masks, there could have been nearly 40% fewer deaths by the start of June. 

    A new study by Victor Chernozhukov and colleagues examines the effect of mandatory mask policies on Covid-19 cases and deaths in the United States. The study finds that containment policies had a large impact on the number of Covid-19 cases and deaths, directly by reducing transmission rates and indirectly by constraining people’s behaviour, and account for roughly half the observed change in the growth rates of cases and deaths.


    FINANCIAL DEVELOPMENT CAN HARM CHILDREN’S ACADEMIC DEVELOPMENT

    Qing Hu, Ross Levine, Chen Lin, Mingzhu Tai         
    18 July 2020

    A country’s financial development increases the demand for low-income workers, and the resulting higher wages induces mothers from low-income families to work more in paid employment. This reallocation of parental time tends to have adverse effects on children’s academic development unless there are sound alternatives for the mother’s parenting time.

    Ross Levine and colleagues present evidence from the United States on whether financial development can harm children’s academic development, arguing that changes in banking regulation across states can cause changes in the experience of children through a number of channels. Results show that these effects are not uniform across household income brackets and can be mitigated when there are other family members such as grandparents that are able to help children with their personal development.


    WHAT CAUSES EMPLOYEES TO WORK TOGETHER? The role corporate culture 

    Gary Gorton, Alexander Zentefis          
    16 July 2020

    Corporate culture is an important determinant of firm performance but has often been overlooked in economic research. Writing at Vox, Gary Gorton and Alexander Zentefis present a theory of the firm based on corporate culture, the idea that this culture is the governing force that allocates resources inside firms in place of lengthy contracts. Corporate culture also impacts numerous other key decisions within firms.

    In firms, employees develop a product in house according to shared values, customs, and norms that each stem from a shared culture. Firms exist because, at times, corporate culture fulfils production more efficiently than detailed contracts would. Further, consistent with empirical evidence, this study shows how some mergers and acquisitions can fail and why corporate cultures are often hard to change once in place.


    COULD ROBOTS WORSEN THE GENDER PAY GAP IN EUROPE? Evidence from twenty countries 

    Cevat Giray Aksoy, Berkay Ozcan, Julia Philipp        
    16 July 2020

    Using new evidence from 20 European countries, a study by Cevat Giray Aksoy and colleagues finds that men at medium- and high-skill occupations disproportionately benefit from robotisation, especially in countries where gender inequality was already severe. The authors recommend that governments pay attention to automation’s distributional issues, and increase their efforts to equip women and men equally with the skills most relevant for future employability. 


    A NEW ERA OF TELEMIGRATION MAY DRIVE DEMAND FOR GLOBALISATION IN SERVICES: Beneficial for emerging economies

    Richard Baldwin, Rikard Forslid          
    16 July 2020

    Changes in working patterns inspired by Covid-19 may transform the development path of many economies. Founder and Editor-in-Chief of VoxEU Richard Baldwin argues that, as we adjust to remote working, a new era of telemigration may drive demand for globalisation in services. This may be good news for many emerging economies, because they can exploit their comparative advantage in labour without having to manufacture goods.


    THE BIG BANG: Stock market capitalisation in the long run

    Dmitry Kuvshinov, Kaspar Zimmermann         
    17 July 2020


     

    While short-run deviations of the stock markets from the economy, such as the current COVID-induced gap, are common throughout history, stock market size should co-evolve with real activity in the long run. 

    A study by Dmitry Kuvshinov and Kaspar Zimmermann uses data from 1870-2015 for 17 countries to assess this prediction empirically. It finds that stock market size and GDP were closely linked until the 1980s but diverged markedly thereafter, with surging equity prices accompanied by stagnating growth. This long-run divergence is historically unprecedented and can be largely explained by a profit shift towards listed firms at the time of historically low discount rates.


    COVID-19: A new challenge for the euro area

    Anne-Laure Delatte, Alexis Guillaume         
    17 July 2020

    Writing at Vox, Anne-Laure Delatte and Alexis Guillaume analyse the impact of Covid-19 over the last months on euro area sovereign bond spreads. They find that differences in healthcare capacity are reflected in bond prices, markets prefer fiscal transfers to loans-based financial assistance programs, and that European Central Bank speeches have stronger effects than deeds during the crisis episode. Of all the euro area members, Italian spreads benefited most from the recent policy interventions. 


    ESTIMATING THE GAINS FROM SPATIALLY TARGETED LOCKDOWNS AGAINST COVID-19

    Pablo Fajgelbaum, Amit Khandelwal, Wookun Kim, Cristiano Mantovani, Edouard Schaal         
    17 July 2020

    Designing spatially targeted lockdowns within the commuting network of big cities to minimise income losses. A new study by Pablo Fajgelbaum and colleagues analyse of how they might turn out in Daegu, Seoul & New York. 

    The study finds that optimal spatial lockdowns generate substantially smaller income losses than uniform lockdowns for a given virus spread. Policymakers have primarily imposed the same lockdown policies uniformly across locations within a city, should the debate be re-centered? 


    CORONAVIRUS PANIC FUELS A SURGE IN CASH DEMAND

    Jonathan Ashworth, Charles Goodhart          
    17 July 2020

    While the economic shutdowns and increased use of online retailing have recently been diminishing cash’s traditional function as a medium of exchange, it seems that this has been more than offset by panic-driven hoarding of banknotes. A new study by Charles Goodhart and Jonathan Ashworth argues that the data so far indicate that currency in circulation has actually surged in a number of countries, contrary to the narrative of the imminent death of cash amid rapid innovation in payment technologies. 


    FIVE LESSONS FROM TRACKING THE GLOBAL PANDEMIC ECONOMY

    Long Chen, Michael Spence        
    17 June 2020

    Mobility has turned out to be a key factor in the co-evolution of the economy and the Covid-19 pandemic. A new study by Long Chen, Michael Spence estimates the magnitude of daily economic contractions by constructing a pandemic economy tracker based on mobility data and makes some interesting findings. 

    1. Speed of policy response is crucial in successfully navigating the pandemic economy.
    2. It is substantially more difficult for larger economies to control the virus. 
    3. Stock markets have generally rebounded faster than the economies they support. 
    4. Third wave countries, primarily emerging and developing economies, are having difficulty controlling the virus without substantial mobility restrictions and contractions.

    LOOMING LIQUIDITY CRISIS COULD SEVERLY AFFECT FIRMS ACROSS EUROPE 

    Fabiano Schivardi, Guido Romano        
    18 July 2020

    The Covid-19 crisis has induced a sharp drop in cash flow for many firms, possibly pushing solvent but illiquid firms into bankruptcy. Fabiano Schivardi, Guido Romano present a simple method to determine the number of firms that could become illiquid, and when. 

    Applied to Italian businesses, the authors find that at the peak, around 200,000 companies (employing 3.3 million workers) could become illiquid due to a total liquidity shortfall of €72 billion euros. It is essential that policymakers shelter businesses by acting quickly, especially if there is a ‘second peak’ after the summer.


    INVESTORS REWARD ENVIRONMENTAL RESPONSIBILITY IN THE COVID-19 CRISIS: Climate action in uncertain times

    Alexandre Garel, Arthur Petit-Romec          
    21 July 2020

    Assessing the cross-section of stock returns during the Covid-19 shock to capture investors’ views and expectations about environmental issues, a new study by Alexandre Garel and Arthur Petit-Romec find that firms with responsible strategies on environmental and climate issues are found to have had better stock returns between 20 February and 20 March 2020. Hence, the Covid-19 shock did not distract investors’ attention away from environmental issues but rather led investors to reward environmental responsibility to a larger extent.

    The study has implications for both managers and investors. For managers, they imply that companies with responsible initiatives on environmental climate issues are expected to do better in the future. Hence, managers cannot hide anymore behind market forces or the conventional wisdom that pursuing a climate-responsible agenda runs counter the wishes of shareholders and would hurt shareholder value. For investors, they imply that environmental issues and in particular carbon emissions are likely to become an increasingly important factor for portfolio compositions and the pricing of stocks in the post-Covid world. 


    HOW THE COVID-19 CRISIS IS RESHAPING REMOTE WORKING: Evidence from the United States 

    Alex Bartik, Zoe Cullen, Edward Glaeser, Michael Luca, Christopher Stanton      
    19 July 2020

    Transition to remote working is uneven among small businesses in the United States, with businesses in industries with higher income and better educated employees more likely to transition to remote working. Productivity effects are also uneven, with many firms becoming less productive as a result of the transition.

    These are the central findings of a study by Edward Glaeser and colleagues, which uses survey data from thousands of small businesses representing a wide set of industries, firm sizes, and regions across the United States to understand how businesses are adjusting to the Covid-19 crisis.


    TESTING AND QUARANTINE POLICIES SHOULD PLAY A CENTRAL ROLE IN MINIMISING THE SOCIAL COSTS OF THE COVID-19 CRISIS

    Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt        
    20 July 2020

    Traditional epidemiology models generally don’t allow for interactions between peoples’ economic decisions and rates of infection, limiting their usefulness for forecasting and policy analysis. 

    Writing at Vox, Martin Eichenbaum and colleagues introduce a framework for combining economics and epidemiology in a way that allows for these interactions and uses the model to address the challenge of designing and implementing policies that improve the trade-off between economic and health outcomes during an epidemic. The results suggest that testing and quarantine policies should play a central role in minimising the social costs of the Covid-19 crisis.


    THE POSSIBILITY OF REMOTE WORKING OFFERS A SOURCE OF RESILIENCE TO CITIES 

    Cem Özgüzel, Paolo Veneri, Rudiger Ahrend        
    15 July 2020

    Cities – and in particular capitals – typically have a higher share of occupations suitable for remote working. This may offset some of the stronger negative economic impacts of Covid-related policies on cities. Regional disparities in the capacity for remote working also clearly reflect the level of education of the workforce.

    These are the main findings of a new study by Cem Özgüzel and colleagues, which assesses the capacity of regions in 30 developed economies to shift to remote working during a lockdown, based on individual-level data on occupations from labour force surveys.


    TECHNOLOGICAL PROGRESS AND HOLLOWING-OUT OF THE MIDDLE-SKILLED LABOUR SHARE OF INCOME

    Mai Dao, Mitali Das, Zsoka Koczan         
    20 July 2020

    Increased trade and technology have contributed to the declining labour share of middle-skilled workers worldwide but have had little effect on low-skilled and high-skilled labour. There is strong evidence that countries with higher exposure to routinisation and greater increase in participation in global value chains have experienced stronger declines in the middle-skilled labour income share, which has been especially pronounced in Austria, Germany, and the United States. 

    A new study by IMF and EBRD economists examines the effects of trade and technology on the labour shares of different skill groups using a new dataset covering both advanced and developing economies. The authors caution that policies should be designed with the goal of spreading the benefits of globalisation to the entire labour force.


    SOCIAL MEDIA IS PROPAGATING CONTAGIOUS PROTESTS ACROSS COUNTRIES 

    Rabah Arezki, Alou Adesse Dama, Simeon Djankov, Ha Nguyen          
    20 July 2020

    Social media is found to play a significant role in driving spillover of protest using the news-based measure. There are large and consistent news-based protest spillovers for countries with strong media penetration.

    Street protests propagate across borders. Writing at Vox, Rabah Arezki, Chief Economist for Middle East and North Africa Region, World Bank and colleagues provide evidence for contagious protests, using both actual and news-based measures of protests. The results point to social media as a vehicle for contagion.


    THE OLD AND THE NEW OF FINTECH: Insights from ECB economists 

    Arnoud Boot, Peter Hoffmann, Luc Laeven, Lev Ratnovski          
    21 July 2020

    Innovations in the information and communication channels of the financial industry may lead to big changes in the traditional bank business model, finds a new study by ECB economists. New policy priorities should focus on accurately assessing the operational risks and ensuring the robustness of these technologies.

    In the extreme, competitive forces created by technological progress can relegate banks to upstream (i.e. non customer-facing) providers of maturity transformation services. They can attempt to stave off the competitive pressures from platforms and specialised entrants by investing in the digitalisation of their own business processes. However, besides the associated costs, such transformation is often impeded by entrenched organisational cultures, reputational risks, and regulatory factors.


    DYNASTIC POLITICIANS MAY CONTRIBUTE TO STABILISING DEMOCRACIES BY BETTER RESISTING PEER PRESSURE

    Jean Lacroix, Pierre-Guillaume Méon, Kim Oosterlinck          
    18 July 2020

    Rising populism has raised concerns that democracies may give in to authoritarian pressure. On 10 July 1940, exactly 80 years ago, the French parliament passed an enabling act granting full power to Marshal Philippe Pétain. 

    Analysing how the Members of Parliament voted, economists from the Université libre de Bruxelles demonstrate that MPs belonging to a pro-democratic dynasty were more likely to oppose the act. Dynastic politicians may contribute to stabilising democracies by better resisting peer pressure.


    MORE EDUCATION ACCOUNTS FOR THE RISING SHARE OF WOMEN IN THE UK TOP 1%

    Richard V. Burkhauser, Nicolas Hérault, Stephen P. Jenkins, Roger Wilkins           
    21 July 2020

    A study by Richard Burkhauser and colleagues analyses gender differences among the UK top 1% of the income distribution between 1999 and 2015. The results show that the rising share of women in the top 1% is largely accounted for by women having increased the time they spend in full-time education by more than men did.


    WHY RESEARCH & DEVELOPMENT GRANTS ARE AN EFFECTIVE POLICY TOOL

    Pietro Santoleri, Andrea Mina           
    19 July 2020

    Research and development (R&D) grants have positive and sizable effects on firm-level outcomes. They tend to alleviate financial frictions and are particularly beneficial for firms in less advanced countries and regions.

    Direct public support for business research and development (R&D) is common practice in many countries, but evidence on its causal effects has been mixed. A new study by Pietro Santoleri and Andrea Mina exploits discontinuity in the assignment mechanism of the first large-scale European R&D grant programme to assess the impact of the policy. The results indicate that direct grants have positive and sizable effects on a wide range of firm-level outcomes suggesting that R&D grants are an effective policy tool. 


    WHY RESEARCH & DEVELOPMENT GRANTS ARE AN EFFECTIVE POLICY TOOL

    Jean-Paul L'Huillier, Raphael Schoenle            
    20 July 2020

    Interest rates have remained close to zero in many economies since the Great Recession. Writing at Vox, Jean-Paul L'Huillier and Raphael Schoenle explore the policy of raising the inflation target in order to generate greater macroeconomic ‘room’ as the recovery process plays out.

    Central banks face constraints when trying to achieve this extra room. The rationale is that by raising the inflation target, the private sector responds by increasing price flexibility. This lowers the potency of monetary policy and thereby endogenously removes part of the room generated by the higher target.



    THE MECHANICS OF THE INDUSTRIAL REVOLUTION 

    Joel Mokyr interviewed by Tim Phillips, 17 July 2020

    Skilled artisans were needed to build, improve and mend the machines that powered the industrial revolution. Joel Mokyr tells Tim Phillips how this can help explain why the revolution happened when - and where - it did.