This week from CEPR: June 6th

Thursday, June 6, 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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    TRADE WAR: The clash of economic systems threatening global prosperity

    Edited by Meredith A. Crowley

    The US-China trade war that currently threatens global prosperity is the outgrowth of long-brewing tensions in the multilateral trading system, not least the challenge of how to integrate the fundamentally different economic systems of Western liberal capitalism and Chinese state capitalism.  

    That is one of the central conclusions of a new VoxEU/CEPR eBook. Dr Meredith Crowley of the University of Cambridge and CEPR has brought together expert commentaries by top trade economists and legal scholars on the origins of the trade war, the emerging effects on economic activity around the world and the likely consequences for the future of globalisation. 

    An experimental employee referral programme (ERP) in a large European grocery chain shows the big potential benefits for employers from offering bonuses to staff who help to recruit new colleagues. The CEPR study shows that ERPs can have substantial benefits beyond simply generating referrals: most notably, workers value being involved in hiring and are therefore more likely to stay. 

    The researchers find that larger bonuses increase referrals and decrease referral quality, though the increase in referrals is modest. Nevertheless, ERPs are highly profitable, partly because referrals stay longer than non-referrals, but mainly because non-referrals stay longer in ERP stores than in stores without the ERP. In a post-experiment firm-wide ERP rollout to all stores, referral rates remain low for grocery jobs, but they are high for non-grocery jobs, which are perceived as more attractive. 

    Figure: Posters Used during the 2017 Firmwide ERP Rollout

    Notes: This is a translated and version of the posters during the 2017 firmwide ERP rollout (with identifying firm information redacted). From left to right, the posters are for grocery store workers, logistics workers, and food production workers, respectively. Except for the different pictures, the posters are the same.

    New CEPR research analyses jobseekers’ perceptions and their relationship to unemployment outcomes to study perceived and actual job finding. Analysing longitudinal data from two comprehensive surveys, the authors have three main findings: 

    • First, that reported beliefs have strong predictive power of actual job finding. 
    • Second, that jobseekers are over-optimistic in their beliefs, particularly those who are long-term unemployed. 
    • And third, that jobseekers do not revise their beliefs downward when remaining unemployed. 

    The researchers find substantial heterogeneity in true job finding rates, accounting for almost all of the observed decline in job finding rates over the spell of unemployment. Moreover, jobseekers’ beliefs are systematically biased and under-respond to these differences in job finding rates. Over-optimistic beliefs contribute to slow exit out of unemployment, explaining more than 10% of the incidence of long-term unemployment.

    Figure E1: Comparative Statics: True vs. Perceived Changes in Arrival Rates

    Notes: Panel A plots the average unemployment duration as a function of actual and perceived arrival rates, changing them in the same way for all types relative to the baseline model.

    • FALLING STERLING, FALLING WAGES AND TRAINING: How the post-Brexit pound has hurt UK workers
      Trade and Worker Deskilling
      Rui Costa, Swati Dhingra and Stephen Machin 
      CEPR DP No. 13768   30 May 2019

    The unexpected result of the Brexit referendum, working through the rapid depreciation of sterling, has hurt UK workers. A new CEPR study shows that the big drop in the value of the pound caused a rise in import prices, which has led to a fall in both wages and training for workers employed in the most heavily hit sectors. 

    The research examines a major world event – the 2016 UK electorate’s vote to leave the European Union – to provide new evidence on the impact of international trade on worker outcomes. It shows that in the modern world of global value chains, increases in the price of imports exert a negative impact on workers because businesses increasingly rely on inputs from abroad. 

    The sterling depreciation following the Brexit vote raised the costs of industries that rely on imported inputs from countries whose currencies became much stronger against the pound on referendum night. Increased export earnings did not provide a reprieve from import cost pressures. Workers in the most heavily hit sectors suffered slower wage growth and cutbacks in job-related education and training. 

    Figure 5: Trends in Wages

    Notes: Log of average wages calculated using LFS industry weights. The gap (and associated standard error) between the horizontal lines showing above/below median averages in the pre-referendum period is 0.001 (0.005) and -0.007 (0.003) in the post-referendum period.

    ADVERTISING IS BAD FOR OUR HAPPINESS: Evidence from one million Europeans

    Chloé Michel, Michelle Sovinsky, Eugenio Proto, Andrew Oswald
    27 May 2019

    Increases in national advertising expenditure are followed by significant declines in reported levels of life satisfaction, according to a new CEPR study by Chloé Michel, Michelle Sovinsky, Eugenio Proto and Andrew Oswald. Blending longitudinal data on advertising with large-scale surveys of citizens’ wellbeing, the research analyses information on approximately one million randomly sampled European citizens across 27 nations over three decades.  

    £350 MILLION A WEEK: The output cost of the Brexit vote

    Benjamin Born, Gernot Müller, Moritz Schularick, Petr Sedláček
    29 May 2019

    It is hard to calculate the current cost of Brexit, because there is no obvious counterfactual. Research by Benjamin Born, Gernot Müller, Moritz Schularick and Petr Sedláček, first published in November 2017, calculated the cost by letting a matching algorithm determine which combination of comparison economies best resembles the pre-referendum growth path of the UK economy. The results suggested a loss of 1.3% of GDP, or close to £300 million per week, since the vote took place. 

    Subsequent updates using the latest OECD data suggest that the negative drag from the Brexit vote now appears to be roughly £350 million a week. But under current OECD forecasts, the output loss is likely to increase to about 4% of GDP by end-2020.


    HOUSEHOLD LOCATION IN ENGLISH CITIES: The better off no longer just in the suburbs

    David Cuberes, Jennifer Roberts, Cristina Sechel
    02 June 2019

    Richer households have typically chosen to live in the suburbs of big cities because of the lower prices and larger properties. Research by David Cuberes, Jennifer Roberts and Cristina Sechel shows that multiple factors now influence household location in England, including urban amenities such as parks, monuments, restaurants, and public transport. 

    Analysis of the eight largest cities outside London – Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield – finds no systematic relationship between income and household distance to the city centre. Indeed, household heterogeneity is an important determinant of location: for example, on average households with heads who are migrants live 25% closer to the centre than non-migrants; and only households who are employed are influenced by the availability of public transport. 

    WHITE SOUTHERNERS AFTER THE AMERICAN CIVIL WAR: Wealth was quickly recouped when the abolition of slavery threatened their economic status

    Philipp Ager, Leah Boustan, Katherine Eriksson
    01 June 2019

    Sons of slaveholders in the American South quickly recovered their fathers’ wealth after the Civil War, according to research by Philipp Ager, Leah Boustan and Katherine Eriksson on the intergenerational effects of a large wealth shock. 

    One striking feature of many underdeveloped societies is that economic power is concentrated in the hands of very small powerful elites. This study explores why some elites show remarkable persistence, even after major economic disruptions, using the American Civil War’s effect on the Southern states. Analysing census data, the researchers show that when the abolition of slavery threatened their economic status, Southern elites invested in their social networks, which helped them to recoup their losses fairly quickly.


    Albrecht Ritschl
    30 May 2019

    Nazi officials believed that Germany’s Jewish minority – half a million people in 1933, just 0.77% of the population – owned up to 20% of national wealth at the time. In fact, while they were better educated than the average German, they were not massively richer.  

    These are among the findings of research by Albrecht Ritschl, which uses taxation data collected for the Allied military governments after 1945 to revisit the claims of Nazi propaganda about the existence of fabulous riches. In fact, under plausible assumptions, the Jewish-owned share of Germany’s private real capital stock broadly matched the population share, with an upper-bound estimate of 1.6%. 


    Jeffrey Chwieroth, Andrew Walter
    03 June 2019


    The accumulation of ‘mass financialised wealth’ has transformed the politics of banking crises. According to a new book by Jeffrey Chwieroth and Andrew Walter, the rising wealth of the middle classes has generated ‘great expectations’ that their wealth will be protected by the government. As a result, democracies perform more financial sector bailouts. They are also more financially fragile and politically unstable.  


    Francesco Franzoni 
    03 June 2019

    Increased concentration in the US asset management industry has led to more volatile prices of stocks held by large institutional investors, according to research by Francesco Franzoni. This poses challenges for regulators trying to weigh price efficiency and economies of scale.


    Esa Jokivuolle, George G. Pennacch
    31 May 2019

    Deposit insurance protects savings, removes incentives for bank runs and can reduce the severity of financial crises; but how should a multinational system be designed? Research by Esa Jokivuolle and George Pennacch looks at the European Deposit Insurance Scheme (EDIS). 

    The study argues that the EDIS has important advantages, but can also create conflicts among members due to potential deposit insurance subsidies that differ across countries. The authors suggest alternative design features that could minimise these subsidies and make a multinational deposit insurance system more mutually agreeable. 


    Henri Servaes
    30 May 2019

    Performance fee-based contracts, which aim to align the interests of investors and investment fund managers do not improve fund performance, particularly where contracts fail to specify a benchmark for results. That is the conclusion of research by Henri Servaes.  


    Jan Hagemejer, Jakub Mućk
    29 May 2019

    Economic growth in Central and East European countries after 1995 has mainly been driven by exports, according to research by Jan Hagemejer and Jakub Mućk. What’s more, the pace of convergence in Europe for exported value added was around four times faster than for domestic value added. 

    Fragmentation of production has made it difficult to assess the contribution of exports to economic growth. This study decomposes growth into value added absorbed at home and that exported.


    Harry Huizinga, Luc Laeven
    29 May 2019

    Banks’ loan loss provisions in the Eurozone [Field]are more pro-cyclical than in non-euro countries, according to research by Harry Huizinga and Luc Laeven. Their study also finds that there is considerable heterogeneity in the pro-cyclicality of loan loss provisioning among Eurozone banks, which should be a concern for bank supervisors, 

    A high pro-cyclicality of banks’ loan loss provisioning is undesirable from a financial stability perspective, as it implies that bank capitalisations are more negatively affected at the trough of the business cycle, exactly when capital market conditions for banks are at their weakest. This study finds that provisioning pro-cyclicality in the Eurozone is about twice as high as in other countries. 

    THE IRISH CRISIS: Lessons for small central banks

    Patrick Honohan
    28 May 2019 

    Many significant aspects of the Irish macro-financial crisis of 2008-13 are not well known, some remain disputed and some are often misunderstood. A new book by Patrick Honohan – Currency, Credit & Crisis: Central Banking in Ireland and Europe – contributes to filling these gaps. 

    The author argues that while the crisis cannot be blamed on membership of the Eurozone, as Ireland’s fiscal and regulatory policies in the first decade of the system fell far short of what was needed to stay safe, management by Europe of the crisis as a whole was also poor. Honohan also draws some wider lessons for the appropriate conduct of central banking in small countries.  


    Katharina Erhardt, Simon Haenni
    27 May 2019 

    Firm entry is widely viewed as a central driver of economic growth, so understanding the role of culture in explaining differences in entrepreneurial activity is important. Using Swiss data on individuals’ cultural origins going back to the eighteenth century, research by Katharina Erhardt and Simon Haenni compares the entrepreneurial activity of individuals who live in the same municipalities but who have their cultural origins on different sides of the language border. 

    The study finds that individuals with ancestry from the German-speaking side founded 20% more firms than those with ancestry from the French-speaking side. Yet, the cultural origin of the founder does not affect firm-level outcomes such as bankruptcy or revenues.

    ARTIFICIAL INTELLIGENCE AND OTHER EMERGING TECHNOLOGIES: Likely effects on citizens’ wellbeing beyond just their income

    Jacques Bughin, Christopher Pissarides , Eric Hazan
    28 May 2019

    Artificial intelligence (AI) promises economic growth as well as creating fear for those whose jobs it may replace. Analysis by Jacques Bughin, Christopher Pissarides and Eric Hazan takes a wider approach to examining how AI and other technologies will affect citizens’ welfare beyond just their income. It argues that the new technologies are intrinsically neither good or bad, it is how they are deployed and how the transition is crafted that conditions the welfare dynamics of societies.


    Oriana Bandiera, Imran Rasul interviewed by Tim Phillips, 31 May 2019

    The Yrjo Jahnsson award is given to the best European economist under 45. This year, Oriana Bandiera of LSE and Imran Rasul of UCL shared the prize. They talk to Tim Phillips about their work, and #whateconomistsreallydo 

    RANDOMIZED CONTROLLED TRIALS: A profile of Esther Duflo, the second economist in the CEPR/UBS Women in Economics series

    Esther Duflo, 30 May 2019

    Esther Duflo’s work focuses broadly on poverty, particularly in poor countries like India and Africa. One area that she has done extensive work in, and is particularly passionate about, is immunisation. In a new Vox video, she speaks about the use of randomized controlled trials, which revealed that although improving the supply of immunizations in India increased uptake, this could be substantially amplified by a little extra outlay on small incentives for people to have their children vaccinated.


    André Sapir , 24 May 2019

    André Sapir discusses how Europe’s institutions can reconnect with its citizens and the benefits this can bring.


    Mushfiq Mobarak, 31 May 2019

    In this Yale Insights animation, Mushfiq Mobarak summarises six observations from economic research about how immigration creates economic benefits.