This week from CEPR: March 05

Thursday, March 5, 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

    • AUTOMATION: Evidence from France indicates that labour and product market effects are overwhelmingly positive 

    WHAT ARE THE LABOR AND PRODUCT MARKET EFFECTS OF AUTOMATION? New Evidence from France
    Philippe Aghion, Celine Antonin, Simon Bunel, Xavier Jaravel      
    CEPR DP No. 14443  25 February 2020 

    At all levels of analysis – plant, firm and industry – the estimated impact of automation on employment is positive, even for unskilled industrial workers. Automation leads to higher profits, lower consumer prices and higher sales. Automation can increase labour demand and generate productivity gains that are broadly shared across workers, consumers and firm owners.
     

    These are the central findings of a new CEPR study by Philippe Aghion and colleagues, using comprehensive micro data on the French manufacturing sector between 1994 and 2015 to document the effects of automation technologies on employment, wages, prices and profits. Among the findings:

    • The estimated elasticity of employment to automation is 0.28, compared with elasticities of 0.78 for profits, -0.05 for prices and 0.37 for sales.
       
    • Consistent with the importance of business-stealing across countries, the industry-level employment response to automation is positive and significant only in industries that face international competition.
       
    • Firms that automate more increase their profits but pass through some of the productivity gains to consumers, inducing higher scale and higher employment.
       
    • Automation can increase labour demand and can generate productivity gains that are broadly shared across workers, consumers and firm owners. 

    The authors conclude that in a globalised world, attempts to curb domestic automation in order to protect domestic employment may be self-defeating due to foreign competition. 

    • PERCEIVED THREATS OF TERRORIST ATTACKS: Evidence from Germany on the impact on public opinion and support for far-right parties    

    TERRORIST ATTACKS, CULTURAL INCIDENTS AND THE VOTE FOR RADICAL PARTIES: Analyzing Text from Twitter
    Francesco Giavazzi, Felix Iglhaut, Giacomo Lemoli, Gaia Rubera     
    CEPR DP No. 14455 |  29 February 2020

    Events that increase the perception of threats from other cultures, at a time when such threats were very visible and salient, may have shifted voters’ attitudes towards those affirmed by the party most vehemently opposed to immigration, the German right-wing party AfD (Alternative für Deutschland), and eventually may have had an effect on electoral outcomes.

    These are the central findings of a CEPR study by Francesco Giavazzi and colleagues, which examines the effects of perceived threats from cultural diversity induced by terrorist attacks on public discourse and voters' support for far-right parties. Among the findings: 

    • Following unexpected terrorist attacks, tweets posted in German constituencies become, on average, more similar to the AfD’s tweets and less similar to the other parties’ tweets.
    • These events fuelled the political debate over the consequences of the government’s immigration policies. AfD politicians have identified the open border policy as posing a security threat for the German population.
    • The increasing similarity between German Twitter users’ and AfD language is driven by Twitter users changing theirs to become more similar to the AfD language, including a negative connotation of diversity and immigration.
    • Terrorist attacks and large-scale crimes attributed to immigrants constitute shocks that dramatically increase the salience of cultural differences and elicit perceptions of threats and hostility from a different religion.
    • To some degree, these concerns might have always been present in the population but are sparked by the events, possibly moving the political leaning of Twitter users towards the party that emphasised threats from immigration and multiculturalism the most.
    • Following the occurrence of major terrorist or culturally charged events, the average electoral constituency observes a significant and lasting shift in the language of its tweets towards the language of the far-right AfD.
    • The same constituencies shift away from the centrist left SPD and the centrist CDU, the two main parties at the time in government. Moreover, there is some weak but suggestive evidence that similarity increases for the far-left parties, indicating that terrorist attacks may increase polarisation.

    • THE GLOBAL FINANCIAL RESOURCE CURSE    

    THE GLOBAL FINANCIAL RESOURCE CURSE 
    Gianluca Benigno Luca Fornaro and Martin Wolf |      
    CEPR DP No. 14441 | 24 February 2020

    Capital flows from developing countries to the United States can generate a global productivity growth slowdown, by triggering a fall in economic activity in US tradable sectors. A new CEPR study by Martin Wolf, Luca Fornaro and Gianluca Benigno dubs this effect the ‘global financial resource curse’. 

    Since the late 1990s, the United States has received large capital flows from developing countries and experienced a productivity growth slowdown. Motivated by these facts, the authors provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. 

    Capital flows from developing countries to the United States boost demand for US non-tradable goods. This induces a reallocation of US economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. 

    Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. The authors dub this effect the global financial resource curse. The model thus offers a new perspective on the consequences of financial globalisation and the appropriate policy interventions to manage it. 

    REUNIFICATION: Why East Germans are not taking advantage of the large wage gap between East and West Germany

    Sebastian Heise, Tommaso Porzio     
    29 February 2020

    Thirty years after reunification, there remains a stark and persistent wage gap between East Germany and West Germany. A study by Sebastian Heise and Tommaso Porzio examines why East Germans do not migrate to the West to take advantage of the higher real wages there. Analysing data from more than one million establishments and almost two million individuals over 25 years, the research suggests that moving people across space is difficult and costly. Reallocating workers to better jobs at their current location could be a more cost-effective avenue to increase aggregate wages  and even accelerate regional convergence.  

     

    THE GENDER GAP IN ENTREPRENEURSHIP: US evidence of the role of ‘networking frictions’ in venture capital

    Sabrina Howell, Ramana Nanda      
    29 February 2020

    Venture capital remains a critical source of financing for new ideas and technologies, but only 10-15% of venture capital-backed entrepreneurs are women. Using data from the Harvard Business
    School’s New Venture Competition, Sabrine Howell and Ramana Nanda show that ‘networking frictions’ play a significant role in the gender gap and that structural solutions focused only on providing women entrepreneurs with more exposure to VCs may not be enough to eliminate it. Instead, networking opportunities should be encouraged or even formalised, particularly in the realm of new venture competitions and accelerators.

     

    STERLING’S DEPRECIATION AFTER THE BREXIT VOTE: Latest evidence on the big impact on consumer prices

    Holger Breinlich, Elsa Leromain, Dennis Novy, Thomas Sampson      
    02 March 2020

    The Brexit depreciation of sterling increased UK consumer prices by 2.9%, an £870 per year rise in the cost of living for the average UK household, which means that people have to work 1.4 weeks longer to afford the same goods and services. That is the conclusion of new research by Thomas Sampson and colleagues.

    When the UK voted to leave the EU on 23 June 2016, financial markets were taken by surprise and the sterling exchange rate depreciated sharply. Since then, UK imports have become more expensive. The original version of this research, published in November 2017, found weaker sterling increased UK consumer prices by 1.7% in the year after the referendum. Updating the analysis using more recent data, the researchers estimate that the Brexit depreciation increased UK consumer prices by 2.9%.

     

    THE BREXIT VOTE AND SLOWING PRODUCTIVITY GROWTH IN THE UK

    Ben Broadbent, Federico Di Pace, Thomas Drechsel, Richard Harrison, Silvana Tenreyro  
    26 February 2020

    The effects of the Brexit referendum result on the UK economy can be thought of as news about a future slowdown in productivity growth in the tradable sector, according to new research by Bank of England economists.

    They also note that the fall of sterling following the Brexit referendum is estimated to cost the average UK household around £870 per year due to higher cost of living. The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum.

     

    SHOCKS, FRICTIONS AND INEQUALITY IN US BUSINESS CYCLES

    Christian Bayer, Benjamin Born, Ralph Luetticke     
    24 February 2020

    How much does inequality matter for the business cycle and vice versa? Using data from the United States, CEPR researchers show that business cycle shocks and policy responses can account for 50% of the increase in US wealth inequality, and virtually the entire increase in income inequality, since the 1980s. 

    The study presents evidence suggesting that interlinked factors can provide greater insight into the recent history of the US business cycle and the economic recovery post-recession.

     

    HOUSING INSECURITY, HOMELESSNESS AND POPULISM: Evidence from the UK

    Thiemo Fetzer, Srinjoy Sen, Pedro Souza      
    20 February 2020


     

    New research suggests that the cut in housing subsidies for low-income households in the UK was, to a large extent, a false economy. The net fiscal savings for the central government were markedly offset by significantly higher local government spending to meet statutory obligations for prevention of homelessness. The cut also led to widespread distress among benefit claimants, some of whom went into rent arrears and were forcefully displaced from their homes.

    These are among the findings of a study by Thiemo Fetzer and colleagues, which examines the impact of a shock to the affordability of rent in the private sector in the UK, in the form of a cut in housing subsidies for low-income households, on homelessness and insecure living conditions as well as on democratic participation.

     

    OUTSIDE DIRECTORS FAIL TO IMPROVE FIRM PERFORMANCE: Evidence from Japan 

    Masayuki Morikawa       
    23 February 2020

    Japanese listed companies are recruiting many more outside directors to their boards in response to changes in corporate law and governance codes. But research by Masayuki Morikawa finds that these changes have had no impact yet on the risk-taking behaviour or performance of firms. One-size-fits-all regulation may not be in the best interests of all firms.

     

    HOW MIGRATION HELPS COUNTRIES BECOME COMPETITIVE AT INNOVATING IN NEW TECHNOLOGIES

    Dany Bahar, Raj Choudhury, Hillel Rapoport     
    27 February 2020

    A study by Dany Bahar and colleagues shows that migrant inventors play an important role in shaping the patent production of their destination countries. Arguably, these dynamics – driven by migrant inventors – can also affect broader economic outcomes, given the secondary effects of patenting and innovation on productivity and firm performance. Based on a 95-country sample spanning several decades, the results suggest that one of the most important engines of economic growth stands to be strongly negatively affected by the growing backlash against migration around the world.

     

    ECONOMIC COSTS OF POLITICAL CONNECTED FIRMS: Evidence from Eastern Europe

    Maurizio Bussolo, Francesca de Nicola, Ugo Panizza, Richard Varghese       
    28 February 2020

    A study by CEPR Vice President Ugo Panizza and colleagues examines around 460,000 politically connected firms from six Central and East European economies and shows that political
    connections ease credit constraints, distort capital allocation and may have large welfare costs. The researchers find that connected firms do not always borrow to invest and, when they do invest, they are likely to misallocate capital.

     

    GDPR: Evidence of the impact on the interconnection behaviour of the independent network operators that make up the internet, 

    Ran Zhuo, Bradley Huffaker, KC Claffy, Shane Greenstein     
    01 March 2020

    The internet comprises thousands of independently operated networks, where bilaterally negotiated interconnection agreements determine the flow of data between networks. New research examines the impact of the EU’s General Data Protection Regulation on the interconnection behaviour of network operators. It finds no measurable effects of GDPR on interconnection topology at the network level, with networks in the EEA growing at a rate similar to networks in non-EEA OECD countries and only economically small effects on the entry and the number of networks. 

    GOVERNMENT BONDS: New evidence on the fundamentals of safe assets

    Maurizio Michael Habib, Livio Stracca, Fabrizio Venditti      
    02 March 2020

    What makes government bonds a safe asset? A new study shows that the low political and institutional risk of issuing countries and the relative size of the debt market foster a safe asset status, with the latter factor – size – reflecting the special role of the United States in providing a large, deep and liquid market for government bonds. Inertia – whether the bond behaved as a safe asset in the past – is also important. Notably, the drivers of safe asset status are heterogeneous within advanced and emerging markets, with external sustainability in particular being relevant for the latter group of countries. 

    BANK CAPITAL REQUIREMENTS:  Effects on the real economy and interactions with monetary policy

    Gabriele Cozzi, Matthieu Darracq Pariès, Peter Karadi, Jenny Körner, Christoffer Kok, Falk Mazelis, Kalin Nikolov, Elena Rancoita, Alejandro Van der Ghote, Julien Weber       
    03 March 2020
    Following the financial crisis, central banks and regulatory authorities assumed new powers to set macroprudential bank capital requirements. This study describes a number of macro models used by the European Central Bank to measure the real impact of capital requirements and their interactions with monetary policy. It warns that a weaker banking system amplifies the impact of monetary policy and contributes to economic instability. Banks’ capital buffers are best augmented during times of affluence, when looser monetary policy can mitigate the costs of increasing capital requirements.

    ARE FINANCIAL CRISES DEMAND OR SUPPLY SHOCKS?

    Felipe Benguria, Alan M. Taylor      
    03 March 2020
    A perennial and fundamental macroeconomic question is whether financial crises are negative demand or supply shocks. New research discusses how the response of international trade flows and prices to financial crises can shed light on the debate. Evidence based on a new dataset of two centuries of financial crises and trade suggests financial crises are clearly negative shocks to demand.

    MERGER POLICY FOR DIGITAL MARKETS

    Tomaso Duso interviewed by Tim Phillips, 28 February 2019

    In the last decade, global digital giants have snapped up hundreds of smaller, innovative companies. Should competition authorities have intervened more often? Tomaso Duso tells Tim Phillips about new research suggesting that they should.

    THE UPWARD MOBILITY OF IMMIGRANTS: US evidence

    Leah Boustan      

    When immigrants come to the United States, they may not make it up to the middle class themselves, but what happens to their children? Leah Boustan discusses a study showing that the children of immigrants are able to achieve more social mobility than the children of the US-born. This is the case almost across the board when looking at country of origin. What matters most to the social mobility of immigrants’ children is where their parents choose to live.

    CULTURE AND ATTITUDES TO WORK: Variations in unemployment duration across the Swiss language border

    Josef Zweimüller     

    To what extent can differences in culture and attitudes towards work explain differences in unemployment across time and space? Josef Zweimüller examines variations in the time that unemployed people in Switzerland spend looking for work, comparing residents of Swiss nationality who speak German with residents who speak French or Italian.

    According to survey evidence and voting results, the Swiss language border separates two social groups with different cultural backgrounds and attitudes towards work. Despite similar local labour markets, French and Italian speakers who lose their job spend almost seven weeks longer in unemployment than their German-speaking neighbours. This effect is comparable to a large increase in the generosity of unemployment insurance.