This week from CEPR: October 17

Thursday, October 17, 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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    Lewis Dijkstra, Hugo Poelman, Andrés Rodríguez-Pose
    CEPR DP No. 14040 | 07 October

    Anti-EU votes are mainly driven by a combination of long-term economic and industrial decline, low levels of education and a lack of local employment opportunities. Once these factors are taken into account, well-off places are more likely to vote for anti-EU parties than places that are worse off, in contrast to explanations linking anti-establishment voting with poor people living in poor places.

    Other factors that have featured prominently as potential drivers of populism – such as ageing, rurality, remoteness, employment decline and population decline – seem to matter much less or matter in different ways (depending on the strength of opposition to EU integration considered).

    These are the central findings of a new CEPR study by Lewis Dijkstra, Hugo Poelman and Andrés Rodríguez-Pose, which provides the first comprehensive overview of EU discontent across more than 63,000 electoral districts in the EU-28 and assesses which factors push anti-EU voting. 

    They note that support for parties opposed to EU integration has risen rapidly and a wave of discontent has taken over the EU. This discontent is purportedly driven by the very factors behind the surge of populism: differences in age, wealth, education, or economic and demographic trajectories. Among the findings of the new research: 

    • The vote for parties that are strongly opposed to EU integration grew from 10% to 18% between 2000 and 2018. 
    • Southern Denmark, Northern Italy, Southern Austria, Eastern Germany, Eastern Hungary, and Southern Portugal are hotspots of anti-EU voting. 
    • Rural areas and small towns are more Eurosceptic than bigger cities. 
    • Votes for parties strongly opposed to European integration are virtually non-existent in Spain, the Baltics, Poland, Slovenia, Croatia, Romania, Belgium and Ireland.
    • The geography of votes for parties moderately opposed to European integration almost fully encompasses the whole of Greece, Hungary and Italy
    • More than one fifth of the electorate in large swathes of the Czech Republic, the Netherlands, France, Austria, southern Denmark and Slovakia voted for anti-EU parties.
    • Populist and anti-system parties do not necessarily advocate the abolition of or a withdrawal from the EU, but they blame many real or perceived ills on European integration.

    Figure 5: Share of vote for parties somewhat opposed, opposed, or strongly opposed to European integration (2013-2018) 


    • REPORTED WEALTH HOLDINGS ARE HIGHLY SENSITIVE TO WEALTH TAXATION: Evidence from Switzerland 

    BEHAVIORAL RESPONSES TO WEALTH TAXES: Evidence from Switzerland 
    Marius Brülhart, Jonathan Gruber, Matthias Krapf, Kurt Schmidheiny   
    CEPR DP No. 14054 | 10 October

    The growth of wealth inequality in many countries has led to a renewed focus on redistributive taxation. In particular, there is much discussion of expanding the package of redistributive tax tools to include an annual wealth tax, a concept that had largely been abandoned by many OECD countries. 

    A new CEPR study by Marius Brülhart, Jonathan Gruber, Matthias Krapf and Kurt Schmidheiny analyses how reported wealth responds to changes in wealth tax rates using rich intra-national variation in Switzerland, the country with the highest revenue share of annual wealth taxation in the OECD. 

    The study finds that reported wealth holdings are highly sensitive to wealth taxation: a 1% point drop in the wealth tax rate raises reported wealth by at least 43% after six years. Administrative tax records of two cantons with quasi-randomly assigned differential tax reforms suggest that 24% of the effect arises from taxpayer mobility and 20% from house price capitalisation. Savings responses appear unable to explain more than a small fraction of the remainder, suggesting sizable evasion responses in this setting with no third-party reporting of financial wealth.

    Table 1: Wealth taxes in OECD countries.

    Notes: In % of total tax revenue; only OECD countries that had non-zero wealth taxes in 1995; source: OECD Global Revenue Statistics (code 4210, Individual Recurrent Taxes on Net Wealth). In 2018, France replaced its wealth tax with a real estate tax, and Belgium introduced a tax on certain types of financial wealth. 


    • ECONOMIC AND POLITICAL INTEGRATION FOR IMMIGRANTS ARE CLOSELY INTERTWINED: Evidence from Norway   

    ARE POLITICAL AND ECONOMIC INTEGRATION INTERTWINED?
    Bernt Bratsberg, Giovanni Facchini, Tommaso Frattini, Anna Rosso  
    CEPR DP No. 14041 | 07 October

    As more immigrants make destination countries their new homes, understanding the determinants of their under-representation in the political process is becoming increasingly important. 

    A new CEPR study by Bernt Bratsberg, Giovanni Facchini, Tommaso Frattini and Anna Rosso examines the differences between immigrants and natives in their decision to run for office in Norway. This is a country that has experienced a large inflow of immigrants and also has generous provisions to extend the franchise in local elections to foreign nationals. 

    The research reveals the key role played by economic integration in political participation: 

    • If returns to labour market experience are higher for migrants than natives, migrants will be less likely to seek office than natives. 
    • As migrants integrate economically, their returns to experience become closer to those of comparable natives, resulting in a similar opportunity cost of entering politics.
    • Faster economic integration (that is, faster convergence of immigrants' returns to experience to those of natives) would also facilitate their political integration.

    The study suggests that economic and political integration are closely intertwined, as economic incentives play a key role in the decision to run for office, yet little is known on how they shape immigrants' selection into candidacy. 

    Figure 1: Share of immigrants among the candidates, electorate and population 

    Notes: Norwegian Population Register. We restrict the analysis to individuals aged 24-63. Population includes anyone in that age group. Electorate includes natives aged 24-63 and immigrants aged 24-63 with at least 3 years of residency. Immigrants are foreign-born individuals from both foreign-born parents, excluding Nordic immigrants.



    THE IMPACT OF NEW TECHNOLOGIES: Increased demand for high-skilled workers, especially in the service sector

    Sotiris Blanas, Gino Gancia, Tim Lee   
    10 October 2019

    Since the early 1980s, software and robots have reduced demand for low and medium-skill workers, the young and women, especially in manufacturing. But these technologies have raised demand for high-skill workers, older workers and men, especially in services.

    These are the central findings of a new study by Sotiris Blanas, Gino Gancia and Tim Lee investigating which emerging technologies have had the largest effect and on which types of workers over the last few decades.

    The research suggests that it is possible for workers to flourish from advances in technology by acquiring new skills that are complementary to machines, rather than remaining in jobs that are destroyed by them.


    STRONG ECONOMY, STRONG CURRENCY

    Ric Colacito, Steven Riddiough, Lucio Sarno   
    11 October 2019

    An investment strategy that buys currencies of strong economies and sells currencies of weak economies generates high returns, according to a new study by Ric Colacito, Steven Riddiough and Lucio Sarno.

    Previous research suggests that exchange rates are disconnected from the state of the economy, and that macroeconomic variables that characterise the business cycle cannot explain asset prices. This research provides evidence of a robust link between currency returns and the relative strength of the business cycle in the cross-section of countries.


    LIVE LONG AND PROSPER? The economics of ageing populations – a new Vox eBook 

    David E. Bloom    
    14 October 2019

    Population ageing, driven by declining fertility, increasing longevity and the progression of large-sized cohorts to older ages, is the dominant global demographic trend of the 21st century. 

    David Bloom introduces a new Vox eBook that examines the myriad challenges and economic uncertainties posed by ageing populations. Overall, the contributions suggest that although the challenges are formidable, they are not insurmountable. There is good reason to reject the view that ‘demography is destiny’.


    ECONOMICS IN THE UK HAS A DIVERSITY PROBLEM THAT STARTS IN SCHOOLS AND COLLEGES: #DiscoverEconomics aims to change that

    Arun Advani, Rachel Griffith, Sarah Smith    
    15 October 2019

    Writing for Vox, Arun Advani, Rachel Griffith and Sarah Smith introduce #DiscoverEconomics – a campaign to increase diversity in economics led by the Royal Economic Society and with the support of a wide range of institutions involved in economic research, communication and policy-making, including the Centre for Economic Policy Research (CEPR). 

    The campaign aims to attract more women, ethnic minority students, and students from state schools and colleges to study the subject at university, as well as changing perceptions of economics and what economists really do. 


    FROM WORKERS TO CAPITALISTS IN LESS THAN TWO GENERATIONS: Chinese urban elite transformation between 1988 and 2013

    Li Yang, Filip Novokmet, Branko Milanovic    
    09 October 2019

    Cities in China have become much richer and much more unequal since late 1980s. Today's urban elite consists mainly of professionals, self-employed and business people: they are much better educated and receive a much greater share of total urban income. This is also reflected in the composition of the Communist Party of China.

    These are among the findings of research by Li Yang, Filip Novokmet and Branko Milanovic, which analyses the historically unprecedented economic and social transformation in China over the past four decades.


    EXPORT PROMOTION: New evidence of what measures are most effective

    Ryo Makioka    
    09 October 2019


     

    Public export promotion agencies, which provide direct support to exporting firms, are more effective when providing bundled services combining multiple types of support and more direct measures, such as helping firms find distributors. These are the conclusions of research by Ryo Makioka, which surveys evidence on the effects of export promotion policies using firm-level observational data.

    He finds that while empirical studies generally find a positive effect of export promotion measures, many show differences in the pattern of effects depending on firm characteristics. 


    THE SOCIAL SUPPRESSION OF LABOUR SUPPLY: Evidence from India

    Emily Breza, Supreet Kaur, Nandita Krishnaswamy  
    12 October 2019

    Enforcing collective action through social norms and social sanctions can be particularly relevant in poor countries, where local social networks are often key to risk-sharing and information diffusion. 

    A study by Emily Breza, Supreet Kaur and Nandita Krishnaswamy uses two experimental exercises to test whether social norms shape aggregate labour supply in informal markets for casual daily agricultural labour in India. The results show that social norms help to sustain wage floors, with workers taking jobs at wage cuts in private but rejecting them in public due to fear of sanctions.


    DOWNTURNS AND THE SIZE OF THE MIDDLE CLASS: New evidence of the impact of the Great Recession

    Joan Costa-i-Font, Alberto Batinti   
    13 October 2019

    How do economic recessions affect the size of the middle class? A study by Joan Costa-i-Font and Alberto Batinti finds that anticipated recessions do not produce an overall middle-class squeeze, but unanticipated shocks such as the Great Recession do. It also finds that recessions increase the share of the population that regards itself as middle class.

    The implications of the study suggest that if governments wish to attain desirable policy objectives traditionally associated with the size of the middle class – such as innovation, democratic stability, and human capital accumulation – only those income losses resulting from unanticipated employment shocks, such as those emerging from the Great Recession, are a cause for concern.


    HOW DOMESTIC FISCAL FRAMEWORKS CAN CONTRIBUTE TO SOUND FISCAL POLICY ACROSS THE EUROPEAN UNION

    Lucio R Pench, Stefan Ciobanu, Marcin Zogala, Cristiana Belu Manescu  
    14 October 2019

    A new study by European Commission economists Lucio Pench, Stefan Ciobanu, Marcin Zogala and Cristiana Belu Manescu shows that other elements of the fiscal framework are just as important as national fiscal rules for fiscal discipline. 

    The study finds that independent monitoring of compliance, more realistic macroeconomic and budgetary forecasts, comprehensive and timely fiscal statistics and medium-term fiscal planning are also key for fiscal discipline in the EU.


    MONETARY POLICY SHOULD PREVENT DEFLATION AND AVOID A BAD EQUILIBRIUM: Analysis by Olli Rehn, Governor of the Bank of Finland

    Olli Rehn   
    15 October 2019

    Writing for Vox, Olli Rehn, the Governor of the Bank of Finland, argues instead that the threat of a deflationary spiral was avoided by several reinforcements of the degree of monetary policy accommodation since 2015. He notes that a key lesson of monetary policy of the last ten years is that timely action is essential to avoid the sort of profoundly harmful equilibrium that might arise from prolonged low inflation and zero interest rates.


    FISCAL POLICY AS A TOOL FOR OUTPUT STABILISATION WHILE KEEPING PUBLIC DEBT STABLE: Rethinking fiscal policy choices in the Eurozone

    Paul De Grauwe, Yuemei Ji   
    14 October 2019

    With an economic slowdown looming in the euro area, how should fiscal policies respond? Writing for Vox, Paul de Grauwe and Yuemei Ji use a behavioural macroeconomic framework to investigate the trade-offs between stabilising output and public debt. 

    The authors propose that when the interest rate is lower than the growth rate of the economy, fiscal policy can be used as a tool for output stabilisation while keeping public debt stable. They argue that many EU countries have the fiscal space to stimulate their economies, which could help in preventing a recession.


    TAXES ON E-CIGARETTES INCREASE TRADITIONAL CIGARETTE SMOKING AMONG PREGNANT WOMEN 

    Rahi Abouk, Scott Adams, Bo Feng, Catherine Maclean, Michael Pesko    
    11 October 2019

    E-cigarettes have become increasingly popular among young people globally. But a series of recent vaping-related illnesses have heightened concerns among critics, who do not see them as a healthier alternative to traditional cigarettes. 

    Against this backdrop of uncertainty, Rahi Abouk and colleagues examine the effects of e-cigarette taxes on smoking outcomes in a particularly important group: pregnant women. Their results show that e-cigarette taxes increase traditional cigarette smoking among pregnant women, but they do not appear to influence birth outcomes. 



    THE ECONOMICS OF AN AGEING POPULATION

    David E. Bloom interviewed by Tim Phillips, 14 October 2019

    We are living longer, and that affects every part of our economic future. David Bloom is the editor of a new VoxEU book on what he calls ‘the what, the so what and the now what’ of ageing. He tells Tim Phillips about some of the policy choices our societies will have to make in the near future.



    THE ECONOMICS OF ETHNIC PREJUDICE 

    Ekaterina Zhuravskaya, 08 October 2019

    Ekaterina Zhuravskaya discusses the link between middlemen minorities and the drivers of anti-Jewish violence in the Russian Empire. She is interested in understanding peoples’ beliefs and prejudices towards different ethnic groups and how these can lead to ethnic conflicts or wars: 

    ‘Economic competition between a minority and majority often leads to conflict because the majority wants to essentially avoid competition... If a minority is specialising in something that is complementary to the occupations of the majority, that should lead to less conflict’. 


    STUDYING DIVERSITY

    Eliana La Ferrara, 11 October 2019

    Early in her career, Eliana La Ferrara looked at American municipalities with the aim of understanding social dynamics when there was more diversity: ‘I showed that increased ethnic diversity is associated with less participation in groups, less trust,’ she says. ‘If municipalities are more diverse, you see lower participation rates.’

    Her early work on ethnic diversity, social participation and trust became her most cited to date. When La Ferrara found an overall negative association with diversity, she became more interested in how to leverage the positive effects, even when there are negative stereotypes present. ‘If you not only diversify but also help people who start off from different conditions to get to know each other better, then the negative effects might not necessarily materialise’ she says .

    This was followed by a study that took place at South African colleges, where black and white first-year students were assigned shared rooms. La Ferrara and her colleagues used an IAT test and at the beginning of the academic year, the test showed that most of the students had negative prejudices against the other group. At the end of the year, the bias of students that had been paired with someone from the other group had decreased dramatically.