The Unassuming Economist

From a new Econbrowser by Hie Joo Ahn and James D. Hamilton:

“We conclude that the true unemployment rate in the U.S. is 1.9% higher on average than the published estimates.”

“We also conclude that the Bureau of Labor Statistics has underestimated the labor-force participation rate by 2.2% on average and that the fall in participation has been slower than suggested by the BLS estimates.”

“On the other hand, we find that reported average unemployment durations significantly overstate the average length of an uninterrupted spell of unemployment. A big factor in this appears to be the fact noticed by Kudlyak and Lange (2018) that some individuals include periods when they were briefly employed but nonetheless looking for a better job when they give an answer to how many weeks they have been actively looking for a job.”

“Here is our paper’s conclusion:

The data underlying the CPS contain multiple internal inconsistencies. These include the facts that people’s answers change the more times they are asked the same question, stock estimates are inconsistent with flow estimates, missing observations are not random, reported unemployment durations are inconsistent with reported labor-force histories, and people prefer to report some numbers over others. Ours is the first paper to attempt a unified reconciliation of these issues. We conclude that the U.S. unemployment rate and labor-force continuation rates are higher than conventionally reported while the average duration of unemployment is considerably lower.”

From Intereconomics:

“The idea of a universal basic income (UBI) is nothing new: the concept of a guaranteed endowment paid by the government to each of its citizens dates back centuries. The UBI has gained momentum in recent years as the relative economic stability of the second half of the 20th century gave way to a more turbulent start to the new millennium. The limits of the free market and globalisation in providing a decent standard of living for every citizen were laid bare for all to see, and inequality widened in even the richest global economies. Added to this was the increasing complexity of social security systems in modern welfare states. Policymakers and civil servants had the unenviable task of deciding who was deserving of assistance, as well as policing those in the system to make sure advantage was not being taken. Proponents argue that a UBI, by simply trusting everyone with a basic income each month, could solve both of these issues. Moreover, it could also be the solution to the purportedly imminent destruction of traditional jobs due to the rise of robotics and artificial intelligence. While the idea of a UBI is intriguing, real-world implementation is anything but basic. No serious answers have been found to the question of how to finance such a system, and until a workable solution is found, a UBI is simply not feasible. Other issues that economists continue to research include the negative effects of a UBI on a person’s willingness to work and the proper size of a UBI in order to fulfil its intended purpose. The following five articles in this Forum deal with these issues in order to analyse the strengths and weaknesses of what will surely be a major topic of debate over the next decade and beyond.”

Continue reading here.

From Intereconomics:

“For decades, mainstream economics has focused on increasing economic growth and accelerating cross-country convergence, while ignoring distributional concerns. However, the consensus has begun to shift, and recent IMF research has paid increased attention to inclusive growth and the detrimental macroeconomic effects of inequality. The IMF also recognises the threat posed by climate change and has begun to dedicate research to exploring ways to decouple carbon emissions from economic growth.

It is common in macroeconomic models to assume the existence of a “representative agent”, one person who represents the preferences of the entire economy. By construction, such models focus on growth rather than on distribution. However, the use of models with “heterogeneous agents” is increasing, which permit a joint analysis of growth and distribution. This trend has been mirrored in the IMF’s research and operations in recent years. While growth remains critical, the institution increasingly recognises that:

• jobs are the basis for people to feel included in society and have a sense of dignity – hence the IMF’s increased focus on unemployment and the functioning of labour markets;
• major segments of the population should have the opportunity to share in the prosperity of a country – hence the research into inequality;
• growth should be shared not just among this generation but with future generations – hence the scaling up of work on addressing climate change.

A common thread through many of the IMF’s recent initiatives is that they seek to promote inclusion. Over time, these issues have become important to the institution’s mission, as they directly affect economic performance and stability in many countries. This article describes the key findings of some of the IMF’s work in these three areas.”

Continue reading here.

From a VoxEU post by Shekhar Aiyar and Christian Ebeke:

“There are contrasting theories on the relationship between income inequality and growth, and the empirical evidence is similarly mixed. This column highlights the neglected role of equality of opportunity in mediating this relationship.  Using the World Bank’s new Global Database on Intergenerational Mobility, it shows that in societies where opportunities are unequally distributed, income inequality exerts a greater drag on growth. 

Despite the firm consensus that income inequality is intrinsically undesirable, its impact on economic growth is much disputed. Simon Kuznets famously argued that inequality is beneficial for economic growth at an early stage of development, since a moneyed capitalist class can undertake more investment, but is harmful at a later stage. Others have pointed to inequality as a necessary, even desirable outcome of rewards to innovation and risk-taking. But there are also numerous theories about how income inequality can reduce investment and hinder the full realisation of human potential. As a canonical example, Galor and Zeira (1993) show that if poor families are constrained to under-invest in education, aggregate growth falls.

The empirical evidence is similarly mixed. Barro (2000) finds that for developed economies income inequality raises growth. On the other hand, Berg et al. (2012, 2018) find that income inequality tends to reduce the duration of growth spells. Forbes (2000) and Panizza (2002) find no systematic effect.

The missing link: Inequality of opportunity

In recent work (Aiyar and Ebeke 2018), we point to the neglected role of equality of opportunity in mediating this relationship. Our hypothesis is simple. In societies where opportunities are unequally distributed – where the material circumstances of parents act as binding constraints on the opportunities available to their children – income inequality exerts a greater drag on growth. Any increase in income inequality tends to become entrenched, limiting the investment opportunities – broadly defined to include investment in children – available to low-income earners, thereby retarding long-term aggregate growth. On the other hand, in societies with a more equal distribution of opportunities, an increase in income inequality can be more easily reversed and need not constrain investment opportunities and growth. To the extent that inequality of opportunity matters in this way, its omission from standard regressions of growth on income inequality leads to misspecification, which can help explain the inconclusive nature of the empirical literature to date.

We measure a society’s distribution of opportunity by the economic mobility of its people across generations. The World Bank’s new Global Database on Intergenerational Mobility (GDIM) compiles cross-country estimates of the elasticity of a son’s income (or education level) with respect to the income (or education level) of their father (Narayan et al. 2018). The higher this elasticity, the lower the degree of intergenerational mobility, which we take to signal a less equal distribution of opportunity. Because each observation requires a comparison of life-cycle income over two generations, this is a slow-moving variable whose latest value says something about societal conditions over a period of several decades. For the purpose of our study and due to data availability constraints, we take this variable to be time-invariant.”

Continue reading here.

From a paper by P.N. (Raja) Junankar at University of Technology Sydney;

“In this paper we review the literature on the impact that monetary policy has on growth and employment in developing countries. Much of the literature focusses on the impact of monetary policy on inflation levels and inflation volatility, and sometimes on output (GDP) levels and volatility of output. This survey of the literature on Monetary policy and growth shows that money plays a small role in developing countries and that monetary policy is not a very important influence on growth but may have some impact on inflation. Although there is much discussion about the merits of keeping inflation levels and volatility low, there is very little literature on studying the impact of low rates of steady inflation on the levels of private investment and technological change and hence on economic growth and on employment. There is very little research about the direct links between monetary policy and employment. The impact of growth on employment depends on what are the main drivers of economic growth and the initial state of the economy. Although growth may lead to increasing employment (formal and informal) there is little evidence showing that growth leads to an increase in “decent employment”.”