Does immigration hurt natives? (updated)

Immigration continues to be a hotly debated topic in many countries, including New Zealand. A number of New Zealand politicians express somewhat negative, shall we say, views on the matter, in much the same way as they do on foreign investment in this country. These politicians play on fears that immigration takes jobs away from natives and imposes significant costs on taxpayers. Such ideas continue to shape electoral campaigns and policy discourses in many countries.

Economists have not been able to steer this debate much. Economic models emphasising the benefits of immigration for natives have typically neglected unemployment and redistribution – precisely the things voters are most concerned about. What happens if we introduce issues such as these into economic models of immigration? A new column at VoxEU.org by Michele Battisti, Gabriel Felbermayr, Giovanni Peri and Panu Poutvaara considers How immigration benefits natives despite labour market imperfections and income redistribution. Just from the title you can guess that Winston Peters wouldn't be bring this piece up during the election campaign.

Battisti, Felbermayr, Peri and Poutvaara write,

In our recent working paper (Battisti et al. 2014), we have introduced wage bargaining, search frictions, and a redistributive welfare state into a framework that still includes skill complementarities between immigrants and natives in production. Hence the traditional, and important, channel of gains for natives (skill complementarity) is introduced in a much more realistic world of frictions and redistribution that can make immigrants costly for natives. We have then calibrated the model to match the average statistics that we observe for 20 OECD countries. We have also simulated two ‘counter-factual’ scenarios:

(i) How does native workers’ welfare compare between the status quo and a situation with no immigrants (closed borders), and
(ii) What has been the effect on native welfare of immigration during the last 10 years?

They then go on to discuss "The relative labour-market performance of immigrants".

Looking at the wages of natives and immigrants of similar skills across the 20 countries considered, some interesting regularities emerge. First, immigrants are usually paid less than natives with similar educational attainments. Second, unemployment rates are usually higher among immigrants.

Table 1. Migrants versus natives: Cross-country heterogeneity within the OECD

Rows 3 and 4 of Table 1 show that, within education groups, immigrants receive lower wages than natives, and the gap is particularly important in the low-skilled segment. Moreover, as shown on rows 5 and 6, high- and low-skilled immigrants alike are also more likely to be unemployed. These differences – even allowing for reasonable differences in productivity – suggest that:

(i) Migrants have worse outside options than natives, and so obtain lower wages through bargaining, and
(ii) They are more likely to be hit by job destruction shocks, and so are more often unemployed.

The next issue Battisti, Felbermayr, Peri and Poutvaara turn to is "How immigration can spur job creation".

The introduction of job creation by firms – an important feature of our framework – generates two important effects of immigration. In particular, if firms cannot discriminate between natives and immigrants in the search process, but can pay immigrants lower wages (as is the case in the data), then the presence of immigrants drives up the average return from job creation. This encourages firms to create more jobs, some of which will be filled by natives. However, if matches with immigrants are more likely to break (as implied by their larger unemployment rate), the expected return to job creation is lower and firms will create fewer jobs. Which channel dominates depends on the relative strength of each mechanism. This can be simulated by our model once we have carefully calibrated its parameters on the data.

Figure 1. Native welfare changes in two migration scenarios, %

We calibrate our model to match the empirical moments for the 20 OECD countries shown in Table 1. Besides the relative labour market performance of immigrants, we also match facts on public spending, letting the government finance public goods and unemployment benefits by proportional taxation. We also match GDP per capita and average job durations for both educational groups.

Figure 1 presents results from two main scenarios. In the first, we calculate the difference in welfare (which can be also thought of as the difference in real post-tax income) between the status quo observed in 2011 and a hypothetical situation with no immigrants (closed borders). We find that the native welfare gains from immigration are positive in 19 out of 20 countries. In all countries but Switzerland (where the effect is essentially zero) natives have, on average, gained from immigration, and sometimes the gain is rather large (up to 2% of after-tax income). In the second scenario, we compute the difference in welfare of natives between the status quo in 2011 and a hypothetical situation in which the immigrant share had been kept at the level of 2000. We find a positive gain from this recent immigration in 16 countries.

In 14 out of 20 cases, the existing stock of immigrants makes both skill-groups of natives (college and non-college educated) better off. In the canonical model without labour market imperfections, these Pareto gains would be impossible. Moreover, even incumbent immigrants are found to be better off with immigration. Again, in the canonical framework this is extremely unlikely, as new immigrants are more closely substitutable with incumbent immigrants than with natives. The reason for these somewhat surprising results is the job-creation effect described above. Namely, immigration can grease the wheels of the labour market by affecting job creation incentives.

So what, you may ask "What explains the cross-country heterogeneity in benefits?"

The comparative statics from our analysis reveal that the following country characteristics increase the native immigration gains from a one-percentage-point increase in the immigrant labour force share:

(i) Higher native–immigrant wage gaps, regardless of the skill group;
(ii) A lower native–immigrant unemployment gap for the low-skilled;
(iii) More generous unemployment insurance;
(iv) A higher share of tertiary-educated workers amongst immigrants;
(v) Lower government expenditures.

The intuition is as follows. Lower bargaining power for immigrants implies that they have lower wages, and this encourages firms to create more jobs. Also, lower job-destruction rates for immigrants make hiring an immigrant more valuable for firms and encourage firms to create more jobs. A more generous unemployment insurance system makes immigration more beneficial for natives because higher unemployment benefits reduce job creation, and immigration helps to alleviate this distortion. In other words, the greasing-the-wheels effect and its lowering of the unemployment rate are particularly valuable when distortions are large. A higher share of tertiary-educated immigrants and lower government expenditures increase the benefits because they lower the extent of redistribution from natives to migrants.

So what conclusions can we draw from this?

Our analysis shows that immigration into imperfectly competitive labour markets need not be worsening labour market outcomes for natives. Instead, it can improve the job creation incentives of firms. Thus, measures that aim at eliminating the immigrant–native wage gap may hurt natives. This positive effect is threatened if immigrants are too often unemployed or if too many of them are unskilled. Policies reducing the rate of job loss for immigrants would therefore help natives. Finally, in contrast to widespread belief, immigrants do not seem to hurt low-skilled natives, even in the more realistic framework developed here. This is because immigration is often balanced between more and less educated, because its job-creation effect can help, and because redistribution towards immigrants is not as large as often suggested in the debate.

So, in short, immigration can be good for you. It also suggests that some kinds of inequality (the immigrant–native wage gap in this case) can have positive effects and, perhaps most importantly, immigrants do not seem to hurt low-skilled natives. Just don't tell Winston.

Ref.:

• Battisti, M, G Felbermayr, G Peri, and P Poutvaara (2014), “Immigration, Search, and Redistribution: A Quantitative Assessment of Native Welfare”, NBER Working Paper 20131.

Update: At the Economics New Zealand blog Donal Curtin notes that a recent survey of UK economists concluded "there is overwhelming support for the view that migration will increase the average income of current UK inhabitants". So immigration is good for you.

The size and effects of some forms of protectionism

From the Economist magazine:

India is hardly the only protectionist when it comes to agriculture. Rich countries are the worst culprits. Japan’s tariffs—778% on rice and 328% on sugar—aim to block trade completely, insulating its small and inefficient producers from competition. The European Union’s common agricultural policy soaks up 40% of its budget. But Mr Modi has run away from reform. India’s food subsidies are massive, costing around 1% of GDP. They lead to huge stockpiles of unwanted, rotting produce, and fan pervasive corruption.

But not only are food subsidies and protection costly, they are not the best way to help the poor.

Giving poor families cash or food stamps would be better at helping the neediest while minimising waste—as Brazil, for example, has demonstrated.

But what are the chances of reform if their are political benefits to the current system? Are agricultural intersts too powerful in many countries?

How many miles can you drive on one hour's wages?

The graph below comes from Ed Dolan's blog, Ed Dolan's Econ Blog.

And a few details on the calculations,

I was able to put together 50 years of pretty consistent data for the key variables, with only a little stitching together to make the starting points and end points fit. The series I used were:

• Nominal wage in dollars per hour for production and nonsupervisory workers.
• Average fuel economy of cars on the road, old and new, based on a series from the Department of Transportation for 1980 to 2012 and estimates from various sources to fill in the earlier years.
• Average gasoline prices from the Bureau of Labor Statistics and Department of Energy.

For years before 1964, data are harder to come by. Instead of trying to put together a complete series, I decided to go with spot estimates for three iconic cars of yore: A 1919 Model T (About 17 MPG), a 1935 Ford V-8 (about 15 MPG), and a larger 1950 Ford V-8, about 14 MPG.

To calculate the miles that you could drive per hour worked (MPHW), just divide your wage by the price you pay for gasoline and multiply by your car’s fuel efficiency in miles per gallon.

Decorporatisation

or the knowledge economy, as some people may call it. At the Stumbling and Mumbling blog Chris Dillow invents a new world, decorporatisation. Chris writes,

In the day job, I've coined a newish word - decorporatization.

My chart shows what I mean. It shows that in recent years we haven't seen just a squeeze on wages, but also a squeeze on profits; the share of these in GDP has fallen recently. One reason for this is that the incomes of the self-employed - measured by the ONS as other incomes - have increased. This hasn't happened because the self-employed are raking it in, but because there are so many more of them.

This is what I mean by decorporatization; we're seeing a shift from corporate sector activity to the self-employed.

Some of this might be due to firms employing freelancers and one-man subcontractors rather than staff - perhaps because transactions costs have fallen. However, whilst this might have have increased profits for particular firms, it hasn't increased them in aggregate.

And this is possible. Likely I would say. But I would put forward another factor, the thing that New Zealand governments used to get very excited about, the knowledge economy. Remember the "knowledge wave" the last Labour government promised us but never seemed to deliver on.

At least insofar as the knowledge economy means an increase in the importance of human capital compared to nonhuman capital in determining the organisational form that businesses will take, it could help explain what Chris is seeing in the data. Rajan and Zingales (2003: 90) argue that

[h]uman capital is replacing inanimate assets as the most important source of corporate capabilities and value. In both their organizational structure and their promotion and compensation policies, large firms are becoming more like professional partnerships.

It is also likely that this change has increased the number of sole-proprietorship and small partnerships being formed.

The important point here is that if your firm is based, in the main, around human capital then it is much earlier and cheaper to set-up a firm than it is to set-up a nonhuman capital based firm. There is no need to find and negotiate with and keep happy external financiers who supply the funding required to purchase large amount of nonhuman capital. With a human capital based firm the human capital is much more likely to be able to provide any nonhuman capital required without the need of external funding. For example if you are a computer scientist using a PC to design small business accounting software, then your firm being a sole-proprietorship or a small partnership is feasible whereas if you are writing software for a super-computer you are more likely to be an employee of whoever owns/rents the computer. That is, in the first case human capital is the major input to the production process of the firm while in the second nonhuman capital plays a much greater role and this leads to different organisational forms.

So what Chris is noting is an affect of a change in the importance of human capital to the production process, at least in some areas of the economy. More small firms are being set-up because it is cheaper to do so. Large amounts of expensive nonhuman capital are not necessary.

The basic income and the welfare state

Cato Unbound is hosting a month-long debate on “The Basic Income and the Welfare State.” The lead essay, “The Pragmatic Libertarian Case for a Basic Income Guaranteei” by Matt Zwolinski, is up now. In it, Zwolinski argues that libertarians should regard a BIG as significantly better, on libertarian grounds, than the current welfare state. It is cheaper, less paternalistic, and less prone to rent seeking. And while it might not measure up to strict standards of libertarian purity, it has a much better chance of actually being adopted in a world where 99% of people reject that purist vision.

Responses from Mike Huemer, Jim Manzi, and Robert Frank will go up over the next week.

A related audio: Libertarians for a Guaranteed Minimum Income? featuring Matt Zwolinski. This is the Cato Daily Podcast for December 5, 2013.

EconTalk this week

Reid Hoffman, co-founder of professional networking site LinkedIn, and Ben Casnocha, former Chief-of-Staff of LinkedIn, talk to EconTalk host Russ Roberts about LinkedIn and their book The Alliance. Hoffman and Casnocha discuss the founding and vision of LinkedIn along with their ideas in The Alliance on how to improve employee/employer relations when turnover is high and loyalty on each side is low.

A direct link to the talk is available here

The Economics of World War I. 2

I have written before about The Economics of World War I project at VoxEU.org. There is now an additional article in the series:

International Organisation and World War I
Patricia Clavin, 3 August 2014
Today’s international institutions have roots in the tenuous interwar peace. This column details the importance of Austria as a prototype for international aid and development. In the case of Austria, the interwar powers realized the inefficacy of a punitive peace, and instituted a system by which private credit markets would assist development in a mutually beneficial relationship. The Austrian ‘success story’ is key to understanding today’s international relations.

Xenophobia is not a good basis for economic policy (updated)

Isaac Davison writes in the New Zealand Herald:

Economic Development Minister Steven Joyce has accused Labour of "xenophobia" in their opposition of the potential sale of Lochinver Station to the Chinese company that bought the Crafar Farms.

Mr Joyce and Grant Robertson, economic development spokesman for Labour, appeared on TV3's The Nation this morning and discussed the sale.

Mr Robertson said under Labour the sale would not go ahead.

"Our criteria would definitely mean that a sale like this would be highly unlikely."

Mr Joyce said the opposition were "electioneering" in relation to the issue.

"When did [Labour] go out and oppose the purchase of James Cameron's land?"

"A little xenophobia from the Labour Party to start the day," he said.

Let me make a couple of points here. For efficiency reasons we want resources to be in the hands of those who value them most highly and the way to do that is sell them to the highest bidder. We want land (and other resources) to be used in the most efficient manner and the country of origin of the buyer is irrelevant to this. A thought experiment: ask yourself, Why are auctions used for so many goods? Its a way of finding out who values the good most highly. Whoever bids the most gets the goods. This is how we maximise the probability of getting an efficient allocation of resources. Secondly would a Labour government compensate the seller of the land for their policy? Under the Labour policy the seller would be forced to sell their land at a lower price than they would otherwise get (or not sell at all) and would a Labour government make up the difference between the actual sale price and the highest possible price? And if not, Why should the seller receive a lower return than they otherwise would?. And if this is a good policy for land why not implement it for other goods as well? What makes this idea land specific?

While I'm thinking about this let me add that the "logic" of our xenophobic friends must be symmetric. That is, if it is bad for foreigners to invest in New Zealand it must be equally bad for foreign counties to have New Zealanders investing in them. So why are New Zealand First, the Conservatives and Labour not announcing their intention to introduce legislation preventing New Zealanders from investing overseas?

Update: There are comments on this issue at Kiwiblog and Homepaddock and by Tim Worstall.

Presidents and the U.S. economy

There is a new NBER working paper out on Presidents and the U.S. Economy: An Econometric Exploration by Alan S. Blinder and Mark W. Watson. The abstract reds:

The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.

So Democrats got lucky.

Incentives matter: drug mules file

This is the abstract of a new paper The market for mules: Risk and compensation of cross-border drug couriers by David Bjerk and Caleb Mason in the International Review of Law and Economics, Volume 39, August 2014, Pages 58–72.

This paper uses a unique dataset to examine the economics of cross-border drug smuggling. Our results reveal that loads are generally quite large (median 30 kg), but with substantial variance within and across drug types. Males and females, as well as U.S. citizens and non-U.S. citizens are all well represented among mules. We also find that mule compensation is substantial (median $1313), and varies with load characteristics. Specifically, for mules caught with cocaine and meth, pay appears to be strongly correlated to expected sentence if caught, while pay appears to be primarily correlated with load size for marijuana mules, who generally smuggle much larger loads than those smuggling cocaine and meth. We argue that our results suggest that this underground labor market generally acts like a competitive labor market, where a risk-sensitive, reasonably well-informed, and relatively elastic labor force is compensated for higher risk tasks.

Why capitalism is better than socialism

In this short (8 mins) video from ReasonTV philosopher Jason Brennan discusses his book "Why Not Capitalism?".

"We're not the Borg from Star Trek. We want to engage in private projects we do by ourselves and not with others," says Jason Brennan, an associate professor of philosophy at Georgetown University.

Brennan's new book, Why Not Capitalism?, casts a critical eye on a notion with wide appeal among academics, politicians, and the general public: That even though history has shown that socialism is unworkable in practice, it's still the best way to run society in theory.

Brennan says that such thinking neglects the fact that even in utopia people will have significantly different visions of a life well lived. "You want a system under which you can realize all these different conceptions of the good life and the good community," he argues. Even in a world free of petty rivalries, tribalism, and human failings, capitalism would still be superior because it uniquely affords citizens the rights and freedoms necessary to customize their lives and pursue their own, personally meaningful projects.

Tyler Cowen on inequality and what really ails America

Eduardo Porter writes-up an email interview he had with economics professor Tyler Cowen on the subject of inequality.

A few interesting questions:

Q: Inequality is running amok. The richest one percent of Americans pull more than a fifth of the nation’s income. The top 10 percent take half, more than during the Roaring Twenties. President Obama seems to believe this is “the defining issue of our time.” Is it?

A: “Income inequality” consists of at least three separate issues: 1) the top one percent is earning more; 2) the relative return to education is rising; and 3) economic growth is slow, and thus many lower- and middle-income groups are not seeing their incomes rise very much over time. The third of these is arguably the defining issue of our time. Grouping these issues all together under the broad heading of “income inequality” I view as a big intellectual mistake.

Q: So should we worry at all about the chasm opening up between the income of the rich and the rest?

A: I worry about stagnation in the middle and towards the bottom, not the income gap per se. A lot of the income growth at the top has come from globalization; for instance, Apple now sells a lot of iPhones to China. That’s not something we should be worried about. Rather, we should celebrate it.

Q: So, your conclusion is we should obsess less about rising inequality in America.

A: We should focus policy on increasing the quality and affordability of housing, health care and education, and on raising the rate of technological advancement. If we did that, we wouldn't have to worry about this red herring of “inequality” writ large any more.

By the way, the biggest inequalities are those across borders. So if we are talking policy, how about a more liberal immigration policy for the United States? That should be the No. 1 priority for anyone concerned about income inequality.

"Neo-liberals" and "progressives": never the twain shall meet?

I was asked to give evidence on behalf of the Fabian Society to the Beveridge Committee on Broadcasting, and although I refused on the grounds that I was not a Socialist (this was countered by saying that there was not a specifically Socialist point of view on broadcasting), I did in fact prepare the first memorandum considered by the Fabian Society Committee on broadcasting and which was the basis from which their discussions proceeded.

Ronald Coase 1961
There is an interesting new working paper out on Ronald Coase and the Fabian Society: Competitive discussion in liberal ideology by David M. Levy and Sandra J. Peart. Levy and Peart open the paper by saying:

Ronald Coase wrote the 1949 memo that guided the discussion of the Fabian Research Group on broadcasting. In the evidence presented to the Beveridge Committee on broadcasting, the Fabians endorsed his recommendations by and large. These two facts have previously escaped notice and, as a result, our understanding of post-war economic thought has been misinformed. The stereotype of post-war economic thought divides the profession into two groups, “neo-liberals” and “progressives”. In this stereotyping “neo-liberals” are said to advance a policy agenda in which markets, rather than governments, provide services; “Progressives”, by contrast, are said to favor a greater role for governments in the provision of services. In this admittedly broad characterization, there is little room for “neo-liberals” to collaborate with “progressives”.

Coase is said to typify the “neo-liberal”, while the Fabians do the same for “progressives.” As such, we would expect that they would have nothing in common in the dimension of policy recommendations. The evidence presented below, however, demonstrates that Coase and the Fabians proposed a third alternative, one that avoided the government-market dichotomy that has been so important in stereotyping post-war thought. Instead of proposing a market or a government solution, Coase and the Fabians recommended that broadcasting in Britain be fragmented to break up the BBC monopoly whose origins Coase had so carefully studied (Coase 1950). When the Beveridge Committee recommended a continuation of the monopoly, Coase was, not surprisingly, distressed. Moreover, he was not pleased with the minority report that recommended commercializing television because Coase thought that policy would be outside the British consensus.

Coase’s willingness to allow public consensus to trump the theoretical rationale for market provision of broadcasting suggests a deep problem with the stereotype of post-war market liberalism. In both the memo for the Fabian Society and his book, Coase used a recently coined word—totalitarian—to describe the theoretical rationale for a broadcasting monopoly presented by the spokesperson of the BBC, Lord Reith. By the word “totalitarian” Coase meant something more general than the policies advocated by Hitler, Mussolini, or somewhat nearer at hand, Mosley, but rather the view that state policy can ignore the legitimate wishes of the citizens of the state. The idea that there are “democratic goals” that can be separated from “democratic means”—a view that Lord Reith articulated frequently as we document in note 8—is the heart of the danger which Coase always and everywhere opposed.

Interesting stuff. The idea that a socialist group like the Fabians were willing to go along with Coase on breaking up the BBC monopoly is not something we would expect to see given the standard division of post-war thought into two, non-intersecting, groups of socialists and (classical) liberals. Coase's opposition to totalitarian thought is somewhat less surprising.

Levy and Peart continue,

The first two paragraphs of the Coase memo reproduced in the documents section below (p. 20) speak to the heart of the issue. What is needed, Coase urged, is sufficient public information to allow an informed discussion to take place. In Coase’s view public discussion had been stymied. Perhaps for strategic reasons, those in authority have not revealed the requisite information about possible alternative arrangements. The issue Coase stresses is not the efficient satisfaction of wants by market processes but public knowledge with which people can work out what institutions seem best to them. In his 1950 British Broadcasting, Coase closes the chapter “Public Discussion of the Monopoly” with the consequences of systematic suppression of information:

Though the programme policy of the Corporation gave the lower social classes what they ought to have, it gave the educated classes what they wanted; or, at any rate, more of what they wanted than they thought they would obtain with what was believed to be the only alternative—commercial broadcasting (1950, p. 177)

The paternalism of the BBC is obvious in that the "lower social classes" got what the BBC considered they should have, rather than what they actually wanted and the "educated classes" got an amount of what they wanted decided by the BBC.

The first two paragraphs of Coase's memo referred to above read:

Memorandum by Mr. R. H. Coase

1. The task of the Beveridge Committee

What is wanted is an entirely new approach to the problems of broadcasting policy in Great Britain. The present attitude is one of uncritical acceptance of the existing organisation. This can largely be attributed to the way in which previous Committees worked. The Crawford Committee, which led to the establishment of the BBC, made (so far as I have been able to discover) no detailed examination of alternative schemes. And we know from Lord Elton that the Ullswater Committee (of which he was a member) came to their conclusions without questioning the basic assumptions on which the case for the existing organisation (and in particular the monopoly) rested.

The present Committee should take a different view of its responsibilities. Alternative arrangements should be examined. And most (if not all) of the evidence presented to the Committee should be published. The lack of information on what is possible has greatly handicapped public discussion. Publication of the evidence would permit an independent assessment of the conclusions reached by the Committee and would assist in the development of an informed public opinion on broadcasting policy.

Here we can see the typical Coaseian call for comparative institutional analysis. And a call to make sure that people have the information to basis such analysis on. We should always think about the role that alternative institutions play in ameliorating or exacerbating conflicts in a world of positive transaction costs - including broadcasting.

EconTalk this week

Sam Altman, president of startup accelerating firm Y Combinator, talks to EconTalk host Russ Roberts about Y Combinator's innovative strategy for discovering, funding, and coaching groundbreaking startups, what the company looks for in a potential startup, and Silicon Valley's attitude toward entrenched firms. The two also discuss Altman's thoughts on sectors of the economy that are ripe for innovation and how new firms are revolutionizing operations in these industries.

A direct link to the audio is available here.

Trade and the poor

A interesting new NBER working paper on Measuring the Unequal Gains from Trade by Pablo D. Fajgelbaum and Amit K. Khandelwal. The abstract reads:

Individuals that consume different baskets of goods are differentially affected by relative price changes caused by international trade. We develop a methodology to measure the unequal gains from trade across consumers within countries that is applicable across countries and time. The approach uses data on aggregate expenditures across goods with different income elasticities and parameters estimated from a non-homothetic gravity equation. We find considerable variation in the pro-poor bias of trade depending on the income elasticity of each country's exports and imports. Non-homotheticities across sectors imply that trade typically favors the poor, who concentrate spending in more traded sectors. (Emphasis added.)

So trade helps the poor given the fact that the poor concentrate their spending in the traded sectors of the economy. Fajgelbaum and Khandelwal writes,

We also find important effects from sectoral heterogeneity. As in the single-sector setting, the pro-poor bias increases with a country’s income elasticity of exports. But, in contrast with the single-sector estimation, the multi-sector model implies a strong pro-poor bias of trade in every country. On average over the countries in our sample, the real income loss from closing off trade are 57 percent for the 10th percentile of the income distribution and 25 percent for the 90th percentile.5 This bias in the gains from trade toward poor consumers hinges on the fact that these consumers spend relatively more on sectors that are more traded, while high-income individuals consume relatively more services, which are the least traded sector. Additionally, low-income consumers happen to concentrate spending on sectors with a lower elasticity of substitution across source countries. As a result, the multi-sector setting implies larger expenditures in more tradeable sectors and a lower rate of substitution between imports and domestic goods for poor consumers; these two features lead to larger gains from trade for the poor than the rich.

Deirdre McCloskey on the great enrichment

From the IEA comes this short video of Professor Deirdre McCloskey. Deirdre McCloskey, Author of The Bourgeois Era series, speaks to ieaTV about inequality, the amazing growth in the wealth of the working class over the past three hundred years and how wealth and commerce has been viewed over the centuries.

Deirdre is the Distinguished Professor in English, Economics, History and Communication at the University of Illinois. As a self-described "postmodern free-market quantitative Episcopalian feminist Aristotelian", she has worked on numerous areas of economic history, including British economic 'failures' during the 19th Century. She has written fourteen books and edited another seven.

Interesting blog bits

1. Andrew Cohen on Libertarianism and Parental Licensing
   

   Back in December of 2011, I posted “Licensing Parents,” defending a view Hugh LaFollette had introduced into philosophical literature in 1980: that the state should license parents (LaFollette further defended this stance in 2010; see Note 1). LaFollette is not a libertarian and as I indicated then, I disagree with him about a lot–including the need to license medical doctors and lawyers. I nonetheless think he is right that we ought to license parents. In this post, I explain why libertarians—or at least minarchist BH-libertarians—ought to endorse parental licensing.

2. Bryan Caplan on The Economist on Overparenting
   

   Though I'm no fan of The Economist's editorials, their science coverage remains outstanding. Check out their latest piece on overparenting.

3. Ryan Bourne on ‘Does good broadcasting require compulsion?’ The question the BBC won’t address
   

   I got to thinking about how helpful this interview style would be when I read the BBC’s own Director of Policy James Heath’s response to my response to his original blog post on why the licence fee is the right method of funding for the BBC. Rather than focusing on the arguments that I had made as to why a licence fee – a compulsory charge applied to everyone who wants to watch any live television – was indefensible and unnecessary, Heath instead used his article to outline why the BBC itself was of value to us.

4. Thorsten Beck, Hans Degryse, Ralph De Haas and Neeltje van Horen on When arm’s length is too far

   The small and medium-size enterprises (SMEs) were among the most severely affected in the Global Crisis. This column discusses new evidence on how different lending techniques affect lending in bad and good times. Data from 21 countries in central and eastern Europe show that ‘relationship lending’ alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.

5. Linda Goldberg, Signe Krogstrup, John Lipsky and Hélène Rey ask Why is financial stability essential for key currencies in the international monetary system?

   The dollar’s dominant role in international trade and finance has proved remarkably resilient. This column argues that financial stability – and the policy and institutional frameworks that underpin it – are important new determinants of currencies’ international roles. While old drivers still matter, progress achieved on financial-stability reforms in major currency areas will greatly influence the future roles of their currencies.

6. David Saha on The Transatlantic Trade and Investment Partnership: Review of the debate on economic blogs

   An early draft of the Transatlantic Trade and Investment Partnership (TTIP) sparked an intensive public debate over possible advantages and disadvantages. This column reviews some arguments in favour of the Partnership and against it. While there is some debate over how large the economic benefit could be in the face of already relatively low trade barriers, critics claim that the deal will lower standards of consumer protection, provision of public services, and environmental protection in the EU.

7. Tim Woratall on Don't Believe What You Read; Google Doesn't Avoid Tax

   It’s the results reporting season over in my native UK again and once again, as regular as the seasons themselves roll around, we’ve spluttering pieces in the press about how Google avoids all of this tax that it should justly and righteously pay. Which means it must be the time of year for me to point out that Google doesn’t in fact avoid paying UK corporation tax, whatever you might be being told in the newspapers.

8. John Cochrane on Lucas and Sargent Revisited

   The economics blogosphere has a big discussion going on over Bob Lucas and Tom Sargent's classic "After Keynesian Macroeconomics."

FEE video: John Blundell - Lessons from Margaret Thatcher

John Blundell speaks about his experience with Margaret Thatcher at "An Evening at FEE" on May 21st, 2011.

Complexity and the art of public policy

Complexity science is changing the way we think about social systems and social theory. Unfortunately, economists’ policy models have not kept up and are stuck in either a market fundamentalist or government control narrative. In this audio from VoxEU.org Roland Kupers argues for a new, more flexible policy narrative, which envisions society as a complex evolving system that is uncontrollable but can be influenced.

A direct link to the audio is available here.

Employee satisfaction, labour market flexibility, and stock returns around the world

In a new NBER working paper Alex Edmans, Lucius Li, and Chendi Zhang study the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the “Best Companies to Work For” in 14 countries. They show that employee satisfaction is associated with positive abnormal returns in countries with high labour market flexibility, such as the U.S. and U.K., but not in countries with low labour market flexibility, such as Germany. I wonder New Zealand would come in this ranking.

These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labour markets, where firms face fewer constraints on hiring and firing. In contrast, in regulated labour markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for the differential profitability of socially responsible investing (“SRI”) strategies around the world. In particular, they emphasise the importance of taking institutional features into account when forming such strategies.

The conclusions of the paper:

This paper studies how the relationship between employee satisfaction and stock returns depends critically on the level of a country’s labor market flexibility. The alphas documented by Edmans (2011, 2012) for the U.S. are not anomalous in a global context, in terms of economic significance, and do extend to several other countries. However, they do not automatically generalize to every country – being listed as a Best Company to Work For is associated with superior returns only in countries with high labor market flexibility. These results are consistent with the idea that the recruitment, retention, and motivational benefits of employee satisfaction are most valuable in countries in which firms face fewer constraints on hiring and firing. These benefits are lower in countries with inflexible labor markets, leading to a downward shift in the marginal benefit of expenditure on employee welfare. Moreover, in such countries, regulations already provide a floor for worker welfare, leading to a movement down the marginal benefit curve. Both forces reduce the marginal benefit of investing in worker satisfaction, and thus being listed as a Best Company may reflect an agency problem.

The results emphasize the importance of the institutional context for both managers and investors. Edmans (2011, 2012) uses long-run stock returns as the dependent variable to mitigate concerns about reverse causality from firm performance to employee satisfaction – any publicly- available performance measure should be incorporated into the stock price at the start of the return compounding window. However, these papers do not make strong claims about causality, as it may be that a third, unobservable variable (e.g. management quality) drives both employee satisfaction and stock returns. Even if their results are interpreted as causal, it is not the case that managers can hope to increase stock returns by investing in employee satisfaction, as a positive link only exists in countries with high labor market flexibility. Turning to investors, a strategy of investing in firms with high employee satisfaction will only generate superior returns in countries with high labor market flexibility. Given that the vast majority of empirical asset pricing studies that uncover alpha are based on U.S. data, the results emphasize caution in applying these strategies overseas. This caution is especially warranted for strategies that are likely to be dependent on the institutional or cultural environment, such as socially responsible investing strategies. Just as the value of employee satisfaction depends on the flexibility of labor markets and existing regulations on worker welfare, the value of other SRI screens such as gender diversity, animal rights, environmental protection, and operating in an ethical industry also likely depend on the context.

The role of labour market flexibility for the results of the paper is interesting. New Zealand is not in their data set and I wonder how flexible our labour markets would look internationally.