This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.

http://people.stern.nyu.edu/wgreene/Econometrics/Arellano-Bond.pdf

Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.

This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a univariate equilibrium correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all regressors are purely I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. Copyright © 2001 John Wiley & Sons, Ltd.

/pdf/bounds-testing-approaches-to-the-analysis-of-level-un6p8czliu.pdf

Bounds testing approaches to the analysis of level relationships

As GDP is a measure of market capacity and not economic well-being, this report has been commissioned to more accurately understand the social progress indicators of any given state. Gross domestic product (GDP) is the most widely used measure of economic activity. There are international standards for its calculation, and much thought has gone into its statistical and conceptual bases. But GDP mainly measures market production, though it has often been treated as if it were a measure of economic well-being. Conflating the two can lead to misleading indications about how well-off people are and entail the wrong policy decisions. One reason why money measures of economic performance and living standards have come to play such an important role in our societies is that the monetary valuation of goods and services makes it easy to add up quantities of a very different nature. When we know the prices of apple juice and DVD players, we can add up their values and make statements about production and consumption in a single figure. But market prices are more than an accounting device. Economic theory tells us that when markets are functioning properly, the ratio of one market price to another is reflective of the relative appreciation of the two products by those who purchase them. Moreover, GDP captures all final goods in the economy, whether they are consumed by households, firms or government. Valuing them with their prices would thus seem to be a good way of capturing, in a single number, how well-off society is at a particular moment. Furthermore, keeping prices unchanged while observing how quantities of goods and services that enter GDP move over time would seem like a reasonable way of making a statement about how society’s living standards are evolving in real terms. As it turns out, things are more complicated. First, prices may not exist for some goods and services (if for instance government provides free health insurance or if households are engaged in child care), raising the question of how these services should be valued. Second, even where there are market prices, they may deviate from society’s underlying valuation. In particular, when the consumption or production of particular products affects society as a whole, the price that individuals pay for those products will differ from their value to society at large. Environmental damage caused by production or consumption activities that is not reflected in market prices is a well-known example.

https://andrewoswald.com/docs/stiglitz20report_commission20final20200920sept.pdf

Report by the commission on the measurement of economic performance and social progress

Policy-makers are considering large-scale programs aimed at self-control to improve citizens’ health and wealth and reduce crime. Experimental and economic studies suggest such programs could reap benefits. Yet, is self-control important for the health, wealth, and public safety of the population? Following a cohort of 1,000 children from birth to the age of 32 y, we show that childhood self-control predicts physical health, substance dependence, personal finances, and criminal offending outcomes, following a gradient of self-control. Effects of children's self-control could be disentangled from their intelligence and social class as well as from mistakes they made as adolescents. In another cohort of 500 sibling-pairs, the sibling with lower self-control had poorer outcomes, despite shared family background. Interventions addressing self-control might reduce a panoply of societal costs, save taxpayers money, and promote prosperity.

/pdf/a-gradient-of-childhood-self-control-predicts-health-wealth-5fdg5ylocq.pdf

A gradient of childhood self-control predicts health, wealth, and public safety

Ethnic diversity is increasing in most advanced countries, driven mostly by sharp increases in immigration. In the long run immigration and diversity are likely to have important cultural, economic, fiscal, and developmental benefits. In the short run, however, immigration and ethnic diversity tend to reduce social solidarity and social capital. New evidence from the US suggests that in ethnically diverse neighbourhoods residents of all races tend to ‘hunker down’. Trust (even of one's own race) is lower, altruism and community cooperation rarer, friends fewer. In the long run, however, successful immigrant societies have overcome such fragmentation by creating new, cross-cutting forms of social solidarity and more encompassing identities. Illustrations of becoming comfortable with diversity are drawn from the US military, religious institutions, and earlier waves of American immigration.

/pdf/e-pluribus-unum-diversity-and-community-in-the-twenty-first-232si1r0e9.pdf

E Pluribus Unum: Diversity and Community in the Twenty‐first Century The 2006 Johan Skytte Prize Lecture

Introduction to New Edition Preface to First Edition 1. Overview THE MICROFOUNDATIONS 2. Wage-Bargaining and Unions 3. Efficiency Wages 4. Wage Behaviour: the Evidence 5. Job Search: the Duration of Unemployment 6. Mismatch: the Structure of Unemployment 7. The Pricing and Employment Behaviour of Firms THE MACROECONOMIC OUTCOME 8. The Macroeconomics of Unemployment 9. Explaining Post-war Unemployment in OECD Countries POLICY IMPLICATIONS 10. Policies to Cut Unemployment Annexes Discussion Questions References

Unemployment: Macroeconomic Performance and the Labour Market

In this new edition of his landmark book, Richard Layard shows that there is a paradox at the heart of our lives. Most people want more income. Yet as societies become richer, they do not become happier. This is not just anecdotally true, it is the story told by countless pieces of scientific research. We now have sophisticated ways of measuring how happy people are, and all the evidence shows that on average people have grown no happier in the last fifty years, even as average incomes have more than doubled. In fact, the First World has more depression, more alcoholism and more crime than fifty years ago. This paradox is true of Britain, the United States, continental Europe, and Japan. What is going on? Now fully revised and updated to include developments since first publication, Layard answers his critics in what is still the key book in 'happiness studies'.

Happiness: Lessons from a New Science

Barely a day goes by without some expert telling us how the continental European economies are about to disintegrate unless their labour markets become more flexible Basically, we are told, Europe has the wrong sort of labour market institutions for the modern global economy These outdated institutions both raise unemployment and lower growth rates The truth of propositions such as these depends on which labour market institutions really are bad for unemployment and growth, and which are not Our purpose in this paper is to set out what we know about this question Our conclusions indicate that the labour market institutions on which policy should be focused are unions and social security systems Encouraging product market competition is a key policy to eliminate the negative effects of unions For social security the key policies are benefit reform linked to active labour market policies to move people from welfare to work By comparison, time spent worrying about strict labour market regulations, employment protection and minimum wages is probably time largely wasted

Labor market institutions and economic performance

The report, published by the Earth Institute and co-edited by the institute’s director, Jeffrey Sachs, reflects a new worldwide demand for more attention to happiness and absence of misery as criteria for government policy. It reviews the state of happiness in the world today and shows how the new science of happiness explains personal and national variations in happiness.

World happiness report

Male unemployment in Britain has risen from around 2 per cent in the 1950s to around 17 per cent in 1985 (see Figure 1). (The figures are for male unemployment because there is no consistent series for women.1) Even more remarkably, unemployment has fallen in only three years out of the last twenty (1973, 1978 and 1979). To account for this, we need a model that explains both changes in the natural (or non-accelerating inflation) rate of unemployment (NAIRU) and deviations from it. We use a three-equation supply-side model, centred on the labour market. This has two main features. The first concerns the determination of employment in the short run. The labour demand function that we use cuts through the fruitless debate now raging (especially in Europe) as to whether current unemployment is 'classical' or 'Keynesian'. According to the 'classical' view, employment is too high because real wages are too high. According to the 'Keynesian' view, real wages are not binding, and unemployment is high because the product market does not clear-with prices too high relative to nominal demand. The whole debate is set in the framework of perfect competition. Yet in perfect competition prices are set by impersonal forces, and it is not clear what could possibly stop prices clearing the market. It is much more reasonable to think of prices as being set by imperfectly competitive firms, existing prices being the best they can think of, given the demand they face. In this context, firms' demand for labour will depend on both the real product wage and the level of real aggregate demand. This is the demand function we estimate, and it conforms both to common sense and to the data. However, this does not imply that employment can be made to grow without limit by pumping up real demand. For in the medium term, when price surprises are eliminated, our model determines three variables (employment, real wages and real demand) on the basis of three equations (an employment equation, a price equation and a wage equation). Thus in the medium term there is a 'natural' level of employment and, corresponding to this, a 'natural' level of real aggregate demand. The second key feature of our model concerns the medium-term determination of unemployment. In the medium term the planned mark-up of wages over prices in wage settlements must be consistent with the mark-up of prices over wage costs in employers' pricing behaviour. For if wage-setters try to set real product wages higher than is consistent with employers' pricing behaviour, this generates ever-increasing inflation. Thus the key to understanding unemployment in the medium term is the behaviour of wage-setters. If events occur that push them towards too-high real wages, then unemployment has to rise to offset these influences. We shall call these influences 'wage pressure variables' or 'push factors,' and they are clearly crucial in understanding unemployment. The variables here include the social security system, employment protection

Richard Layard

Papers

Unemployment: Macroeconomic Performance and the Labour Market

Happiness: Lessons from a New Science

Labor market institutions and economic performance

World happiness report

Unemployment in Britain