Showing papers in "National Bureau of Economic Research in 1991"

The Company You Keep: The Effects of Family and Neighborhood on Disadvantaged Youths

Abstract: We examine the effects of family background variables and neighborhood peers on the behaviors of inner-city youths in a tight labor market using data from the 1989 NBER survey of youths living in low-income Boston neighborhoods. We find that family adult behaviors are strongly related to analogous youth behaviors. The links between the behavior of older family members and youths are important for criminal activity, drug and alcohol use, childbearing out of wedlock, schooling, and church attendance. We also find that the behaviors of neighborhood peers appear to substantially affect youth behaviors in a manner suggestive of contagion models of neighborhood effects. Residence in a neighborhood in which a large proportion of other youths are involved in crime is associated with a substantial increase in an individual's probability of the being involved in crime. Significant neighborhood peer effects are also apparent for drug and alcohol use, church attendance, and the propensity of youths to be out of school and out of work. Our results indicate that family and peer influences both operate in manner such that "like begets like."

National Saving and International Investment

Abstract: This paper extends earlier work by Feldstein and Horioka on the relation between domestic saving rates and international capital flows or, equivalently, between domestic saving rates and domestic investment. The basic conclusion of the present analysis is that an increase in domestic saving has a substantial effect on the level of domestic investment although a smaller effect than would have been observed in the 1960s and 1970s. The savings retention coefficient for the 1980-86 period is 0.79, down from 0.91 in the l960s and 0.86 in the 1970s. The more closely integrated economies of the EEC also appear to have more outward capital mobility (i.e., a lower saving retention coefficient) than other OECD countries. There is no support for the view that the estimated saving-investment relation reflects a spurious impact of an omitted economic growth variable. Although budget deficits are inversely related to the difference between private investment end private saving, we reject the view that this reflects an endogenous response of fiscal policy in favor to the alter-native interpretation that the negative relation is evidence of crowding out of private investment by budget deficits. This interpretation is supported by the evidence that domestic investment responds equally to private saving and to budget deficits. The implication of the analysis thus supports the original Feldstein-Horioka conclusion that increase in domestic saving does raise a nation's capital stock and therefore the productivity of its workforce. Similarly, a tax on capital income is not likely to be shifted fully to labor and land by the outflow of enough capital to maintain the real rate of return unchanged.

Wage Dispersion Between and Within U.S. Manufacturing Plants, 1963-1986

Abstract: This paper exploits a rich and largely untapped source of information on the wages and other characteristics of individual manufacturing plants to cast new light on recent changes in the United States wage structure. Our primary data source, the Longitudinal Research Datafile (LRD) , contains observations on more than 300,000 manufacturing plants during Census years (1963, 1967, 1972, 1977, 1982) and 50,000-70,000 plants during intercensus years since 1972. We use the information in the LRD to investigate changes in the plant-wage structure over the past three decades. We also combine plant-level wage observations in the LRD with wage observations on individual workers in the Current Population Survey (CPS) to estimate the between-plant and within-plant components of overall wage dispersion.

Speculative Attacks and Models of Balance of Payments Crises

Abstract: Recent developments in the theoretical and empirical analysis of balance of payments crises are reviewed. A simple analytical model highlighting the process leading to such crises is first developed. The basic framework is then extended to deal with a variety of issues, including alternative postcollapse regimes, uncertainty, real sector effects, external borrowing and capital controls, imperfect asset substitutability, sticky prices, and endogenous policy switches. Empirical evidence on the collapse of exchange rate regimes is also examined, and the major implications of the analysis for macroeconomic policy are discussed.

Immigration Policy, National Origin, and Immigrant Skills: A Comparison of Canada and the United States

Abstract: Over 12 million persons migrated to Canada or the United States between 1959 and 1981. Beginning in the mid?1960s, the immigration policies of the two countries began to diverge considerably: the United States stressing family reunification and Canada stressing skills. This paper shows that the point system used by Canada generated, on average, a more skilled immigrant flow than that which entered the United States. This skill gap, however, is mostly attributable to differences in the national origin mix of the immigrant flows admitted by the two countries. In effect, the point system "works" because it alters the national origin mix of immigrant flows, and not because it generates a more skilled immigrant flow from a given source country.

A Cross-Country Study of Growth, Saving, and Government

Abstract: Models of endogenous economic growth can generate long-term growth without relying on exogenous changes in technology or population. A general feature of these models is the presence of constant or increasing returns in the factors that can be accumulated. I use some models of this type to study the determination of per capita growth, investment in physical and human capital, and population growth. The determinants of these variables involve aspects of government policy - including public infrastructure services, maintenance of property rights, government consumption, and taxation - and the initial level of per capita income. I examine the predicted relationships by using a cross-country sample that expands on the Summers-Heston set of about 120 countries. Aside from their data on levels of per capita GDP and the breakdown of GDP into components, I have added information about the composition of government expenditures, proxies for economic freedom and property rights, measures of political stability, and so on. This expansion in variables reduced the number of countries to 72. The findings verify some of the predictions about the determination of growth and investment/saving rates. For example, government consumption and investment spending, and proxies for economic freedom show up as suggested by the models. Also, the interplay among population growth, investment in human capital (school enrollment), and the initial level of per capita income confirm theoretical predictions about the tradeoff between the quantity and quality of children. I anticipate that additional results will emerge from my ongoing research in this area.(This abstract was borrowed from another version of this item.)

R&D Productivity: A Survey of Econometric Studies at the Firm Level

Abstract: This paper surveys econometric studies investigating the relationship between R&D and productivity at the firm level and assesses the results obtained so far and some of the problems encountered. The findings reviewed fall naturally into three major categories: based on the cross-sectional or time-series dimensions of the data and specified in terms of the elasticity of R&D or the rate of return to R&D. In view of the problems involved in modeling the effects of R&D on productivity and in measuring the appropriate variables, it is an agreeable surprise that most studies have managed to produce statistically significant and frequently plausible estimates. However, many of the current studies are not fully comparable and their results still leave much to be desired. The task of achieving progress is an arduous one.

Technology Commitment and the Cost of Economic Fluctuations

Abstract: When firms must make technology commitments, economic fluctuations impose costs in the form of ex post inefficiency in production technology. We present a general equilibrium model in which, due to the presence of technology commitment, greater volatility of productivity shocks leads to lower mean output. When learning-by-doing is incorporated, mean output becomes permanently lower as a consequence of higher volatility. The negative and persistent relationship between mean and variance of output implied by our model is strongly verified by the data. We estimate that observed volatility has imposed a cost amounting to almost two percentage points of U.S. GNP growth.

Host Country Benefits of Foreign Investment

Abstract: This paper reviews the empirical evidence on the very different conclusions that can be drawn about productivity spillovers of foreign direct investment. It explains the concept of host country spillover benefits, describes the various forms these benefits can take, both within and between industries, and summarizes the evidence regarding the relative magnitudes of the various forms of spillovers. Moreover, the paper discusses host country policy measures which can accelerate both the BC affiliates' technology imports and the diffusion of their technology in the host economies.

The Invisible Hand and Modern Welfare Economics

Abstract: This paper reviews and puts into perspective recent work reassessing the first and second Fundamental Theorems of Welfare Economics It assesses the implications of the Greenwald-Stiglitz theorem establishing the (constrained) Pareto inefficiency of market economies with imperfect information and incomplete markets as well as recent work on endogenous technological change The information theoretic limitations to the Second Fundamental Theorem are also discussed, including the inability to separate out issues of equity and efficiency The final sections of the paper consider the consequences of these problems for economic organization, economic policy, and the role of ideology in the belief in the Invisible Hand

Intertemporal Labor Supply: An Assessment

Abstract: The lifecycle labor supply model has been proposed as an explanation for various dimensions of labor supply, including movements over the business cycle, changes with age, and within-person variation over time. According to the model, all of these elements are tied together by a combination of intertemporal substitution effects and wealth effects. This paper offers an assessment of the model's ability to explain the main components of labor supply, focusing on microeconomic evidence for men.

Is Inequality Harmful for Growth? Theory and Evidence

Abstract: Is inequality harmful for growth? We suggest that it is. To summarize our main argument: in a society where distributional conflict is more important, political decisions are more likely to produce economic policies that allow private individuals to appropriate less of the returns to growth promoting activities, such as accumulation of capital and productive knowledge. In the paper we first formulate a theoretical model that formally captures this idea. The model has a politico-economic equilibrium, which determines a sequence of growth rates depending on structural parameters, political institutions, and initial conditions. We then confront the testable empirical implications with two sets of data. A first data set pools historical evidence-which goes back to the mid 19th century-from the US and eight European countries. A second data set contains post-war evidence from a broad cross-section of developed and less developed countries. In both samples we find a statistically significant and quantitatively important negative relation between inequality and growth. After a comprehensive sensitivity analysis, we conclude that our findings are not distorted by measurement error, reverse causation, hetroskedasticity, or other econometric problems.

Fiscal policy, capital accumulation, and debt in an open economy*

Abstract: in open economies. The recent literature addressing this problem does so using various versions of the utility maximizing representative agent framework. Two types of issues have received attention; the effects of changes in government expenditure policy on the one hand, and issues pertaining to debt and tax-financing policies on the other. Of necessity, formal analyses of this type are restrictive, being required to invoke abstractions which permit them to focus on the specific issues at hand in the most lucid way. But in almost all cases, the role of capital accumulation, a central component of the adjustment process, is either ignored or incorporated in restrictive ways. Particular significant contributions to the literature are contained in a series of papers by Frenkel and Razin, most of which are brought together in Frenkel and Razin (1987). This book provides a comprehensive treatment of the impact of deficits in a two-country world economy. For a large part their analysis

Political Instability, Political Weakness and Inflation: An Empirical Analysis

Abstract: In this paper we analyze empirically the most important implications of two family political economy models of inflation: the "myopic? government approach and the "weak" government approach. In myopic government models inflation is the deliberate outcome of politicians strategic behavior, while in weak government models inflation is the unavoidable result of a political struggle between different factions. In testing the implications of these two models we use a new data set on political developments in 76 countries for the period 1971-1982. Using a number of alternative definitions of the inflation tax we find out that the data supports the implications of the myopic governments models; countries with a more unstable political environment tend to rely more heavily on the inflation tax. There is no evidence in favor of the weak government hypothesis.

Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa

Abstract: We develop a simple formal framework to clarify the trade-offs involved in the choice between a fixed and flexible exchange-rate system. We then apply the framework to the CFA Zone countries in Africa, which have maintained a fixed parity with the French Franc since independence. Thanks to the predominance of a few agricultural products and natural resources in their exports, CFA member countries have suffered frequent shocks in their terms of trade. A flexible exchange rate could have possibly alleviated the costs of these external shocks. On the other hand, CFA member countries have managed to maintain lower inflation levels than their neighbors. Our framework provides a way of weighing these costs and benefits. The inflation differential between CFA and non-CFA African countries has been around 14 percentage points. We attribute this differential to the standard time-consistency problem inherent in discretionary macroeconomic policy. Nonetheless, our highly stylized calculations suggest that fixed exchange rates have been, on the whole, a bad bargain for the CFA member countries. Under reasonable output-inflation tradeoffs, the output costs of maintaining a fixed exchange rate have outweighed the benefits of lower inflation.

Housing and Saving in the United States

Abstract: The efficient markets hypothesis has dominated modern research on asset prices. Asset prices and their intrinsic values differ in inefficient financial markets but difficulties in the measurement of intrinsic value greatly complicate market efficiency tests. Reflections on the measurement of intrinsic value provide insight into the interpretation of existing evidence and suggestions for generating new evidence on market efficiency. This review essay on the state of knowledge about market efficiency focuses on "A Reappraisal of the Efficiency of Financial Markets", analyzing the research areas from this perspective: (1) short-run stock return predictability; (2) asset pricing anomalies; and (3) excess volatility and present value relations.

From Centrally-Planned to Market Economies: The Road from CPE to PCPE

Abstract: The early stages of transformation of centrally planned economies into market economies are examined. In the transitional phase when an economy is no longer centrally planned, but not yet market based – when it is a "previously centrally planned economy" – expectations play a key role. A model is developed to analyze the consequences of expected price liberalization, and the benefits from early development of financial markets and speedy implementation of price reform are demonstrated. Ways to reduce liquidity overhang are examined, the consequences of privatization are analyzed, and the benefits of an effective tax system are highlighted.

Exchange Rate Volatility and Misalignment: Evaluating some Proposals for Reform

Abstract: The need for reform of the international monetary system has been a recurring theme in the writings of Robert Triffin.2 In this paper, we follow Professor Triffin’s lead and analyse several proposals for reducing the volatility and/or misalignment of key-currency exchange rates. The proposals examined are a system of target zones, the imposition of controls or taxes on international capital flows, and a strengthening of international co-ordination over economic policies. Our purpose is not to endorse one proposal and to dismiss others. For one thing, some of the proposals have common elements. For another, some features of each of the proposals are already present in the existing exchange rate system. Instead, we see evaluation of these proposals as a useful vehicle for identifying issues that merit attention in any serious examination of how the functioning of the international monetary system might be improved.

Is Europe an Optimum Currency Area

Abstract: An optimum currency area is an economic unit composed of regions affected symmetrically by disturbances and between which labor and other factors of production flow freely. The symmetrical nature of disturbances and the high degree of factor mobility make it optimal to forsake nominal exchange rate changes as an instrument of adjustment and to reap the reduction in transactions costs associated with a common currency. This paper assesses labor mobility and the incidence of shocks in Europe by comparing them with comparable measures for Canada and the United States. Real exchange rates, a standard measure of the extent of assymetrical disturbances, remain considerably more variable in Europe than within the united states. Real securities prices, a measure of the incentive to reallocate productive capital across regions, appear considerably more variable between Paris and Dusseldorf than between Toronto and Montreal. A variety of measures suggests that labor mobility and the speed of labor market adjustment remain lower in Europe than in the United states. Thus, Europe remains further than the currency unions of North America from the ideal of an optimum currency area.

Product Demand, Cost of Production, Spillovers, and the Social Rate of Return to R&D

Abstract: The purpose of this paper is to develop and estimate a model of production with endogenous technological change. Technological change arises from R&D capital accumulation decisions. These decisions respond to market and government incentives and generate R&D capital spillovers. A spillover network of senders and receivers is estimated. The network shows that each receiving industry is affected by a distinct set of R&D sources and each sending industry affects a unique set of receivers. For the receivers, spillovers generally expand product markets, lower product prices, increase production costs and input demands. For the sources, significant R&D spillovers cause the social rates of return to R&D capital to be substantially above the private returns.

What is a Business Cycle

Abstract: This paper considers the question in its title from several angles. Part 1 looks at economic history and the development of thinking about business cycles - the popular meaning and economists' definitions and ideas. Part 2 reviews the lessons from business cycle chronologies and duration data, the concepts of periodicity of cycles and phases, and the apparent moderation of macroeconomic fluctuations in the second half of the 20th century. Part 3 compares the recent business cycles and growth cycles for several major industrialized, market-oriented countries. Part 4 discusses the role of endogenous cyclical variables, the outside shocks of various types, the systematic timing sequences, and the regularities of cyclical comovements and amplitudes. Understanding business cycles is aided by each of these models of analysis. Business cycles have varied greatly over the past 200 years in length, spread, and size. At the same time, they are distinguished by their recurrence, persistence, and pervasiveness. They make up a class of varied, complex, and evolving phenomena of both history and economic dynamics. Theories or models that try to reduce them to a single causal mechanism or shock are unlikely to succeed.

The Effects of U.S. Tax Policy on the Income Repatriation Patterns of U.S. Multinational Corporations

Abstract: U.S. corporations owe taxes to the U.S. Treasury on income earned both inside and outside American borders. This paper examines the incentives created by the U.S. tax system for the legal avoidance of taxes on foreign source income. Using data from 1986 corporate tax returns, we investigate the extent to which U.S. corporations structure and coordinate remittances of income from their foreign subsidiaries to reduce their U.S. and foreign tax liabilities. In contrast to previous work in this area, our estimates of the tax consequences of income remittances from foreign subsidiaries to parent corporations explicitly take into account the ability to use foreign tax credits generated from one source of foreign income to offset the U.S. tax liability generated by other sources of foreign income, withholding tax rates on income remittances, variations in source country corporate income tax systems, and dynamic aspects of the U.S. tax system. Our findings indicate that U.S. multinationals are able to take advantage of the U.S. tax system to avoid paying much U.S. tax on their foreign source income.

The Marshall Plan: History's Most Successful Structural Adjustment Program

Abstract: The post-World War II reconstruction of Western Europe was one of the greatest economic policy and foreign policy successes of this century. "Folk wisdom" assigns a major role in successful reconstruction to the Marshall Plan: the program that transferred some $13 billion to Europe in the years 1948-51. We examine the economic effects of the Marshall Plan, and find that it was not large enough to have significantly accelerated recovery by financing investment, aiding the reconstruction of damaged infrastructure, or easing commodity bottlenecks. We argue, however, that the Marshall Plan did play a major role in setting the stage for post-World War II Western Europe's rapid growth. The conditions attached to Marshall Plan aid pushed European political economy in a direction that left its post World War II "mixed economies" with more "market" and less "controls" in the mix.

The Effect of the New Minimum Wage Law in a Low-Wage Labor Market

Abstract: After nearly a decade without change, legislation that affected the Federal minimum wage in two significant ways took effect on April 1, 1990: (1) the hourly minimum wage was increased from $3.35 to $3.80; and (2) employers were enabled to pay a subminimum wage to teenage workers for up to six months. This paper examines the effect of these changes in the minimum wage law in a low-wage labor market using data from a survey of 167 fast food restaurants in Texas. We draw three main conclusions. First, our survey results indicate that less than 2 percent of fast food restaurants have taken advantage of the youth subminimum, even though 73 percent of the sampled restaurants paid a starting wage of less than $3.80 before the new minimum wage took effect. Second, we find that a sizeable minority of fast food restaurants increased wages for workers by an amount exceeding that necessary to comply with the higher minimum wage. Third, the majority of fast food restaurants in Texas that were directly affected by the minimum wage increase did not report that they attempted to offset their mandated wage increase by cutting fringe benefits or reducing employment.

Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States

Abstract: The main goal of this paper is to estimate to what extent the federal government of the United States insures member states against regional income shocks. We find that a one dollar reduction in a region's per capita personal income triggers a decrease in federal taxes of about 34 cents and an increase in federal transfers of about 6 cents. Hence, the final reduction in disposable per capita income is on the order of 60 cents. That is, between one third and one half of the initial shock is absorbed by the federal government. The much larger reaction of taxes than transfers to these regional imbalances reflects the fact that the main mechanism at work is the federal income tax system which in turn means that the stabilization process is automatic rather than specifically designed each time there is a cyclical movement in income. Some economists may want to argue that this regional insurance scheme provided by the federal government is an important reason why the system of fixed exchange rates that exists within the United States today has survived without major problems. Under this view, the creation of a European Central Bank that issues unified European currency without the simultaneous introduction (or expansion) of a fiscal federalist system could put the project at risk. Rough calculations of the impact of the existing European tax system on regional income suggests that a one dollar shock to regional GDP will reduce tax payments to the EEC government by half a cent!. Hence, the current European tax system has a long way to go before it reaches the 34 cents of the U.S. Federal Government.

Minimum Wages in Puerto Rico: Textbook Case of a Wage Floor?

Abstract: This paper uses time series and cross-industry data on employment and wages in Puerto Rico to assess the effects of applying the U.S. minimum wage to the Puerto Rican labor market. We find that the U.S. minimum has a massive effect on the earnings distribution in Puerto Rico and that it has substantially lowered employment and altered the allocation of labor across industries. The reduction in employment is due to the fact that the minimum has a high level relative to average earnings or productivity, not to an especially high estimated elasticity of employment to the minimum. We claim that the results support the textbook model of the minimum wage more strongly than studies of the minimum in the U.S. because in Puerto Rico the U.S. minimum has "real bite."

Short and Long Run Externalities

Abstract: In this paper we build upon previous work on external economies in manufacturing [Caballero and Lyons (1989, 1990)] by providing new evidence helpful for discriminating between different types of externalities. We investigate four-digit level input-output relationships and find that, over shorter horizons, the linkage between an industry and its customers is the most important factor in the transmission of externalities. This suggests that transactions externalities accruing primarily to the seller, and/or activity-driven demand externalities are significant for explaining the short-run behavior of measured total factor productivity. Over longer horizons. on the other hand, it is the activity level of suppliers that is more important. This suggests that external effects are also operating through intermediate goods linkages.

Evidence on Employment Effects of Minimum Wages and Subminimum Wage Provisions From Panel Data on State Minimum Wage Laws

Abstract: We construct a panel data set on state-level minimum wage laws and economic conditions to reevaluate existing evidence on minimum wage effects on employment, most of which comes from time-series data. Our estimates of the elasticities of teen and young-adult employment-to-population ratios fall primarily in the range -0.1 to -0.2, similar to the consensus range of estimates from time-series studies. We also find evidence that youth subminimum wage provisions enacted by state legislatures have moderated the disemployment effects of minimum wages.

Designing a Central Bank for Europe: A Cautionary Tale From the Early Years of the Federal Reserve System

Abstract: Introduction Important questions concerning the structure and operation of a European central bank (ECB) remain to be answered. How much independence should national central banks retain during the transition to a single currency? What voting or mediation rules should be used to resolve conflicts among the national representatives on the ECB's governing council? What role should be played by existing central banks in implementing pan-European policies once the ECB comes into operation? The Delors Report and the provisional statutes of the ECB, drafted by the governors of European Community central banks in Basel in November 1990, provide clearer answers to some of these questions than others. According to the Delors Report, during the transition to a single central bank (‘Stage 2’ of the process of monetary unification in the language of Brussels), national central banks will retain full nominal independence in the sense of continuing to issue their own national currencies and to intervene in domestic financial markets, but little real autonomy in that exchange rates will become immutably fixed and hence money supplies and interest rates will be determined by market forces. According to the draft statutes of the ECB, the policies of the new institution will be decided by votes cast by members of the bank's council, consisting of the 12 governors of the existing central banks and 6 executive directors appointed by the European Council. Voting will be by simple majority.

Life Insurance Inadequacy - Evidence From a Sample of Older Widows

Abstract: This paper studies the changes in income experienced by older women when their husbands die. The data used are the Retirement History Survey. The six waves of this survey provide information on roughly 1300 women who became widowed during the ten year period of the survey, 1960-1979. The findings indicate that about one third of new widows experience a substantial reduction (25 percent or greater) in their living standards when their husbands die. The reduction in living standard associated with the husband's death is more severe for younger widows and widows with greater income pre-widowhood. Couples could insure against severe reductions in income of widows by purchasing more life insurance. These findings lead, therefore, to the conclusion reached in previous studies by the authors and other researchers, namely that many couples fail to purchase enough life insurance to prevent a sharp drop in the wife's consumption if her husband dies. This conclusion raises the question of the role of the government in requiring the purchase of life insurance by couples, through the social security system's survivor insurance. The strong and uniform evidence on the pattern and level of life insurance purchases has implications for the scale of social security survivor benefits and the appropriate mix of total social security benefits between survivor and nonsurvivor benefits.