Oxford Economic Papers - current issue

Longer life, higher welfare?

Grimm, M., Harttgen, K. — 2008-03-18

Whereas life expectancy continues to increase in most industrialized countries, many developing and transition countries are today confronted with decreases in life expectancy. Usual measures employed to compare welfare over time and space fail to deal with such demographic change and may lead to the so-called ‘repugnant conclusion’ that lower life expectancy involves higher welfare per capita. We illustrate this type of transmission channel using various welfare criteria and reference populations. We also consider feed-back effects from the demography on the economy using a neo-classical growth model. We show that the ‘repugnant conclusion’ can be avoided if we choose a lifetime welfare measure instead of a period (or snapshot) welfare measure. All concepts are illustrated empirically using a small sample of developed and developing countries.

Growth, inequality, and welfare: comparisons across space and time

Gruen, C., Klasen, S. — 2008-03-18

We propose and apply several welfare measures that combine average income with a measure of inequality to undertake cross-country comparisons of aggregate welfare for the 1970 to 2000 period. Our welfare measures, which are based on theoretical and empirical findings on the role of inequality in social welfare, drastically change the impression of levels of welfare, significantly affect the welfare ranking of countries in different benchmark years, affect changes in ranking over time, and affect convergence between industrialized and developing countries. While the results are sensitive to the type of inequality and its presumed effect on welfare, the results are robust to different ways to address comparability problems inherent in the inequality data used.

Job-worker mismatch and cognitive decline

de Grip, A., Bosma, H., Willems, D., van Boxtel, M. — 2008-03-18

We have used longitudinal test data on various aspects of people's cognitive abilities to analyse whether overeducated workers are more vulnerable to a decline in their cognitive abilities, and undereducated workers are less vulnerable. We found that a job-worker mismatch induces a cognitive decline with respect to immediate and delayed recall abilities, cognitive flexibility and verbal fluency. Our findings indicate that, to some extent, it is the adjustment of the ability level of the overeducated and undereducated workers that adjusts initial job-worker mismatch. This adds to the relevance of preventing overeducation, and shows that being employed in a challenging job contributes to workers’ cognitive resilience.

Unemployment duration and unemployment insurance: a comparative analysis based on Scandinavian micro data

Roed, K., Jensen, P., Thoursie, A. — 2008-03-18

Based on pooled register data from Norway and Sweden, we find that differences in unemployment duration patterns reflect dissimilarities in unemployment insurance (UI) systems in a way that convincingly establishes the link between economic incentives and job search behaviour. Specifically, UI benefits are relatively more generous for low-income workers in Sweden than in Norway, leading to relatively longer unemployment spells for low-income workers in Sweden. Based on the between-countries variation in replacement ratios, we find that the elasticity of the outflow rate from insured unemployment with respect to the replacement ratio is approximately one in Norway and 0.5 in Sweden.

Why are more redistributive social security systems smaller? A median voter approach

Koethenbuerger, M., Poutvaara, P., Profeta, P. — 2008-03-18

One of the stylized facts of unfunded social security programs is that programs are larger in size, measured relative to the GDP, the tighter the link between pension claims and past earnings. We provide a political economy explanation of this stylized fact in a median voter model, where people vote on the social security tax rate. We compare pension systems with flat-rate and earnings-related benefit formulas. Only flat-rate benefits redistribute within a generation from high to low income groups. If labor supply is endogenous, they also imply larger efficiency costs than earnings-related schemes. Using data on eight European countries, we find that the median voter is typically middle-aged with high income. For these voters, earnings-related systems are more attractive both because of less intragenerational redistribution and lower distortions in labor supply. The median voter model is also able to account for a considerable degree of cross-country variation in contribution rates.

Assessing inflation targeting through intervention analysis

Angeriz, A., Arestis, P. — 2008-03-18

The aim of this paper is to deal with the empirical aspects of the ‘new’ monetary policy framework, known as Inflation Targeting. Applying Intervention Analysis to multivariate Structural Time Series models, which avoids certain biases encountered in the use of conventional regression estimators, new empirical evidence is produced in the case of a number of OECD countries. These results demonstrate that although Inflation Targeting has gone hand-in-hand with low inflation, the strategy was introduced well after inflation had begun its downward trend. But, then, Inflation Targeting ‘locks in’ low inflation rates. The evidence produced in this paper suggests that non-Inflation Targeting central banks have also been successful on this score.

Non-productive consumption loans and threshold effects in the inflation-growth relationship

Hung, F.-S. — 2008-03-18

Recent empirical evidence indicates that two inflation thresholds exist in the inflation-growth relationship. Pre-existing theoretical models, however, fail to generate such a pattern. By adding consumption loans (which are non-productive) into a standard model of imperfect information, this paper finds that an increase in the inflation rate may increase, decrease, or have no significant effect on economic growth for inflation rates below a threshold level; however, for inflation rates higher than this threshold level, an increase in the inflation rate significantly reduces economic growth. Moreover, the marginal impact of an increase in the inflation rate in terms of reducing economic growth increases with the rise in the inflation rate, until the inflation rates reach the second threshold level, from which such a marginal effect significantly decreases. These results accord well with recent empirical evidence.

How to measure the unobservable: a panel technique for the analysis of TFP convergence

Di Liberto, A., Pigliaru, F., Mura, R. — 2008-03-18

This paper proposes a fixed-effect panel methodology that enables us to simultaneously take into account both TFP convergence and the traditional neoclassical-type of convergence. We analyse a sample of Italian regions between 1963 and 1993 and find strong evidence that both mechanisms were at work during the process of aggregate regional convergence observed in Italy up to the mid-seventies. Finally, we find that our TFP estimates are highly positively correlated with standard human capital measures, where the latter is not statistically significant in growth regressions. This evidence confirms one of the hypotheses of the Nelson and Phelps approach, namely that human capital is the main determinant of technological catch-up. Our results are robust to the use of different estimation procedures such as simple LSDV, Kiviet-corrected LSDV, and GMM à la Arellano and Bond.

Intrinsic comparative statics of a general class of profit-maximizing rate-of-return regulated firms

Caputo, M. R., Partovi, M. H. — 2008-03-18

An exhaustive comparative statics analysis of a general rate-of-return regulated, profit-maximizing model of the firm is carried out under a minimal set of assumptions. The resulting intrinsic comparative statics are contained in a positive semi-definite matrix. Each element of this matrix consists of a product of the A-J effect term and a Slutsky-like expression, thereby permitting the familiar interpretation of a compensated price change. The minimal set of assumptions allows a range of anomalous behavior that includes, inter alia, a reversal of the sign of the A-J effect and an increase in the use of an unregulated factor as a result of a compensated own-price increase. The implications of additional assumptions for the mathematical structure of the model and its economic consequences are discussed, and the equivalency relations among those assumptions are delineated. Throughout, mathematical results of the analysis are interpreted with a view to elucidating their intuitive economic significance.

Acknowledgements

2008-03-18