Great Questions from Paul Krugman

Why have profits been so strong in a weak economy? Why, with profits so high, don’t businesses find reason to invest more (equipment investment is actually fairly strong, but construction remains weak). (For the seriously wonkish, why do average and marginal q seem to be so different?)

His full post is here.

Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

From Clemens Fuest, Andreas Peichl, and  Sebastian Siegloch:

Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities’ tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

Local Economic Development, Agglomeration Economies and the Big Push: 100 Years of Evidence from the Tennessee Valley Authority

Here’s an interesting paper from Pat Kline and Enrico Moretti on local economic development, agglomeration, and the Big Push.

We study the long run effects of one of the most ambitious place based economic development policies in U.S. history: the Tennessee Valley Authority (TVA). Using a rich panel dataset of counties, we conduct an evaluation of the dynamic effects of the TVA on local economies in the seventy years following the program’s inception. We find that the TVA led to short run gains in agricul- tural employment that were eventually reversed, while impacts on manufacturing employment continued to intensify well after the program’s subsidies had lapsed – a pattern consistent with the presence of agglomeration economies in the manufacturing sector. Economists have long cautioned that the local gains created by place based policies may be offset by losses elsewhere, yielding ambiguous effects on the U.S. as a whole. We develop a novel approach to assessing the aggregate consequences of place based policies. Our findings suggest that the TVA boosted national manufacturing productivity by roughly 0.3% and that the dollar value of these productivity gains substantially exceeded the program’s costs.

Here’s how they conclude:

This paper makes two primary contributions. Our substantive contribution is to estimate the local and aggregate effects of one of the largest place based policies in U.S. history. To our knowledge, we are the first to empirically quantify the long run social costs and benefits of a place based policy. A second contribution is methodological: we have developed a tractable empirical framework for evaluating the aggregate welfare effects of placed based policies, with the potential to be applied to many other settings.

Our empirical findings are policy relevant. The evaluation designs of Section 3 provide strong evidence that the TVA sped the industrialization of the Tennessee Valley and provided lasting benefits to the region in the form of high paying manufacturing jobs. Notably, the impact on manufacturing employment persisted well beyond the lapsing of the regional subsidies, suggesting the presence of powerful agglomeration economies. By contrast, the agricultural sector, which is unlikely to exhibit substantial agglomeration forces, retracted dramatically once subsidies terminated.

Our analysis in Section 6 suggests the TVA substantially raised the productivity of the U.S. manufacturing sector by roughly 0.3% between 1940 and 1960. We estimate that the stream of benefits associated with this increase exceeded the program’s costs, though this conclusion rests on several unverifiable assumptions regarding the functioning of labor markets.

Most of the national impact of the TVA on worker welfare is accounted for by the direct effects of the program’s vast investments in public infrastructure. Our finding of a roughly constant agglomeration elasticity suggests the program’s indirect effects were minimal. A noteworthy implication is that although agglomeration economies represents an important market failure at the local level, this failure does not provide a rationale for federal intervention in the spatial distribution of manufacturing activity.

We caution, however, that our findings do not necessarily apply to all contexts, as the strength and shape of agglomeration economies may well vary across industries, periods and levels of aggregation. Our results are specific to the manufacturing sector and a period of U.S. history when manufacturing employment was expanding and earnings were relatively high. An important task for future work is to assess whether similar qualitative results hold for modern development efforts, such as those centered on building high tech clusters. 

 

It Takes a Regime Shift: Recent Developments in Japan through the Lens of the Great Depression

A recent paper from Christy Romer (via Greg Mankiw).

The Miracle of Microfinance? Evidence from a Randomized Evaluation

From Esther Duflo, Abhijit Banerjee, Rachel Glennerster, Cynthia G. Kinnan: 

ABSTRACT: This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market.  In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums.  Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan.  They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses.  There was no effect on average monthly expenditure per capita.   Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined.  Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts.  Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end.  We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.

Worker Flows Over the Business Cycle: the Role of Firm Quality

Lisa Kahn and Erika McEntarfer have an interesting paper on worker flows, firm quality, and the business cycle. They define firm quality as average pay (and their findings are robust to using other sensible definitions).

Here’s one of their key graphs:

This graph shows that while all firm types shrink the size of their workforce in recessions (i.e. growth is negative), net job growth declines more for good (high paying) firms. This is because they have more separations in recessions than low-quality firms. High wage firm hiring doesn’t fall by as much as it does for low wage firms, but this difference in hiring is not large enough to overcome the difference in separations.

Here’s how they conclude:

In this paper, we use employer-employee matched U.S. data to study net and gross worker flows over the business cycle as a function of firm quality. We find that low-quality firms fare relatively better in the recession; their growth rates shrink by less. This is because separation rates at low-wage firms fall by more. It looks as though high-quality firms are more likely to make layoffs in an economic downturn, while still keeping up a modest amount of hiring. This set of results is consistent with the need for low-quality firms to continually replenish their stock of workers in boomtimes when they lose their workforce to high-quality firms, while in busts they can grow, relative to high-quality firms. In contrast, high-quality firms grow relatively faster in boomtimes and experience relatively more separation in busts. As we have said, these findings are consistent with the Moscarini Postel-Vinay poaching model described above, while we provide ancillary evidence that labor demand explanations cannot be driving our results.

Furthermore, this set of facts is suggestive of two important implications for workers matching in recessions. First, low-quality firms may have an easier time attracting and retaining high-quality workers in a recession. We might therefore see that among workers matching in recessions, workers will be overqualified, relative to the firms that hire them. Second, relatively speaking, low-quality firms have an easier time retaining workers in recessions, since, as we have shown, they shrink less quickly. Therefore a worker matching to a low-quality firm in a recession is likely to stay there for longer; he or she will have less of an opportunity to make a job-to-job transition to a high-quality firm. In our data, we can look at both of these effects directly and we do so in Kahn and McEntarfer (2013).

While previous research has emphasized match quality may decline in recessions due to a lack of workforce reallocation (Barlevy 2002), our evidence here suggests an additional sullying effect. The types of jobs workers get stuck in are more likely to be low-quality. This is evident in our finding that, relatively speaking, low-quality firms have an easier time growing in the bust, while high-quality firms want to reduce the size of their workforce. One interpretation of our results is that the reduced ability to move on to better matches caused by a recession has a greater impact on workers in low-quality firms compared to those in high-quality firms. These results have implications then for the costs of recessions, both in the short- and long-run. These results also have important implications for the literatures on the differential impact of recessions of workers. For example, that entering the labor market in a recession (Kahn 2010, Oreopoulos, von Wachter and Heisz 2010) or being displaced from a long-term job in a recession (Davis and von Wachter 2010) has particularly long-lasting, negative wage impacts, could potentially be explained by these workers spending more time in low-quality firms.

Does Entrepreneurship Pay? The Michael Bloombergs, the Hot Dog Vendors, and the Returns to Self-Employment

From an interesting paper by Ross Levine and Yona Rubinstein:

We find that the incorporated self-employed earn much more per hour and work many more hours than salaried and unincorporated workers.  After conditioning on standard Mincerian characteristics, the incorporated self-employed have median residual hourly earnings that are 25% greater and median residual hours worked that are 15% greater than their salaried counterparts. We also find that the median unincorporated individual earns less per hour than his salaried counterpart and much less than a comparable incorporated worker. This helps explain earlier findings concerning the negative pecuniary returns to self-employment: the incorporated earn more than salaried workers, the unincorporated earn less, and there are more unincorporated than incorporated individuals.

The higher earnings of the incorporated self-employed partially reflect returns to individual traits and partially the returns to activities associated with incorporation. Individuals that at some point in their lives incorporate tend to earn about 33% more on average (and 20% more at the median) as salaried workers than comparable salaried workers that never incorporate: some people have traits associated with both higher earnings, regardless of employment type, and a greater tendency to incorporate. Nevertheless, even when controlling for individual effects, the average individual enjoys a 14% boost in residual hourly earnings when switching from salaried to incorporated self-employment (while the median person receives a 4% increase).

Furthermore, the distribution of the residual hourly earnings of the self-employed, especially the incorporated, has much fatter tails than that of salaried workers. For example, people that are successful when they are incorporated (90th-percentile of the residual hourly earnings distribution of the incorporated) tend to enjoy 70 percent more earnings than their earnings as successful salaried workers (90th-percentile of the residual hourly earnings distribution of the salaried). Entrepreneurship offers the possibility of comparably enormous positive returns.

In particular, we find that (1) incorporated individuals are more educated and more likely to come from high-earning, two parent families than salaried workers, and (2) even as teenagers, people that incorporate later in life tend to score higher on learning aptitude tests, exhibit greater self-esteem, and engage in more aggressive, illicit, and risky activities than those that do not. Along most of these dimensions, the unincorporated are on the other end of the spectrum, with values lower than salaried workers. This helps account for the puzzling observation that self-employed and salaried workers have similar traits: aggregating the incorporated and unincorporated masks crucial differences about the traits of people that sort into each sub-category of self-employment.

We also discover that several cognitive and noncognitive traits are more important for shaping the pecuniary returns to incorporated self-employment than they are for influencing the success of salaried and unincorporated individuals. Learning aptitude, self-esteem, and aggressive, risk-taking traits—which are all measured when individuals are teenagers—are especially, positively associated with being a highly successful incorporated business owner later in life. While a diverse body of research argues that traits related to self-esteem induce individuals to try self-employment (e.g., Zukerman 1994; Nicolaou, et al. 2008), our work suggests that such traits yield large pecuniary returns. These findings are consistent with research documenting nontrivial returns to noncognitive traits (Bowles et al. 2001; Heckman and Rubinstein, 2001; Heckman et al. 2006; Heckman, 2000). [...]

Note, we do not evaluate the causal impact of incorporation on earnings. Rather, we assess the pecuniary returns from self-sorting into incorporation, the cognitive and noncognitive traits underlying this sorting, and how these traits differentially shape the returns to various employment activities. The nature of entrepreneurs and the returns to entrepreneurship are inextricably connected.