Friday, August 31, 2007

Of boomers and cohorts

There has been plenty of complaints about the baby boomers from younger workers over the years. But while they may appear to have hogged many of the good jobs over the past decade or two, its not all upside. A new Boston Fed working paper finds that as the boomers age, the increase in the proportion of the workforce who are older lowers their relative wage premium for more experienced workers. According to Population Aging, Labor Demand, and the Structure of Wages by Margarita Sapozhnikov and Robert K. Triest, there are significant age cohort wage effects:

One consequence of demographic change is substantial shifts in the age distribution of the working age population. As the baby boom generation ages, the usual historical pattern of there being a high ratio of younger workers relative to older workers is increasingly being replaced by a pattern of there being roughly equal percentages of workers of different ages. One might expect that the increasing relative supply of older workers would lower the wage premium paid for older, more experienced workers.

This paper provides strong empirical support for this hypothesis. Econometric estimates imply that the size of one’s birth cohort affects wages throughout one’s working life, with members of relatively large cohorts (at all stages of their careers) earning a significantly lower wage than members of smaller cohorts. The cohort size effect is of approximately the same magnitude for men and for women. Our results suggest that cohort size effects are quantitatively important and should be incorporated into public policy analyses.

This also implies a higher relative wage for (scarcer) younger workers.

Monday, July 30, 2007

Of babies and currencies

It's a connection I confess I never made when working in the City, but a recent MAS Staff Paper by Andrew K. Rose and Saktiandi Supaat, Fertility and the real exchange rate, claims that countries with falling fertility rates are likely to experience a depreciation in their currency:

We use a quinquennial data set covering 87 countries between 1975 and 2005 to investigate the relationship between fertility and the real effective exchange rate. Theoretically a country experiencing a decline in its fertility rate can be expected to have higher savings, lower investment, a current account surplus, and accordingly a real depreciation. We test and confirm this hypothesis, controlling for a host of potential determinants such as PPP deviations and the Balassa-Samuelson effect. We find a statistically significant and robust link between fertility and the exchange rate.  Our point-estimate is that a decline in the fertility rate of one child per woman is associated with a depreciation of approximately .15% in the real effective exchange rate.

So that's bearish for the yen, bullish for Africa?

Thursday, December 28, 2006

Germany's baby bonus

People respond to incentives - even expectant mothers. We know from Andrew Leigh and Joshua Gans' recent paper, for example, that Australia's 'baby bonus' resulted in over 1,000 births being moved from late June to early July 2004, mostly via fewer C-sections and inducement procedures.

It looks like Germany is experiencing a similar effect, as expectant German mothers delay giving birth to cash in on benefits. Today's Scotsman reports:

Heavily pregnant German women are going to extreme lengths to delay giving birth until 1 January 2007 - because a new law will mean a difference of tens of thousands of pounds in benefits.

Parents of babies born in Germany on or after January 1 will benefit from generous new family subsidies. Consequently, all sorts of tips about keeping baby at bay are being traded on the internet, in magazines and in family planning classes.

"From Christmas onwards, I have been standing on my head," said expectant mother Antje Grimm. "I have heard that is one way to stop the child from becoming too overactive while not harming it."

Under the new Elterngeld, or "parents' money" law, parents who stay home to look after the newborn child will receive 67 per cent of their last net income tax free, or up to 1,800 - more than £1,300 - a month, for the first 12, or in some cases 14, months after the birth.

The already affluent, in particular, will be significantly better off. Currently, parents whose annual net income lies below a certain level - 30,000 per couple - can choose between up to 24 monthly payments of up to 300 or 12 monthly payments of up to 450.

...the motivation behind the plan to get Germans reproducing is based on sheer pragmatism: the German birth rate has fallen to an average of 1.3 children per woman - far lower than the 2.1 children per family replacement rate needed in industrialised countries. The Federal Statistics Office has ominously forecasted a drop in the population from today's 82 million people to just 69 million by 2050 - a decline it warned "cannot be halted".

That kind of demographic implosion would spell disaster for the country's creaking pension system. The shrinking population could also result in a shortage of skilled workers and lack of innovation.

German politicians hope the legislation can help reverse that trend.

Though the law may help in the long run, it has expectant mothers in their last days of pregnancy feeling a bit anxious. In recent weeks, soon-to-be parents have inundated doctors and midwives for advice on how to prolong pregnancy.

Wednesday, September 27, 2006

An economic history of bastardy

There are a lot more English bastards these days than there used to be. Professor John Ermisch at ISER, University of Essex, explains why in his fascinating new working paper: An Economic History of Bastardy in England and Wales (PDF). Here's the summary:

A remarkable feature of English demographic history is the explosion in childbearing outside marriage during the last quarter of the twentieth century, after 400 years of relative stability. Over the period 1845-1960, the percentage of births outside marriage moved within a small range, averaging about 5%. The paper finds that, up to the First World War, higher unemployment discouraged marriage and increased non-marital births, with a recovery in marriages in the subsequent year.

This pattern is consistent with poorer labour market conditions discouraging marriages among pregnant would-be brides, thereby increasing bastardy. During the inter-war period, higher unemployment continued to produce postponement of marriages, but non-marital childbearing was no longer linked to unemployment, nor is there a clear link to unemployment in the post-war period.

After 1960, when the contraceptive pill was introduced, childbearing outside marriage began to climb slowly, and it exploded after 1980, reaching 42% in 2004. This was partly driven by a steep increase in the age-specific non-marital births rates of women aged 20-34 from the mid-1970s to the early 1990s, after which they stabilised at a high level. At fixed average non-marital and marital age specific birth rates, this increase in the proportion of births outside marriage can be mainly accounted for by a large fall in the proportion of women aged 20-34 who are married, which is in turn associated with a dramatic rise in cohabiting unions. These unions are short-lived before either dissolving or being converted into marriage.

But this begs the question: why didn’t average non-marital fertility rates fall when more women cohabited? Women had the means (contraception and legal abortion) to avoid nonmarital childbearing if they wanted to do so, and so the substitution of cohabiting unions for marriages need not have raised non-marital fertility.

A theory of marriage market search (courtship) in which out-of-wedlock childbearing is an option suggests why it may be a rational choice, even when fertility can be controlled. A woman’s welfare as a single mother is likely to be influenced by the prevalence of single mothers in the population, which may reflect social stigma against single mothers. When their prevalence is low, nonmarital childbearing is discouraged. A temporary change in the determinants of non-marital childbearing that raises it, like the large rise in unemployment in the late 1970s/early 1980s, can produce rapid erosion of the stigma and a self-reinforcing rise in childbearing outside marriage.

This dynamic is likely to be concentrated among a segment of the population who already had stronger incentives to have a child before marriage. If this social influence model is valid, then it is likely to be the case that socio-economic differences in the chances of having a child before marriage widen as childbearing outside marriage becomes more common, and the paper provides evidence that this has happened.

An alternative, or complementary, explanation stresses the role of the rise in cohabiting unions and delay in partnership. These generated an increase in non-marital births by increasing the unmarried  population. This view also points to the operation of a social influence model in explaining the dramatic rise in cohabitation, and the paper provides evidence of a diffusion of cohabiting unions from the better educated to the less educated population.

Tuesday, July 25, 2006

RBA 2006: Demography, asset prices and financial markets

Every July, central bankers and economists gather in Sydney for the Reserve Bank of Australia's two-day research conference. This year's theme is Demography and Financial Markets. For those interested in demography, asset prices or monetary policy, it's a high quality smörgåsbord. Enjoy:

Hat tip: Stephen Kirchner at Institutional Economics

Monday, July 24, 2006

NBER 2006, Week 3

The third week of the NBER Summer Institute 2006 features a bumber crop of sessions scheduled. Listed below are links to the 16 wokshops and organisers:

* Children’s Workshop (Gruber)
* Social Insurance (Chetty)
* Labor Studies Workshop (Freeman/Katz)
* Intellectual Property Policy and Innovation (Jones/Stern)
* Health Economics Workshop (Grossman)
* Health Care and Aging/Health Care/Health Care, Aging and Productivity (Garber)
* Economics of National Security (Feldstein)
* Economics of Real Estate and Local Public Finance (Gyourko/Mayer/Sinai)
* Social Security Workshop (joint with Aging) (Liebman/Samwick)
* Aging and Health Care Workshops (Berndt/Cutler/Garber/Wise)
* Innovation Policy and the Economy (Finkelstein/Furman/Lerner)
* Education Workshop (Joint with Labor Studies) (Hoxby)
* Economics of Taxation (Goolsbee)
* Workshop on Public Policy and the Environment (Goulder/Greenstone)
* Empirical Personnel Economics Workshop (Shaw)
* Law and Economics Workshop (Jolls/Shavell)

Monday, July 17, 2006

The young, the old, and the restless

Some more evidence that demography matters. The NBER Summer Institute 2006 workshop on Impulse and Propagation Mechanisms which began today includes a fascinating paper from Nir Jaimovich, UC San Diego, and Henry Siu, University of British Columbia: The Young, the Old, and the Restless: Demographics and Business Cycle Volatility (PDF). It finds that a "significant part" of the moderation of post-war business cycles in the G7 economies is due to changes in the age composition of the labour force:

In this paper we investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition ofthe labor force account for a significant fraction of the variation in businesscycle volatility observed in the US and other G7 economies. During the postwar period, these countries have experienced dramatic demographic change, though details regarding extent and timing differ from place to place.

Using panel data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in US business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for a significant part of this moderation.

What is the mechanism? The authors find an "empirical regularity" in the G7 economies: age-specific differences in business cycle responsiveness of market work.

...the age profile of business cycle employment volatility can be roughly characterized as U-shaped, with large differences across age groups. The young and old display greater cyclical sensitivity than prime-aged individuals.

...the crucial channel of influence of demographic composition on business cycle volatility operates through differences in the sensitivity of market work across age groups.

UPDATE: Greg Mankiw has also noticed the paper, calling it "The most intriguing hypothesis I heard today."

Sunday, July 16, 2006

Does longer life expectancy boost growth?

The NBER Summer Institute 2006 started last week. One of the most notable papers so far has been a paper by MIT's Daron Acemoglu and Simon Johnson: Disease and Development: The Effect of Life Expectancy on Economic Growth (PDF) and 21 page data appendix (PDF). Here's the abstract:

What is the effect of increasing life expectancy on economic growth? To answer this question, we exploit the international epidemiological transition, the wave of international health innovations and improvements that began in the 1940s. We obtain estimates of mortality by disease before the 1940s from the League of Nations and national public health sources.

Using these data, we construct an instrument for changes in life expectancy, referred to as predicted mortality, which is based on the pre-intervention distribution of mortality from various diseases around the world and dates of global interventions. We document that predicted mortality has a large and robust effect on changes in life expectancy starting in 1940, but no effect on changes in life expectancy before the interventions. The instrumented changes in life expectancy have a large effect on population; a 1% increase in life expectancy leads to an increase in population of about 1.5%. Life expectancy has a much smaller effect on total GDP both initially and over a 40-year horizon, however.

Consequently, there is no evidence that the large exogenous increase in life expectancy led to a significant increase in per capita economic growth. These results confirm that global efforts to combat poor health conditions in less developed countries can be highly effective, but also shed doubt on claims that unfavorable health conditions are the root cause of the poverty of some nations.

Greg Mankiw has also noted this paper. Commenting in his post health and wealth yesterday:

The bottom line: Even if reformers (such as Jeff Sachs and Bill Gates) succeed in their admirable goal of promoting better health in poor countries, we should not expect that success to fix the problem of persistent poverty.

Tuesday, June 27, 2006

Summer in Verona

I'm not sure why I spent last week in London, when I could have been in Verona attending the European Society for Population Economics (ESPE) annual conference. Judging by the programme and book of abstracts (PDF), there were some very interesting papers. I will highlight them over coming days.

Thursday, May 25, 2006

Germany's demographic challenge

For those interested in demographics, Deustche Bank has published another big report. The demographic challenge: Simulations with an overlapping generations model (PDF) by Bernhard Gräf and Marc Schattenberg simulates the Germany population over the next 150 years, using their own OLG model. Their main conclusion is that "we will have to get used to substantially lower prosperity gains going forward." Here are some of the results of their simulations:

The growth potential of the German economy will shrink from about 1 ¼% p.a. at present to a mere ¼% p.a. by about 2060.

The annual increase in real income per capita will be dampened by up to 0.3 of a percentage point up to 2050, falling to just below 1% p.a. This comes to only one-third of the annual increases in prosperity from 1955 to 2005.

Under “Status quo” conditions, the return on capital will decline by around 100 basis points by 2060.

A change of pensions policy towards “More personal provision” would drive down returns by a further 35 basis points.

And the old-age dependency ratio is  set to nearly double by 2060. But longer term, there is some good news:

Our projections suggest that the population in our “model world” will decline by a further 15% from 2050 to 2080 and then remain stable from about 2150.

That's all right then.

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