New Economist

New book: Information Markets

A new book, Information Markets: A New Way of Making Decisions, has just been published by the AEI-Brookings Joint Center for Regulatory Studies - and the whole book can be downloaded for free. Edited by Robert W. Hahn and Paul C. Tetlock, it publishes seven papers from a December 2004 conference.

This collection of essays provides a state-of-the-art analysis of the potential impact of information markets on public policy and private decision-making. The authors assess what we really know about information markets, examine the potential of information markets to improve policy, lay out a research agenda to help improve our understanding of information markets, and explain how we might systematically improve the design of such markets.

Hat tip: Tyler Cowen at Marginal Revolution.

Give Chinese farmers their (property) rights

The rhetoric at this year’s meeting of China’s National People’s Congress was dominated by the problem of improving the lives of 700m farmers. But the one simple, radical reform that would revolutionise life in rural China, however, was not mentioned - the granting of private property rights to farmers. Tom Miller, Beijing correspondent of the China Economic Quarterly, writes about the issue on FT.com today: Rural reform stays silent on land rights.

The end of broker research?

Brokers have yet to learn that it's quality, not quantity, that their clients want. This, along with higher direct costs from the unbundling of broker research, has cut demand from fund managers. Monday's FTfm weekly reports that Sell-side research heads for extinction:

The quality and relevance of equity research provided by investment bank analysts to fund managers is falling, leading to predictions that some brokers will close their research divisions. Evidence of the waning influence of analysts was provided by a report that found two-thirds of the research received by the UK's top 50 fund managers was irrelevant.

The report, by APR Smartlogik, an information management company, revealed that fund managers yearned for better research - three-quarters of them said they would opt to receive more information if it were tailored to their needs.

The battle for Chinese consumers

Megastores are spreading across China, reports Guardian journalist Jonathan Watts: Wal-mart leads charge in race to grab a slice of China. Wal-Mart are not the only ones keen to compete for a burgeoning £140bn retail market

Compared with their counterparts in Britain, Chinese shoppers are not satisfied simply pushing a trolley around a shop to buy products that are carefully packaged to look as different as possible from their origins. They want to net their own fish, grab their own turtles and chop the heads off their own dead ducks. If that means facing up to the fact that every purchase of meat or fish is an execution order, then so be it. If it's not fresh, it won't sell.

This is one of the lessons being learnt by a growing number of western supermarket chains as they surge into the fast-growing Chinese market. This week Wal-Mart - the world's biggest retailer - declared its intention to lead the charge, announcing that it will hire up to 150,000 new staff in China over the next five years. The plan is the most ambitious attempt yet to convert China to western consumer culture - albeit with a local flavour.

"We're going to be growing in all directions," Joe Hatfield, chief executive of Wal-Mart Asia, told Reuters news agency in predicting that his company's Chinese operation could be as big as its 3,700-store United States business within 20 years. It is one of many. Britain's Tesco and B&Q, France's Carrefour and Leroy Merlin, Germany's Metro and Tengelmann, and Japan's Ito-Yokado and Aeon have all moved into China in the past decade. Most are now expanding at the rate of 10 to 20 megastores a year. In the fast-food sector western firms are so ubiquitous that there is even a Starbucks inside the Forbidden City - Beijing's old imperial palace - and Kentucky Fried Chicken and McDonald's outlets beside Tiananmen Square.

It is the same in the luxury goods sector, where Prada, Louis Vuitton and Chanel are opening outlets in shopping centres across the wealthy eastern regions. Even more spectacular is the advance of the sporting giants, Nike and Adidas - adding to their Chinese franchises at the rate of more than a store a day each as the 2008 Beijing Olympics approaches.

Like everything in China these days, the change is at a spectacular speed and on a scale the world has never seen before. It is already one of the fastest expansions in retail history, but analysts say it could get faster as international giants race for territory in a £140bn retail market that is growing at a double-digit pace...

The end of sisterhood?

For the first time in history, women in developed societies can take up any occupation or career they please. This has brought enormous benefits. But it has also had some less positive consequences—the death of sisterhood, a decline in female altruism and growing disincentives to bear children. So argues Professor Alison Wolf in her cover story for the April 2006 issue of Prospect magazine. Here's an extract from her article, Working girls:

Women used to enter the elite as daughters, mothers and wives. Now they do so as individuals.

This marks a rupture in human history. It is one that has brought enormous benefits to many people, and to many women in particular. But its repercussions are not all positive, either for society as a whole, or for all women. We are no more likely to return to the old patterns than we are to subsistence agriculture, so we need to understand what the new female labour market means for all our lives.

Three consequences get far less attention than they deserve. The first is the death of sisterhood: an end to the millennia during which women of all classes shared the same major life experiences to a far greater degree than did their men.

The second is the erosion of "female altruism," the service ethos which has been profoundly important to modern industrial societies - particularly in the education of their young, and the care of their old and sick.

The third is the impact of employment change on childbearing. We are familiar with the prospect of demographic decline, yet we ignore, sometimes wilfully, the extent to which educated women face disincentives to bear children.

UK data doesn't tell the whole picture

How accurate are the preliminary numbers from commonly-used UK macroeconomic indicators for forecasting and as a guide to trend growth? Anthony Garratt and Shaun P Vahey's article in the February 2006 Economic Journal, UK Real-Time Macro Data Characteristics, casts some doubt. The authors find that "the preliminary measurements of most real-side macro indicators are downwards biased predictors of subsequent measurements". Or, as the abstract puts it:

We characterise the relationships between preliminary and subsequent measurements for 16 commonly-used UK macroeconomic indicators drawn from two existing real-time data sets and a new nominal variable database. Most preliminary measurements are biased predictors of subsequent measurements, with some revision series affected by multiple structural breaks.

To illustrate how these findings facilitate real-time forecasting, we use a vector autoregresion to generate real-time one step ahead probability event forecasts for 1990Q1 to 1999Q2. Ignoring the predictability in initial measurements understates considerably the probability of above trend output growth

This downward bias might help explain why private sector forecasts have usually been more pessimistic about the prospects for UK growth than HM Treasury. Readers who are not EJ subscribers can find a June 2005 version of the paper here (PDF).

Blinder on offshoring

Mark Thoma brings to our attention a new Foreign Affairs piece by Alan Blinder from Princeton: Offshoring: The Next Industrial Revolution. It's only available to subscribers, but here's the summary:

Economists who insist that "offshore outsourcing" is just a routine extension of international trade are overlooking how major a transformation it will likely bring -- and how significant the consequences could be. The governments and societies of the developed world must start preparing, and fast.

And here's a December 2005 version, published as a CEPS working paper: Fear of Offshoring (PDF).

What explains the US wage gap?

A new and noteworthy paper by Claudia Canals from Columbia University seeks to decompose the widening US wage gap: What Explains the Widening Wage Gap? Outsourcing vs. Technology (PDF).

The approach taken is an accounting decomposition: using a two-step methodology based on Haskel and Slaughter (2002) to decompose the change in factor prices or wages into their different sources:

In particular, we derive a way of measuring technological change (first step) and a theory that links wages to technological change (second step). We then link the changes in technology from the first step with the change in wages from the second step.

The results are interesting:

..we quantify that outsourcing accounts for 28 percent of the actual widening in the wage gap in the 1980-1999 period, biased technological change explain 15 percent of the widening, and total biased technological change explain up to 58 percent of it.

The methodology is innovative, overcoming some of the problems with previous approaches. Her paper also goes beyond most in this field by including not only manufacturing but major service industries as well.

Unfortunately the data is quite dated, only going up to 1999. Canals used the BEA's Historic Input-Output Accounts, which are based on the 1987 Standard Industry Classification, and are not consistent with the newer NAICS-based estimates for 1997-2004. Let's hope she does another paper using the newer data, to see whether outsourcing effect has grown since the 1990s.

I am also looking forward to reading her forthcoming paper, Why previous methods of tackling the effect of outsourcing into labor demand have failed?

Why human capital matters for growth: 1, 2, 3

Three recent papers have argued, in my view persuasively, that the impact of human capital on growth has been under-estimated. Here's a quick summary of them:

Paper 1: Human Capital in Growth Regressions: how much difference does data quality make? by Angel de la Fuente and Rafael Domenech (Journal of the European Economic Association, March 2006) finds that better human capital data finds a a stronger positive correlation with growth than earlier studies:

We construct estimates of educational attainment for a sample of 21 OECD countries. Our series incorporate previously unexploited information and remove sharp breaks in the data that can only reflect changes in classification criteria. We then construct indicators of the information content of our estimates and a number of previously available data sets and examine their performance in several growth specifications.

We find a clear positive correlation between data quality and the size and significance of human capital coefficients in growth regressions. Using an extension of the classical errors in variables model to correct for measurement error bias, we construct a set of meta-estimates of the coefficient of years of schooling in an aggregate Cobb-Douglas production function. Our results suggest that the value of this parameter is likely to be above 0.60.

An extended working paper version, along with a document describing the construction of the education series and a spreadsheet with the data, are available here.

Paper 2: Human Capital, the Structure of Production, and Growth (PDF) by Antonio Ciccone and Elias Papaioannou (November 2005) uses data for 37 manufacturing industries in around 40 countries to examine whether more or better education "was associated with faster growth in schooling-intensive industries in the 1980’s. The short answer is yes. Here's the longer answer:

Do high levels of human capital foster economic growth by facilitating technology adoption? If so, countries with more human capital should have adopted more rapidly the skilled-labor augmenting technologies becoming available since the 1970’s. High human capital levels should therefore have translated into fast growth in more compared to less human-capital-intensive industries in the 1980’s. Theories of international specialization point to human capital accumulation as another important determinant of growth in human-capital-intensive industries. Using data for a large sample of countries, we find significant positive effects of human capital levels and human capital accumulation on output and employment growth in human-capital-intensive industries.

Paper 3: On the Aggregate and Distributional Implications of Productivity Differences across Countries, by Andrés Erosa, Tatyana Koreshkova and Diego Restuccia (Richmond FRB Working Paper 06-2, March 2006) finds that returns from human capital play a central role in explaining income and productivity differences between nations:

We develop a quantitative theory of human capital with heterogeneous agents in order to assess the sources of cross-country income differences. ..Our quantitative model generates a total-factor-productivity (TFP) elasticity of output per worker of 2.8. This implies that a factor of 3 difference in TFP is amplified through physical and human capital accumulation to generate a factor of 20 difference in output per worker -- as observed in the data between rich and poor countries. The implied difference in TFP is in the range of estimates from micro studies. The theory suggests that using Mincer returns to measure human capital understates human capital differences across countries by a factor of 2.

The cross-country differences in human capital implied by the theory are consistent with evidence from earnings of immigrants in the United States. We also find that TFP has substantial effects on cross-sectional inequality and intergenerational mobility and that public education policies can have important aggregate and distributional implications.

These are important findings, which I hope will attract the attention they deserve.

The failure of France's 35 hour week

Not only were the employment effects of reducing the standard workweek to 35 hours "not significant", the policy has also made French workers less satisfied with their jobs. Those are the somewhat surprising claims of a new paper by Marcello M. Estevão from the IMF and Filipa Sá from MIT, to be given next month at the IZA European Summer School in Labor Economics.

Their paper, Are the French Happy with the 35-Hours Workweek? (PDF), doesn't pull many punches and is bound to cause controversy in France. Here's the abstract:

Aiming at lowering unemployment, the French government mandated the reduction of the standard workweek from 39 to 35 hours in 1998 to be implemented in large firms by 2000 and in small firms by 2002. The difference in timing by firm size is used to set up a quasi-experimental design to analyze the effect of the law on workers’ welfare. The law may have worked as a coordination mechanism to improve welfare in the presence of strong positive complementarities in leisure among individuals, or it may have introduced distortions and made workers worse off. Estimates from the French Labor Force Survey for the years 1993 to 2000 suggest that the law did not make workers happier.

The 35-hours mandate increased the proportion of dual-job holdings and the transitions from large to small firms, which may have been motivated by the desire to work more hours. Estimates using data on subjective satisfaction with hours of work from the Eurobarometer suggest that those who were affected by the law became less satisfied with their hours of work.

The law also increased wages in large firms relative to small firms to compensate workers for the reduction in hours and keep the same monthly income. As a result, large firms replaced some workers with cheaper unemployed individuals. The net employment effect is harder to quantify, but the estimates suggest it was not significant.