New Economist

Did abortion lower the crime rate? The evidence from England

Since Donohue and Levitt's 2001 QJE article The Impact of Legalized Abortion on Crime (PDF), and in particular since the publication of Freakonomics, there has been quite a controversy in the United States about a possible causal relationship between higher abortion rates and the fall in crime. But what about other countries? A new paper by Leo H. Kahane from California State University, David Paton of the Nottingham University and Rob Simmons from Lancaster University to last week's ESPE 2006 conference in Verona adds to the evidence.

The Abortion-Crime Link: Evidence from England and Wales (PDF) uses panel data from 1983 to 1997 for the 42 police force areas in England and Wales to test the hypothesis that legalizing abortion contributes to lower crime rates. The authors have two robust findings:

Of the many results presented in this paper, there are two things we can say with confidence. First, increased unemployment rates are associated with increased crime. Second, the greater the proportion of children in care (our proxy for ‘social deprivation’), the greater the crime rate. These results are remarkably consistent and robust to various estimation methods.

But they are much more equivocal on the abortion-crime link:

We are unable to say with confidence, however, that abortion legalization in the U.K. significantly reduced crime in England and Wales some twenty years hence. We come to this conclusion by first noting ..that total recorded crime in the U.K. began to decrease at about the same time as in the U.S., despite the fact that abortion legalization occurred about five years earlier. Thus we have a discrepancy in the timing of the potential effect of abortion on crime between the U.S. and the U.K. On the other hand, regression models linking effective abortion rates in the U.K. and subsequent recorded crime suggest the same negative and significant correlation between the two variables (at least for total crime and some sub-categories) as that reported for the U.S. by D & L.

When the authors used a similar model and estimation methodology to Donohue and Levitt, they "are able to replicate the negative association between abortion rates and reported crime found by  for the U.S." But the authors recognise this negative correlation may be spurious, and so test for endogeneity:

We test this latter explanation by modeling abortion rates as endogenous to crime. In this approach, we identify abortion rates using on the proportion of abortions provided in the patient’s area of residence and the proportion provided free of charge. When abortion is treated as being endogenous, the negative correlation between abortion rates and crime disappears.

Though finding "no clear connection between the two", they add some important caveats:

Lastly, it must be noted that few of our results are robust to different specifications and samples. For example, the significant negative correlation between abortion and crime rates in the exogenous models does not hold for some sub-categories (e.g. violent and sex crimes) and is not robust to some other specifications (excluding London, area-specific trends and first-difference estimation).

Similarly, although the finding of no significant correlation between abortion and crime in the endogenous models is somewhat more robust to our various experiments, we do find evidence of a negative correlation between abortion and violent crime in some specifications.

An unsually frank admission. Finally, they highlight the problems facing researchers in this area:

The fragility of the results in this paper serve to emphasize the difficulty researchers have in identifying causal effects of social change such as abortion legalization on crime rates some years hence, particularly given the myriad of other social changes occurring over the same time and which may dilute any effect.

Blast from mild-mannered Mervyn

Bank of England Governor Mervyn King is normally pretty mild-mannered, but yesterday he finally let rip. He told the Treasury Committee of his frustration with a slow and “very informal” approach to choosing new Monetary Policy Committee members.

Things are certainly getting tight. The resignation of Richard Lambert and the sudden death last week of David Walton has left the MPC operating with only seven members instead of the usual nine. The quorum is six members.

According to today's Telegraph story, King calls for MPC overhaul, his comments were unusually candid:

MPs and former members of the MPC have expressed concern that there is too little transparency in the way the Chancellor picks members, and the Treasury Select Committee is planning to launch an investigation this autumn.

Appearing before the Treasury Committee yesterday, Mr King said there was growing disquiet within the Bank about the length of time it was taking to find a replacement for Mr Walton and Richard Lambert, who is leaving before the end of his term to become CBI director general.

"It is not the people or how the process works in essence, but it is trying to find a mechanism for ensuring that decisions are taken in a timely way," said Mr King.

"It is not for me to say what the process should be but at the moment we have a process which is very informal and seems to result in appointments being made at the last minute. I can't think of anyone who benefits from that.

"There will always be vacancies when people leave unexpectedly and it is always right to take time and get the right replacement, but to do that we need a slightly more systematic process." He called for a timetable for guidance.

According to Ashley Seager in the Guardian, King bemoans delays in appointing MPC:

Many are puzzled that the Treasury always takes so long to find candidates, given that there is no shortage of qualified economists in the City and academia who could do the MPC job. The external jobs pay £150,000 a year pro-rata, with most members working three days.

Still, the comments appear to have prompted a quick response from the Chancellor. Reuters report Brown-to appoint new Bank policymaker "soon".

The morning after: FOMC blog round-up

Plenty of econoblog comment overnight on the FOMC's 25 basis point hike in US rates to 5.25%, and speculation about where the Federal Reserve is headed.

Mark Thoma provides a helpful analysis of changes in the wording of the Fed's press release that signal the course of future policy.

Dave Altig at Macroblog agrees the language is more dovish, providing plenty of news headlines and quotes suggesting A Kinder Gentler FOMC? But as he reminds readers, "things do change, and change pretty quickly."

William J Polley reminds us we the Fed is in a "data dependent" mode, and while "I can envision scenarios in which there is a pause in August", the most likely prospect is "one more increase if the data is status quo."

David Gulley at Hypothetical Bias asks: Is the Fed done? His 'bottom line' is that "the Fed has a history of overdoing tightening regimes. To demonstrate his inflation-fighting credentials, Bernanke may continue this pattern."

Ironman at Political Calculations blog calculates that increasing the Federal Funds Rate to 5.25% "will keep the probability of recession occurring in the next 12 months at 27%."

Meanwhile, Bloomberg's Caroline Baume tells us to Relax, It's Six Weeks Until the Next Fed Meeting:

For something that is so widely anticipated and universally agreed upon, we sure spend a lot of time discussing the outcome of each Federal Reserve meeting.

Starting two days before the meeting, a gaggle of economists, investors, futures brokers and former Fed officials, some of whom haven't seen any central bank service for two decades, parade across the TV screen offering nuggets of wisdom. (No shoeshine boys just yet, but increased transparency should open up the field.)

They look thoughtful and sound erudite when they talk about pithy subjects like Fed credibility. I learned just this week that Alan Greenspan had it and Ben Bernanke doesn't. The only way Ben can get it is by 1) being Alan, which is not something anyone else can do, or 2) flexing his muscles and raising rates some more, even if it goes against his better judgment.

I keep reading that Ben has to earn his inflation-fighting credentials without overshooting and sending the economy into a tailspin. None of these armchair quarterbacks throwing up the challenge offer any insight into how to pull it off.

Offshoring in Denmark - not many hurt

The Institute for International Economics have published a working paper Offshoring in Europe - Evidence of a Two-Way Street from Denmark (PDF) by Peter D. Ørberg Jensen, Jacob Funk Kirkegaard, and Nicolai Søndergaard Laugesen. Based on a large Danish survey of companies in tradable goods and services sectors, it finds offshoring has been a net creator of jobs:

In 2002–05 more jobs were created as a result of offshoring of activities into eastern Denmark from companies outside Denmark (i.e., inshored to Denmark) than were eliminated due to offshoring from companies in the Danish region. Overall, the employment effects of both offshoring and inshoring were found to be limited to less than 1 percent of all jobs either lost to offshoring or gained via inshoring.

As the authors conclude, "contrary to the mainstream media portrayal of globalization, it is not a one-way but a two-way street." They identify key labour market policy challenges:

For Denmark, the worries in purely numerical terms regarding the employment effects of globalization seem overly alarmist. However, the trends revealed in the study do pose challenges for low-skilled workers - the group most negatively affected - and for highly skilled specialists, who face pressure to constantly upgrade their skills.

Aside from the Danish findings, I found their comparative analysis of interest. Figure 2 shows that of the European jobs shed between 2002 and 2005, only 4% were due to offshoring/delocalisation - compared with 74% from downsizing and 16% from bankruptcy or closure. Figure 3 shows that the intensity of offshoring is highest in Finland and Portugal, followed by Britain and Denmark.

Data fun for all the family

OK, I confess - I'm a  data junky. So I am very thankful to Jim Gibbon (via Eszter Hargittai of Crooked Timber) for posting about Gapminder. It provides the best visualisation of data I have ever seen. Here is Jim's post:

I’ve been blown away this morning by a new tool for displaying world development data called Gapminder.  If you want a spicy way to show off statistical data, it’s hard to imagine a more compelling software program.  There is a great video demonstration of Gapminder being used in what is possibly one of the best presentations I have ever seen (I laughed, I cried, my jaw dropped).  You can play around with the program online, but make sure to watch the video to get a sense of its capabilities.  (Note: No statistical knowledge required, appropriate for all audiences!)

The Gapminder Foundation was founded by Ola Rosling, Anna Rosling Rönnlund and Hans Rosling in Stockholm. It shows what a small non-profit can do.  You can checkout the Gapminder tool online - and there is also a related tool with even more options on the website: Trendalyzer. It's capabilities are awesome. The website also has plenty of downloads and presentations.

Are European degrees all the same?

Are European university degrees of equal value? Not according to a paper given at last week's ESPE 2006 conference in Verona.  Johanna Schneider, visiting scholar at the Institute for the Study of International Migration at Georgetown University, has looked at the earnings of European university graduates in the United States, and the effect of their place of education. Her paper, Return on Education for Immigrants: The Case of Highly Skilled Europeans in the United States (PDF), finds a wide variation in graduate earnings:

While most studies treat European immigrants as a single group doing fairly well in the United States, this paper suggests that there is reason to assume differences in return on education among European countries. Indeed, idiosyncratic sociopolitical structures and heterogeneous education systems among European countries lead to significantly different regional results.

According micro data from the National Survey of College Graduates (National Science Foundation) immigrants who received their degree in either Eastern or Southern European countries earn less than natives along the lines of economic assimilation theory. In contrast, and controlling for relevant variables, immigrants from Western or Northern Europe earn up to 14 and 23 percent more than comparable nativeborn Americans. These findings highlight how European degrees are valued and the extent to which they prepare individuals to compete in international labor markets.

She draws a clear policy conclusion:

...the findings may provide valuable support to the Bologna Process launched by the European Union to improve and equalize higher education in its member countries.

Quite. According to her estimates, Western Europeans earn 13.8% more than natives and Northern Europeans 22.8% more. However her paper does not define which countries are in each region. Nor does she break down the results by country. That would be extremely interesting.

BIS' warning to the world

Earlier this week BIS, the Bank of International Settlements, held ita Annual General Meeting and published its Annual Report. In my opinion this is the best single source on inflation and monetary policy and is required reading for all central bank watchers. This year, there is also an illuminating analysis on how globalisation has affected wages and prices. Here is the report's contents:

76th Annual Report by chapter:
	Table of contents, letter of transmittal Read (PDF, 11 pages, 53 kb)
I.	Introduction: resilience to mounting strains Abstract | Full Text (PDF, 8 pages, 56 kb)
II.	The global economy Abstract | Full Text (PDF, 23 pages, 819 kb)
III.	Issues in emerging market economies Abstract | Full Text (PDF, 25 pages, 800 kb)
IV.	Monetary policy in the advanced industrial economies Abstract | Full Text (PDF, 20 pages, 1842 kb)
V.	Foreign exchange markets Abstract | Full Text (PDF, 19 pages, 1472 kb)
VI.	Financial markets Abstract | Full Text (PDF, 22 pages, 1487 kb)
VII.	The financial sector Abstract | Full Text (PDF, 20 pages, 593 kb)
VIII.	Conclusion: coping with risks, today and tomorrow Abstract | Full Text (PDF, 14 pages, 67 kb)
	Organisation, governance and activities of the Bank Abstract | Full Text (PDF, 74 pages, 326 kb)

Over the fold I have includede several press reports highlighting BIS' warnings about inflation, the need for higher rates, and the impact of globalisation. But you are much better off reading the report yourself.

Beauty, earnings and productivity

We know from the work of Daniel Hamermesh and others that attractive employees are paid better, other things being equal, than average-looking people. Is the impact of beauty on earnings due to pure discrimination, or might productivity differences be a factor? One of the papers given at last week's ESPE 2006 conference in Verona tackles this question. Productivity or Discrimination? Beauty and the Exams (PDF) by Giam Pietro Cipriani & Angelo Zago provides evidence against the hypothesis of Becker-type discrimination stemming from tastes and in favor of productivity-related discrimination. They do this by distinguishing between oral exams (where beauty is observed) and written exams (where it is not):

Using a rich set of data from the College of Economics at the University of XX, we examine the effects of students’ physical appearance on examination results. We find evidence that beauty has a significant impact on academic performance, a result which is consistent with and comparable to the impact found in the labor market literature.

In addition, since we can compare student performances in oral and written exams, where in the latter the evaluation is blind, i.e., not influenced by physical appearance, we can in fact understand better the source of the “beauty premium”, that is disentangle productivity from discrimination effects. We find that the effect of beauty on academic performance cannot be ascribed to pure professor discrimination. One could then argue that to the extent that wages rise with educational attainments, our findings corroborate the hypothesis that the payoffs to beauty reflect differences in productivity.

The paper suggests that good looks could make people more productive. But what is the mechanism? Drawing on recent experimnental and theoretical literature, the authors point to the greater confidence and self esteem of attractive people, which makes them expend greater effort. As they note, this could be the result of past discrimination:

Essentially the higher productivity of attractive people could be the result of pure discrimination in the past because of different parental (and teacher) solicitude or of past and current social stereotypes that affect self esteem and motivation and hence productivity via a self-fulfilling prophecy.

UPDATE: Greg Mankiw has also cited this paper on his blog.

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.

EMU and wage flexibility

A fixed exchange rate regime reduces an economy's ability to absorb macroeconomic shocks. Hence there is a case for higher labor market flexibility in countries which are members of a monetary union or which intend to join one. With that in mind, Ian Babetski at the Czech National Bank has examined whether steps towards European Monetary Union (EMU) go hand in hand with higher wage flexibility.  His new working paper, Aggregate Wage Flexibility in Selected New EU Member States, finds that they don't:

Focusing on the cross-country analysis of labor markets in the enlarged European Union, this paper aims to assess empirically the role of aggregate wages as a correction mechanism for dealing with economic disturbances. A comparable quarterly data-set is constructed covering 1995–2004 for four central European states (CE-4), four new EU members already participating in the Exchange Rate Mechanism-II (ERM-II participants), and three peripheral members of the euro area (EMU- 3). We apply classical time series/panel, Bayesian, and cointegration techniques to determine the extent to which aggregate wages can accommodate shocks in the economy. The macroeconomic data does not seem to support the argument that real wages are flexible in the CE-4, the ERM-II participants, and the EMU-3.

What are the implications for economic policy makers? Babetski identifies four:

Several policy implications follow from the analysis. First, a lack of wage flexibility is considered to be one of the costs of euro adoption. However, the costs should be assessed against the potential benefits of joining the euro area. Second, joining the euro area is not likely to lead automatically to higher wage flexibility. Therefore, there is a call for adopting more flexible labor market policies in the monetary union in order to be better able to address asymmetric shocks. Third, the observed decrease in real wage flexibility in several countries, or the absence of such, could be at least partially linked to a decline in inflation in the new member states over the past decade. Last but not least, if the central bank sets its inflation target at too low a level, there might not be enough room for real wage adjustments.

His point about the link between lower inflation and real wage flexibility is an interesting one, which I don't consider central bankers have given sufficient attention to. It echoes, of course, the work of Erica Groshen et al on wage flexibility - though Babetski does not cite the seminal paper, Identifying Inflation's Grease and Sand Effects in the Labor Market.

As to EMU, if adopting the Euro reduces wage flexibility and doesn't reduce intra-Eurozone disperson of prices or economic growth, then one must wonder about the longer-term survival of monetary union.