New Economist

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.

Explaining India's middle class failure

The September 2007 issue of Prospect magazine has an interesting cover story on India's middle class failure. As Tom Nuttall explains in the magazine's weblog, First Draft:

the September issue ..marks the 60th anniversary of Indian independence by asking an uncomfortable question of India’s new middle class - why is it so uninterested in politics and social justice?

In our cover story, Chakravarthi Ram-Prasad argues that aspects of India’s history and culture have helped shape a middle class - easiest the biggest in the world - that is largely apathetic about politics and the 300m Indians living in extreme poverty.

Ram-Prasad argues that although "there are now effective movements of marginalised groups and opportunistic social coalitions in many states", until the middle class begins to engage politically, India will suffer from a lop-sided modernisation.

It's an interesting read. I attach a PDF version. Also worth reading are the comments on the weblog post cited above.

The economics of pre-school

The Wall Street Journal's Real Time Economics weblog has an interesting post by Deborah Solomon on the economics of pre-school

James Heckman, University of Chicago economist and 2000 Nobel prize winner, has become a key advocate for pre-school, with his work routinely cited by everyone from Sen. Hillary Clinton to state legislators. But his interest in early education happened in a roundabout way.

In the early 1990s, while doing work evaluating government job programs, he noticed that the reason minorities weren’t going to college at a greater rate was not because they couldn’t afford it but because of “ability gaps.” Minorities were more likely to be lacking in both cognitive and non-cognitive abilities, making it more difficult for them to excel – or even stay — in school.

He grew interested in finding out when those gaps first occur and was surprised to discover that they take place in a child’s formative years.

“I happened to notice that ability gaps opened up very strongly at ages 3, 4 and 5,” Mr. Heckman says, adding those gaps “were so predictive of a range of behavior.”

That discovery helped fuel his belief that intervention efforts need to happen while kids are still very young, before they even get into Kindergarten. “If we wait too late the costs of remediation are high and they’re higher than anything we’ve paid so far,” he said. Mr. Heckman is part of a growing cadre of economists — Federal Reserve Chairman Ben Bernanke among them — who see pre-school as a cure for inequality. (Read more in a page-one WSJ article here.)

In 2004, he and a colleague produced a paper with some landmark findings, including that pre-school could reduce crime, keep people off welfare and boost taxes down the road. His paper has been cited by legions of pre-school supporters, who tout the economic benefits as a strong reason to fund pre-school.

But while Mr. Heckman is a proponent of early education, he believes it should be targeted solely at disadvantaged kids and not all kids, as some advocates propose.

“You go where the marginal returns are the highest and they’re highest with disadvantaged children,” he says. He fears that all the economic data – including his own — has produced a “rush to judgment” that has convinced some camps to pre-school for everyone will produce the greatest return.

“It worries me a lot,” he says. “Science doesn’t support universality … we have to approach it more cautiously.”

India's miracle

India's miracle is the subject of a special issue of the british weekly New Statesman. I have already posted on one article, about the country's economic growing pains. But there are five other articles worth mentioning:

* Ramachandra Guha kicks off the special report with a brief history lesson, looking at the factors behind which make India such an unlikely nation

* Over 60 years, democracy in India has been challenged by poverty, violence and religious extremism. But against all the odds, it has survived. Salil Tripathi writes about Midnight's adults

* Kalpana Sharma on India's looming energy crisis: Fuelling the fire

* In Moving on, Sandy Howard explains how Delhi's transport captures the divide between rich and poor.

* Mahmood Farooqui writes that India's 150 million Muslims face poverty, illiteracy and attacks from the Hindu right, but their identity and traditions are inseparable from the rest of the country: Minority report

India's growing pains

The Guardian's Randeep Ramesh writes in the latest New Statesman that "the puzzle is that India is economically confident, yet sunk in interminable poverty": Growing pains

For India's newspapers and television, the country's story is of a resurgent nation of 1.1 billion people taking its rightful place in the new world order. Daily headlines in the capital, New Delhi, highlight the runaway stock market, Bollywood's soft superpower and India's 36 dollar billionaires - more than in any other Asian nation.

...There is little doubt that India is experiencing a rapid and sustained rise in living standards for the first time in centuries. Growth has averaged 8 per cent since 2003, second only to China. According to the investment bank Goldman Sachs, India's young population gives it the potential to grow faster than China in the long term.

For many Indians this is exhilarating stuff: in the 1970s the country threw out Coca-Cola and IBM and sealed itself off from the outside world. Heady stuff, but ultimately economic folly. Growth slowed to 1 per cent a year - at that rate it would have taken 70 years to double incomes. Tentative reforms began in the 1980s, but it took a balance-of-payments crisis in 1991 for the government to usher in unexpectedly brave changes. Today, India's outward-looking, hypercompetitive policies as well as the trend towards smaller families mean incomes will double in a decade.

Yet it will remain a poor country. Last month, government figures showed that malnutrition is endemic, with about 46 per cent of children aged three or younger underweight and almost 80 per cent anaemic. Less than 50 per cent of women can read or write their name. Only a third of homes have a toilet. The country is probably the world's largest Dickensian paradox - having both the best and the worst of times.

The puzzle is that India is economically confident, yet sunk in interminable poverty. This is because most Indians live in a vast rural, feudal darkness and only a lucky few are part of the shining new future. Services, essentially white-collar work, makes up more than half of national income. But this does not mean that tens of millions of Indians sit behind terminals talking to someone in New York or London. Information technology, the poster-boy industry of India's economy, employs just 1.5 million people - a mere drop in the labour pool of 470 million.

Even worse, only 35 million people in India have any sense of job security and 20 million of those work for the government. The rest of the working population - some 435 million people - are part of "the unorganised sector": toiling on the land, or driving a taxi, or running a chai stall, or working as menial household labour.

In India, growth has been largely jobless. Historically, dynamic economies have relied on industry to fuel growth. In China, this led to millions of people leaving the land to work in factories. But during the 1990s, industry actually shrank as a proportion of the Indian economy. There is rural migration, too, where the sons of tillers leave to eke out a precarious existence as security guards and drivers in the big cities.

The problem is reaching crisis point. Each year another ten million people enter the job market. To soak up the labour, India will have to build up its manufacturing sector quickly. This might sound like a return to the past - India's first prime minister, Jawaharlal Nehru, wanted his country to rush towards industrialisation.