by Prof Michael J. Böhm, University of Bonn and Dr Christian Siegel, University of Kent. Discussion paper KDPE 1902, March 2019.

Non-technical summary:

Many developed economies have experienced a rapid aging of their workforces and are projected to age further. This demographic change has substantial effects on the labor market by changing relative supplies of older and younger (or experienced and inexperienced) workers, and thereby on their relative wages as argued by previous literature. In this paper we establish that the overall effects of demographic change on the labor market are much more far reaching as also employment rates are impacted.

From an empirical point of view, it is quite difficult to study the effects of demographic change in aggregate data, as important other variables (including technology, policy, and society) change at the same time. We therefore devise a novel identification strategy in this context, based on the differential aging of local labor markets. In particular, we construct an instrumental variable for local experience, which exploits the largely predetermined age structure and which allows us to estimate the causal effects of experience supply.

Specifically, we study both the effect of demographic change on relative wages as well as on relative employment rates of experienced workers. We find that increased experience supply, induced by the ageing of the workforce, not only reduces experienced workers’ relative wages, but also the relative fraction of experienced individuals in employment compared to inexperienced individuals, in line with the predictions of our theoretical model. We further investigate this novel effect in more detail and find that it is fully driven by experienced workers’ labor force participation, rather than unemployment. We also demonstrate that a substantial part of the effect is through claiming social security income.

These results are potentially very important for policy design, especially of old-age benefits systems, as they highlight that (experienced) workers’ participation rates should not be viewed as constants nor as following secular trends alone. Instead our findings imply that a more abundant group has a lower employment rate, which raises flags that the overall pressure from the aging of the baby boom cohort on social security systems might be larger than what projections based on exogenous participation rates would predict. Another implication of our finding is that aging affects labor market inequality across generations, with larger cohorts facing relatively lower employment and wage rates than smaller cohorts, ceteris paribus. Nonetheless, our results also suggest that demand shifts at the aggregate level over the last decades have been biased in favor of experience.

This prevented the wage return to experience from falling, despite the overall pronounced increase in experience supply.

You can download the complete paper here.

A research paper by Miguel León-Ledesma (Professor of Economics) together with Dr Cristiano Cantore (Bank of England) and Dr Filippo Ferroni (Federal Reserve Bank of Chicago) has been featured in VoxEU and Bank Underground (the research blog of the Bank of England).

‘How do monetary policy shocks affect the distribution of income between workers and owners of capital? Do workers benefit relatively more when policy changes? Using evidence from five developed economies, we show that the share of output allocated to wages (the ‘labour share’) temporarily increases following a positive shock to the interest rate. This means that the slice of the pie enjoyed by those whose earnings are mostly made up of wages increases at the expense of profits and capital income. Strikingly, this redistribution channel that shows up in the data runs precisely in the opposite direction to the predictions of standard New Keynesian models commonly used to study the effects of monetary policy.

Despite its importance, there is no systematic empirical evidence on the effect of monetary policy shocks on the labour share. Yet, structural models widely used for monetary policy analysis (Galí 2015) rely on a transmission mechanism that has clear implications for the evolution of the labour share following a monetary policy shock.’

Read the full blog posts here:

VoxEU: https://voxeu.org/article/monetary-policy-and-labour-share

Bank Underground: https://bankunderground.co.uk/2019/03/27/the-missing-link-monetary-policy-and-the-labor-share/#more-4771

Dr Anirban Mitra, Lecturer in Economics, has recently been awarded a British Academy Small Research Grant for his work on political dynasties and vote-buying. Anirban, together with his collaborator in India, Dr Arnab Mukherji (Indian Institute of Management Bangalore), will explore the connections between the issues of political dynasties and vote-buying with the aim of building a database for politicians in the State Legislatures of India to identify their family networks.

The research proposal is below:

Political dynasties exist in many countries – be they democratic or otherwise. Another issue which is salient worldwide is the practice of vote-buying in elections. This entails the use of campaign funds to ‘persuade’ voters – ahead of any impending elections – to cast their votes in a certain way. This is conceptually different from winning over voters through explication of the superiority of one’s policy platforms. It is a form of bribery, and is clearly against the very notion of fairness in democratic procedures. We propose to study the connections between the two issues namely, political dynasties and vote-buying. Specifically, we ask the following questions: to what extent is vote-buying linked to the existence political dynasties? Does the institution of political dynasties lead to a greater surge in vote-buying activities or not? Can this putative link shed light on the mechanisms shaping the organisation of political parties?

We propose to start building a database for politicians in the State Legislatures of India which would identify their family networks. Clearly, doing it for all the major states in India would require vast amounts of resources (including time) though undoubtedly such a database would be of considerable value to social scientists working on India. We propose to start work on three populous states in India – namely, Bihar, Karnataka and Uttar Pradesh. This would allow us to work with a sample of 870 electoral constituencies followed over a decade; hence, allowing for around 2 elections in each constituency.

We plan to utilise this database to assess the implications for public goods provision (specifically, investments in health and education among other items) arising from the presence of political dynasties. We also hope to delve into the question as to how informal institutional features (like family structure, gender norms, etc.) may be crucial in determining how political dynasties arise in some societies and not others. This work will be critically dependent upon our understanding of the network of family ties that pervade the Indian political system.

by Dr Zsófia L. Bárány, Sciences Po and CEPR and Dr Christian Siegel, University of Kent. Discussion paper KDPE 1901, March 2019.

Non-technical summary:

The fact that labor productivity growth is different across sectors is well known. Average annual labor productivity growth between 1960 and 2017 in the US, for instance, was 2.49% in the goods sector, much higher than the 1.53% in low-skilled and the 0.72% in high-skilled services. However, there is no consensus on the origins of these differences.

In this paper we study the drivers of sectoral labor productivity growth in a productionside framework. We consider various types of occupational labor as distinct factors in the sectoral production faction, allow for technological change to be sector-and-factor specific, and infer the evolution of the sector-and-factor specific technologies over time directly from the data drawing on the model’s optimality conditions.

Our results show that technological change has been very far from neutral. That we do not impose that sectoral technological change is factor-neutral, nor that factor-specific technological change is uniform across sectors, turns out to be crucial. Technologies have evolved at very differential rates, both across factors within each sector and across sectors for a given occupation or type of capital. In particular, amongst the labor-augmenting technologies those augmenting routine occupations have been growing the fastest in all sectors, but at very different rates: at 5.59% per year in goods, at 2.92% in low-skilled services and at 1.32% in high-skilled services.

Through a series of counterfactual simulations, we study the role of inputs and of technological change in labor productivity growth. We find that the single most important driver of sectoral labor productivity growth differences are the sector-specific growth rates of routine labor augmenting technologies. Without sector-specific routine labor augmenting technological change, labor productivity growth would have been almost equalized across sectors. This type of technological change explains at least 59 percent of labor productivity growth in low-skilled services, 74 percent in goods and 21 percent in high-skilled services. Moreover, in terms of labor productivity growth in the aggregate, we show that the contribution of routine labor augmenting technological change is large and increasing over time. In its absence aggregate growth would have been lower by about a third between 1960-1990, and there would have been hardly any growth over 1990-2017.

These counterfactuals also allow us to evaluate the role of various other channels proposed in the literature for sectoral productivity growth differences, such as differential capital intensities and capital accumulation, or differential sectoral intensities in occupational employment and technological change specific to occupations. We show that while capital accumulation contributes to labor productivity growth (without it growth would have been 39 percent lower on average), it does not generate the sectoral differences observed in the data. Similarly we find that in terms of occupational employment structure, differences across sectors as well as changes over time within sectors hardly matter for sectoral labor productivity differences.

You can download the complete paper here .

An article based on research by the School’s Dr Zaki Wahhaj, Reader in Economics and his co-author Professor M. Niaz Asadullah from the University of Malaya, has been published in VoxDev titled ‘Research in Bangladesh shows how early marriage contributes towards women expressing more traditional gender attitudes’: