On the Importance of Soft Skills in the U.S. Labor Market

EPP master project by Antonio Biondi, Zacharias Kountoupis, Joan Rabascall, and Marco Solera ’20

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Abstract

This paper explores the role of soft skills in the U.S. labour market. According to the previous literature, these skills – also called non-cognitive- are crucial as they allow firms to lower coordination costs by trading job tasks more efficiently. We look at both sides of the labour market.

On the demand side, we collect 4,980 job ads from U.S. job portals through a web scraping technique, finding that larger firms require more job tasks and soft skills in their ads than the small and the medium ones.

On the supply side, we match the skills from the O*NET dictionary with the Survey of Income and Program Participation (SIPP) of the United States from 2013 to 2016, estimating return to soft skills around 15% of hourly wage. Moreover, we find statistically significant soft skills wage premium in the big firms around 2.5%, up to 3.5% for highly educated workers.

To the best of our knowledge, this is the first paper that finds a firm size wage premium for soft skills. These pieces of evidence suggest that larger enterprises are willing to pay more soft skills as they face higher coordination costs.

Conclusions

An increasing literature is focusing on the role of “soft skills” as the critical driver for labour market outcomes. A growing body of empirical evidence documents a reversal in demand for cognitive and soft skills: stagnating or even decreasing the first one, sharply increasing the second one.

A possible explanation is given by the fact that soft skills are associated to job tasks that are harder to replace by the automation, as they are mainly composed of tacit knowledge that is tough to encode (Autor, 2015). In this paper we analyse the role of soft skills in the U.S. labour market and their impact on wage.

As regards the supply side, we use the factor analysis to collect skills and abilities, finding a return to soft skills around 15% on U.S. hourly wage, that is almost four times higher than the return to cognitive abilities (4%). Moreover, we found a statistically significant soft skills wage premium in larger firms around 2.5% of hourly wage, up to 3.5% for those highly educated. We also document a strong complementarity between the firm size wage premium and level of education, especially for women: for this latter, the premium starts from 3% and increases to 4,5% when considering only those with more than 12 years of schooling. Results are consistent with our hypothesis, according to which soft skills are more valuable when increasing the size of firms as they are supposed to face higher coordination costs, compare to small enterprises.

The demand side analysis supports our results. After collecting job ads from U.S. job portals, we found that larger firms require more soft skills than the small ones. Finally, we report an excess of demand for soft skills in comparison to their occupational needs.   

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About the Barcelona GSE Master’s Program in Economics of Public Policy

Criminals or Victims? Evidence on Forced Migration and Crime from the Colombia-Venezuela Border

ITFD master project by Maria Dale, Giacomo Gattorno, Andre Osorio, Rebeca Peers, and Kerenny Torres ’20

Photo: George Castellano / AFP

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Abstract

How does a sudden migrant crisis affect criminal activity, and through which mechanisms does this effect take place? We approach this topic by studying the effect of Venezuelan migration on crime rates in Colombia, in the context of the recent migrant crisis that made more than 1.2 million Venezuelans cross the border. 

Our study focuses on border provinces, where the presence of non-economic migrants is higher and potential assimilation problems could be exacerbated. Building on the fact that Venezuelan migration to Colombia happened due to apparently exogenous reasons and is unrelated to economic outcomes in the latter, we are able to study the causal effect of this large migration wave on crime rates. 

Our results show that Venezuelan forced migration had no significant effect on overall crime, but a positive and significant effect on personal theft in Colombian border provinces. Furthermore, migration had a positive and significant effect on personal theft victimization rates of both Venezuelans and Colombians, while only having significant effects on the criminalization rates of Venezuelans. These results are robust to different specifications and controls, and two placebo tests provide strong evidence in favor of our empirical strategy and results. Finally, we link our findings with the overarching criminal context in Colombian border provinces, and develop relevant policy recommendations based on our findings.

Conclusions

In this paper we analyzed the impact of the Venezuelan migrant crisis, which saw more than 1.2 million Venezuelans cross the border, on crime rates in Colombian border provinces between 2014 and 2018. We focused on the border provinces to study the particular effects of non-economic migration, as we find that migrants in this area did not target areas with specific characteristics but just settled in the closest center to get food, medicine and essential services. This settlement decision strictly based on closeness to border is also illustrated by the figure below: not only is the highest share of foreign-born population in the Colombian regions concentrated in our area of study (the 7 border provinces), but within these border provinces there is also a clear concentration in municipalities on the physical border with Venezuela.

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Figure 1. Venezuelan-born population as % of total population by province and municipality, 2018. Source: Own calculations, based on data from DANE.

The main contribution of our study was presenting compelling and robust evidence on no significant effect of Venezuelan forced migration on overall crime, but a positive and significant effect on personal theft in Colombian border provinces. By also analyzing both the direct and indirect mechanisms through which this migration inflow can have an effect on different crime rates, we’re able to establish a causal effect of migration on both personal theft victimization and criminalization rates of Venezuelans, while only having significant effects on the victimization rates of Colombians.

Besides our key findings, other results hint at a more holistic narrative: migration also had a positive and significant effect on both homicide and personal injury victimization rates of Venezuelans. What could be driving these effects? As seen previously, Venezuelan migrants settled in municipalities right across the border from Venezuela – which, coincidentally, are municipalities where criminal organizations have a large presence: criminal organizations are present in 23 of the 42 municipalities on the border, and in 39 of the 81 municipalities where the change in proportion of Venezuelan migrants between 2014-18 was above the average. 

In these high migration municipalities, as a consequence of criminal activity, homicide rates tended to be much higher at baseline than in other municipalities. Moreover, we see some evidence of discrimination in homicides – after controlling for all relevant socioeconomic covariates, being Venezuelan seems to have a significant and positive effect on being a victim of homicide. 

This additional information could help construct the following holistic narrative and recommendations: 

  • A large wave of migrants arrived in low-income border provinces with little (formal) employment opportunities, and some had to resort to small-scale theft to make a living, which explains the positive effect of migration on Venezuelan personal theft criminalization rates
  • Driven by both opportunity and attractiveness of targets, this caused an increase in personal theft victimization rates for both Colombians and Venezuelans, although it was much higher for the former than for the latter.
  • However, these municipalities were controlled largely by criminal organizations, which started threatening Venezuelans and forcefully recruiting them in large numbers. This could help explain the positive and significant effect of migration on both homicide and personal injury victimization rates of Venezuelans.
  • These findings imply that government policies should focus on reducing the vulnerability of Venezuelans by providing swift access to the formal labor market, either in border provinces or nationwide, so that Venezuelans can avoid resorting to small-scale theft and escape forced recruitment and exploitation from criminal organizations.

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About the Barcelona GSE Master’s Program in International Trade, Finance, and Development

Stealth trading in modern high-frequency markets

Finance master project by Alejandro García, Thomas Kelly, and Joan Segui ’20

Photo by Aditya Vyas on Unsplash

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Introduction

This paper builds on the stealth trading literature to investigate the relationship between several different trade characteristics and price discovery in US equity markets.  Our work extends the Weighted Price Contribution (WPC) methodology, which in its simplest form posits that if all trades conveyed the same amount of information, their contribution to market price dynamics over a certain time interval should equate their share in total transactions or total volume traded in the period considered. Traditionally, the approach has been used to provide evidence that trades of smaller sizes convey a disproportionate amount of information in mature equity markets through the estimation of a parsimonious linear specification.

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The methodology is flexible enough to accommodate for a first set of key extensions in our work, which focus on studying the relative price contribution from trades initiated by high-frequency traders (HFTs) and on stocks of different market capitalization categories over the daily session. Nonetheless, previous research has found that short-lived frictions make the WPC methodology ill-suited for analyzing price discovery at under-a-minute frequencies, a key timespan when HFTs are in focus. Therefore, to analyze the information content of trades of different attributes at higher frequencies we use a Fixed Effects specification to characterize trades that correctly anticipate price trends over under-a-minute windows of varying length as price informative.

Key results

At the daily level, our results underpin prior research that has found statistical evidence of smaller trades inputting a disproportionate amount of information into market prices. This result holds regardless of the type of initiating trader or market capitalization category of the stock being transacted, suggesting that the type of trader on either side on the transaction does not significantly alter the average information content over the session. 

At higher frequencies, trades initiated by HFTs are found to contribute more to price discovery than trades initiated by non-HFTs only when large and mid cap stocks are being traded, consistent with prior empirical findings pointing to HFTs having a strong preference for trading on highly liquid stocks.

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Industrial Robots and Where to Find Them: Evidence and Theory on Derobotization

Economics master project by Amil Camilo, Doruk Gökalp, Julian Klix, Daniil Iurchenko, and Jeremy Rubinoff ’20

An abandoned factory robot
Image by Peter H from Pixabay

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Around the world, and especially in high-tech economies, the demand and adoption of industrial robots have increased dramatically. The abandonment of robots (referred to as derobotization or, more broadly, deautomation) has, on the other hand, been less discussed. It would seem that the discussion on industrial robots has rarely been about their abandonment because, presumably, the abandonment of industrial robots would be rare. Our investigation, however, shows that the opposite is true: not only do a substantial number of manufacturing firms deautomate, a fact which has been overlooked by the literature, but the reasons for which they deautomate are highly multi-dimensional, suggesting that they depend critically on the productivity of firms and those firms’ beliefs about robotization.

Extending the analysis of Koch et al. (2019), we use data from SEPI Foundation’s Encuesta sobre Estrategias Empresariales (ESEE), which annually surveys over 2000 Spanish manufacturing firms on business strategies, including on whether they adopt robots in their production lines. We document three major facts on derobotization. First, firms that derobotize tend to do so quickly, with over half derobotizing in the first four years after adoption of robots. Second, derobotizing firms tend to be relatively smaller than firms which stay automated for longer periods of time. Third, firms that abandon robots demand less labor and increase their capital-to-labor ratios. The prompt abandonment of robots, we believe, is indicative of a learning process in which firms robotize production with expectations of higher earnings, but later learn information which causes them to derobotize and adjust their production accordingly.

With this in mind, we propose a dynamic model of automation that allows firms to both adopt robots and later derobotize their production. In our setup, firms face a sequence of optimal stopping problems where they consider whether to robotize, then whether to derobotize, then whether to robotize again, and so on. The production technology in our model is micro-founded by the task-based approach from Acemoglu and Autor (2011). In this approach, firms assign tasks to workers of different occupations as well as to robots in order to produce output. For simplicity, we assume two occupations, that of low-skilled and high-skilled workers, where the latter workers are naturally more productive than the former. When firms adopt robots, the firm’s overall productivity (and the relative productivity of high-skilled workers) increases, but the relative productivity of low-skilled workers decreases. At the same time, once firms robotize they learn the total cost of maintaining robots in production, which may exceed their initial expectations. At any point in time, firms can derobotize production with the newfound knowledge of the cost. Likewise, firms can reautomate at a lower cost with the added assumption that firms retain the infrastructure of operating robots in production.

The simulations of our model can accurately explain and reproduce the behavioral distribution of automation across firms in the data (see Figure 1). Indeed, we are able to show that larger and more productive firms are more likely to robotize and, in turn, the firms which derobotize tend to be less productive (referred to as the productivity effect). However, the learning process which reveals the true cost of robotized production (referred to as the revelation effect) also highlights the role of incomplete information as a plausible explanation for prompt abandonment.  Most importantly, our simulations suggest that analyses which ignore abandonment can overestimate the effects of automation and, therefore, must be incomplete. 

Our project is the first, to our knowledge, to document the pertinent facts on deautomation as well as the productivity effect and the revelation effect. It is apparent to us, based on our investigation, that any research seeking to model automation would benefit from modeling deautomation. From that starting point, there remains plenty of fertile ground for new questions and, consequently, new insights.

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Cross-border effects of regulatory spillovers: Evidence from Mexico

Forthcoming JIE publication by Jagdish Tripathy ’11 (Economics)

Economics alum Jagdish Tripathy ’11 has a paper forthcoming in the Journal of International Economics on “Cross-border effects of regulatory spillovers: Evidence from Mexico.”

Paper abstract

This paper studies the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan demand by the non-tradable sector to changes in household credit supply range from 1.2–1.8. These results emphasize cross-border effects of regulations in the presence of global banks.

Key takeaways

Loan-loss provisions introduced in Spain in 2012 imposed a significant burden on the balanced sheet of Spanish banks. This regulation was unrelated to the Mexican financial system or the credit conditions of Mexican households. However, Mexican subsidiaries of two large Spanish banks, BBVA and Santander, reduced lending to Mexican households in response to the regulation (Fig. 1).

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Fig. 1. Growth in credit lending by Spanish and non-Spanish banks in Mexico.

Mexican municipalities with a higher exposure to Spanish banks (Fig. 2) experienced a larger contraction in lending to households. This drop in lending to households (i.e. a drop in credit supply) was associated with a reduction in lending to the local non-tradable sector driven by a drop in local demand. This shows (1) cross-border effects of a macroprudential regulation on lending and economic activity, and (2) the macroeconomic effects of shocks in lending to households in an emerging economy.

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Fig. 2. Share of Spanish banks in the household credit market across Mexican municipalities.

About the author

Jagdish Tripathy ’11 is an Advisor at Bank of England. He is an alum of the Barcelona GSE Master’s in Economics and has his PhD from GPEFM (UPF and Barcelona GSE).

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Effects of Syndication on Investment Performance

Finance master project by Ozan Diken and Dominic Henderson ’20

Two people review reports together
Photo by bongkarn thanyakij from Pexels

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Paper abstract

In venture capital, two or more venture capitalists (VC) often form syndicates to participate in the same financing rounds. Historically, syndicated investments have been found to have a positive effect on the investment performance. The paper provides insight into the effects of syndication on the likelihood of a successful exit for the venture-backed firm. It addresses the possible driving components such as the composition of the syndicates and, in particular, the internal investment funds being classed as external firms in two of the four models proposed, as well as a relaxation on the definition of investment round. One of the main conclusions is that in the analysis, using the chance of exiting and money in minus money out as success factors, syndication coefficients across all models are shown to have a higher chance of exiting. This supports the Value-add hypothesis and opposes the alternative, the Selection hypothesis, as it proposes that syndicated VC firms bring varying expertise to the project in order to increase the success factors post-investment. The paper advises to proceed with caution as the story is not consistent across the analysis.

Main conclusions

The paper aimed at looking to add to the literature of debates on reasons for syndication, such as the Valueadd vs Selection hypothesis as set out from various points of views. Uncertainty around profitability is the reason for syndication through the Selection hypothesis, however, the Value-add hypothesis suggests that VCs syndicate to add additional value to the venture post-investment. This is where the varying definitions of syndication we introduced, in order to draw inferences from the data. If the Soft definition of syndication (where syndication can occur across multiple investment rounds), was more successful, it may favour the Value-add hypothesis. However, in the initial test using “exited” as success, the Soft syndication models did not show a significant difference compared to the Hard syndication models.

bar chart

Using the chance of exiting as a success factor, syndication coefficients across all models showed a higher chance of exiting. Using this as a success factor, you could argue for the Value-add and against the Selection hypothesis, as syndicated investments across all models resulted in a higher chance of exiting the investment. Including the key controls, resulted in similar conclusions to be drawn, with syndication increasing the log odds of exiting. This does support the conclusions of Brander, Amit and Antweiler (2002) that highlight that the Valueadd hypothesis dominates.

Using Money Out minus Money In as a success factor it was shown syndicated investments increased this which would be in line with the Value-add hypothesis according to Brander, Amit and Antweiler (2002), however, this could be down to successful companies being input with greater investments which are already successful.

Using exit duration as a success factor, conclusions were unable to be drawn about syndication, as the syndication coefficients were not significant. A potential reason for this, as the literature suggests, Guo, Lou and Pérez-Castrillo (2015), highlight, that the type of fund the investment is being purchased for has an impact on the duration and amount of funding, therefore impacting the returns of the VCs. They find that CVC (corporate venture capital) backed startups receive a significantly higher investment amount and stay in the market for longer before they exit (Guo, Lou and Pérez-Castrillo, 2015). The data did not allow us to analyse the type of fund, meaning the investment strategy could differ from the outset. As no control variable exists for the type of fund it is therefore assumed this does not significantly impact the outcome. Controlling for the type of fund may have shed light on this aspect of the results.

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About the Barcelona GSE Master’s Program in Finance

Markets, Politics, and the Political: Can economics solve today’s most pressing problems?

by Pablo Hubacher Haerle ’20 (Economics)

Can economics be trusted in taking care of the most pressing questions of today in a neutral and un-ideological way? That is the topic of an essay written by Economics alum Pablo Hubacher Haerle ’20 for Chasmotics, an online publishing platform which seeks to question and problematize contemporary times through philosophical thought.

Painting: "The Bablyonian Marriage Market." Artist: Edwin Long. Year: 1875.
“The Babylonian Marriage Market.” Edwin Long (1875).

Exploring the link between politics and economics

Economics has long been perceived as an unattractively technocratic discipline. Recently, this trend seems to reverse, as economics becomes more popular among young people devoted to change the world for the better. Effective altruists, who seek to do the most good in the most efficient way, recommend that students acquire a PhD in economics, because “you have a high chance of landing an impactful research job” and it is “one of the most promising graduate study options for people who want to make a difference” (Duda 2015).

It is argued that tackling some of today’s pressing political problems such as climate change, income inequality or racism within the economical framework has the advantage of, unlike in less quantitative subjects such as history or sociology, dealing with such political issues with evidence, instead of ideology. But what exactly is the link between politics and economics? How do these two fields interact? And, can economics be trusted in taking care of the most pressing questions of today in a neutral and unideological way?

Looking at the relationship between economic thinking and politics, this essay suggests an answer.


About the author

Pablo Hubacher Haerle ’20 is a recent graduate from the Barcelona GSE Master’s in Economics.

Responding to COVID-19 by prioritising sustainability and wellbeing in the recovery

Elliot Jones ’18 (Macro) and Maximilian Magnacca Sancho ’21 (incoming ITFD)

Photo by John Cameron on Unsplash

Maximilian and Elliot connected through social media due to the Barcelona GSE connection and started working together on this piece due to shared research interests.


The COVID-19 pandemic is changing the way that we live our lives. As time passes it is becoming apparent that even once the lockdown policies have been eased and some level of normality has been resumed, the new world that we live in will be different to the one we knew before. This article focuses on emerging trends within the UK that have largely taken place as a result of COVID-19, or in some cases the pandemic has simply accelerated a trend that was already occurring. We then look to offer a range of public policy solutions for the recovery period where the overarching objective is to increase wellbeing in society in a sustainable way. These are focused towards the UK but several could be paralleled to other advanced economies.

chart
Chart 1. Consumer spending in April 2020 by category, % change year-on-year

But first, before we get to the policy solutions, briefly, what have been the main economic and wellbeing effects that we have seen as a result of COVID-19? In 2020, it is expected that the fall in overall economic output is going to be larger than during the financial crisis in 2008. Much of this is due to the level of decline in economic activity as a result of the UK governments lockdown policy. This was a necessary decision in order to reduce the spread of the virus and ensure the health service still has capacity to treat those that have unfortunately caught the disease. However, it has led to a significant liquidity shock for both households and businesses. Large portions of the labour market are now out of work and levels of consumer spending have declined rapidly (Chart 1). Alongside sharp falls in measures of economic performance, measures of wellbeing have declined rapidly as well (Chart 2). Increases in measures of uncertainty have mirrored increases in anxiety. While, social distancing policies are having a large impact on measures of happiness.

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Chart 2. ONS wellbeing measures (2011-2020)

Source: ONS. Notes: Each of these questions is answered on a scale of 0 to 10, where 0 is “not at all” and 10 is “completely”. Question: “Overall, how satisfied are you with your life nowadays?”, “Overall, to what extent do you feel that the things you do in your life are worthwhile?”, “Overall, how happy did you feel yesterday?”, “Overall, how anxious did you feel yesterday?”.

The UK government responded to the shock posed by COVID-19 with a range of policy interventions to provide funding to those that have been most impacted. At a macro level, the long-lasting effects of this crisis will be more pertinent if economic activity does not respond quickly after the government’s schemes have ended. Large portions of UK businesses have limited cash reserves to fall back on in a scenario where demand remains subdued for some time. However, even if the recovery period is strong there will still have been some clear winners and losers during this crisis. Younger workers, those on lower incomes and those with atypical work contracts are the ones that have been most heavily impacted (Chart 3). Whilst those on higher incomes, that are more likely to be able to work from home, have increased their household savings during this period, due to less opportunities to consume.

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Chart 3. Impact of COVID-19 on household savings by income and employment type

The policy solutions outlined below aim to be complementary of one another and look to amplify observed trends that are positive for wellbeing and to provide intervention where trends have been negative for wellbeing: 

  1. Climate at the centre of the response: This is less a policy recommendation and more a theme for the response. However, our message here is that increased public spending projects, focused towards green initiatives should be combined with a coherent carbon tax policy which influences incentives and helps to support the UK’s transition to a low carbon economy. 
  2. Labour market reforms: The government should look to develop a centralised job retraining and job matching scheme that supports workers most impacted by COVID-19, helps to encourage structural transformation towards emerging industries and increases the amount of highly skilled workers in the UK workforce. 
  3. Tough decisions on business: Some businesses will require further assistance from the UK government in the form of equity funding, rather than the debt funding seen so far. This should be done on a conditional basis, requiring all these businesses to comply with the UK’s climate objectives and should only be provided to businesses in industries that are expanding or strategically important to the UK economy. 
  4. Modernising the regions on a cleaner, greener and higher level: Looking to build on the governments ‘levelling up the regions’ policy to reduce regional inequalities, our policy consists of government funded infrastructure policies that include green investments for regions outside of the UK’s capital.  
  5. Harbouring that rainbow effect: Building on the increased community spirit that has been observed during the pandemic, this policy solution looks to increase localised community funding to maintain social cohesion and support those with mental health issues. 

Lastly, as the policy recommendations focus on expanding public investment to support the recovery, it is important to consider what this means for public debt sustainability in the UK. The conclusion is that as a result of the low interest rate environment, the most efficient way out of this recession is to borrow and spend on projects that will increase resilience to future shocks and support the UK’s transition to a low carbon economy. 

Please click on the link below to read about this in more detail. Comments are welcome.


Full article originally posted on Exploring Happiness.

Elliot Jones ’18 is a Sovereign Credit Risk Analyst at the Bank of England. He is an alum of the Barcelona GSE’s Master’s in Macroeconomic Policy and Financial Markets.

LinkedIn | Exploring Happiness

Maximilian Magnacca Sancho ’21 is an incoming student in the Barcelona GSE Master’s in International Trade, Finance, and Development.

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Accounting for Mismatch Unemployment

JEEA publication by Benedikt Herz ’08 and Thijs van Rens (former BGSE professor)

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Benedkit Herz (Economics ’08, GPEFM ’13), has published a paper in the Journal of the European Economic Association. His co-author is former Barcelona GSE Professor Thijs van Rens (now at Warwick).

Paper abstract

We investigate unemployment due to mismatch in the United States over the past three and a half decades. We propose an accounting framework that allows us to estimate the contribution of each of the frictions that generated labor market mismatch. Barriers to job mobility account for the largest part of mismatch unemployment, with a smaller role for barriers to worker mobility. We find little contribution of wage-setting frictions to mismatch.


Benedikt Herz ’08 is member of the Chief Economist’s Team, European Commission DG for Internal Market and Industry. He is an alum of the Barcelona GSE Master’s in Economics.

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Democratic tipping points

VoxEU article by Adilzhan Ismailov ’15 (Economics) and Professor Antonio Ciccone

CEPR’s policy portal VoxEU has published the article “Democratic tipping points” by Economics alum Adilzhan Ismailov ’15 and Antonio Ciccone, professor at the Barcelona GSE and the UPF Economics department, where Adilzhan is currently doing his PhD.

VoxEU promotes “research-based policy analysis and commentary by leading economists.” The site receives about a half million page views per month.

Article summary

Persistence of democratisation following transitory economic shocks plays an important role in the theory of political institutions. This column tests the theory of democratic tipping points using rainfall shocks in the world’s most agricultural countries since 1946. Negative rainfall shocks have a strong and transitory effect on agricultural output, but a persistent positive effect on the probability of democratisation even after ten years.

Key conclusions

The recent history of democratic (non-)transitions in the world’s most agricultural countries indicates that transitory events can have enduring effects on democratic institutions. When lower rainfall led to below-average agricultural output in these countries, countries ruled by authoritarian regimes were more likely to democratise and more likely to be democratic ten years later.

The shape of the effect of rainfall on the probability of democratisation indicates that the effect is through agricultural output. The agricultural economics literature finds an inverted-U-shaped effect of rainfall on agricultural output. In the theory of Acemoglu and Robinson (2001, 2006) we build on, transitorily lower output raises the probability of democratisation, and transitorily higher output lowers the probability of democratisation. Hence, the inverted-U-shaped effect of rainfall on agricultural output should translate into a U-shaped effect of rainfall on the probability of democratisation. We find this to be the case. Moreover, our results indicate that rainfall shocks tend to produce the largest change in the probability of democratisation when the estimated effect of rainfall on agricultural output is largest.

Figure. Effect of rainfall on real agricultural output and on the probability of democratisation

Note: The inverted-U-shaped solid black line is the effect of rainfall in year t on real agricultural output in year t and is measured on the left axis. The U-shaped coloured lines are the effect of rainfall on the probability of democratisation between years t-1 and t (one year later). The three classifications of democratic and autocratic regimes used in the figure are those of Acemoglu et al. (2019) (blue solid line); Przeworski et al. (2000) (red dotted line), as updated by Cheibub et al. (2010) and Bjornskov and Rode (2020); and Geddes et al. (2014) (green dashed line). The effect of rainfall on the probability of democratisation is calculated using the effect of rainfall in year t in column (1) of Tables 2 and 3 in the paper respectively for the Acemoglu et al. and the Przeworski et al. democratisation indicator. For the Geddes et al. democratisation indicator, the effect of rainfall on the probability of democratisation is calculated using the effect of rainfall in year t-1 in column (5) of Table 3. This is because of Geddes et al.’s unconventional start date for democratic regime transitions; see page 16 for details. Real agricultural output is an index with the base period 2004-2006. Rainfall is measured in dm.

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Adilzhan Ismailov ’15 is a PhD candidate at GPEFM (UPF and Barcelona GSE). He is an alum of the Barcelona GSE Master’s in Economics.