Economic Forces: Pondering price theory

A newsletter about supply and demand by Brian Albrecht ’14 (Economics of Public Policy)

Economic Forces is a new weekly newsletter by Brian Albrecht ’14 (Assistant Professor of Economics, Kennesaw State University) and Josh Hendrickson (Associate Professor of Economics, University of Mississippi).

“We are both professors of economics with a passion for what used to be called price theory. This newsletter is our attempt to work through and clarify points in price theory,” the authors explain in the newsletter’s introduction.

“You’ll have to pry supply and demand from my cold, dead hands.”

That’s the title of Brian’s first post to the newsletter. In it, he gives an overview of the Economic Forces project and and “a simple defense of (the increasingly scoffed at by the loudest voices online) supply and demand. “It seems silly to need to defend supply and demand within economics circles,” Brian says, “But it is 2020…”

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Brian Albrecht ’14 (PhD, University of Minnesota) is Assistant Professor of Economics at Kennesaw State University. He is an alum of the Barcelona GSE Master’s in Economics of Public Policy.

A Flexible Fix? Assessing the Labour Market Penalties to Flexible Working in Britain

EPP master project by Charley Lamb, Jana Eir Víglundsdóttir and Alessandro Zicchieri ’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

Our paper examines the wages and career prospects of employees in flexible work arrangements (FWAs). Using the British Household Panel Survey, we analyse the effect of being in a FWA on hourly wages and the likelihood of promotion. We use the occupational share of employees in FWAs before and after the introduction of “Right to Request” (R2R) legislation as an instrument to control for sample selection. Applying our instrument in pooled OLS and linear regression models, we find that flexible workers, particularly women, may receive higher wages than their non-flexible counterparts. This supports theoretical arguments that FWAs could increase labour productivity.

Conclusions

Our findings imply that there may be no penalty associated with workers adopting flexible working practices. Our instrumental variables wage model implies there could in fact be a reverse effect: coefficients changed from negative. In particular, the effect of FWAs was significant and large for women, leading to an approximately 9 percent increase in their wages. Those in FWAs have higher wages than those in conventional working arrangements, controlling for variables such as occupational choice, hours worked, and personal circumstances (including number of children and educational background). Similarly, we cannot reject the hypothesis that FWA has no impact on career progression, when modelling promotions as a 10 percent pay rise versus the previous year.

figure
Income Distribution and FWA

We do find some evidence that working flexibly decreases the difference in wage outcomes between men and women. The approximately 9 percent increase in wages associated with our FWA variable in our women-only specification compares to a 5 percent increase in our men-only specification. We cannot reject the hypothesis that FWAs have no effect on men’s wages. We find evidence women in FWAs are paid significantly more than their non-flexible counterparts.

This begs the question: why do those in FWAs appear to achieve better labour market outcomes than those not in FWAs? This appears to contradict some findings of economic theory on compensating wage differentials and the effects of similar working arrangements, such as part-time work. Further, the fact that our wage findings were highly significant for women (and not for men) appears to go against the gendered difference in how men and women use flexible working; men are more likely to use FWAs to improve their career outcomes, whilst women use FWAs to accommodate care needs.

First, we could have captured a range of productivity benefits that often come alongside flexible working practices. The increase in schedule control may improve worker satisfaction and hence productivity in itself, but is also often associated with better workplace practices such as improved management (Bloom et al, 2010). The increase in flexible working seen across many sectors (such as services) following the R2R reforms may have disproportionately benefited them ahead of other, less “flexible” sectors. The UK, with more than two-thirds of its labour force in the service sector, may have seen a productivity rise associated with more employees having greater scheduling control. Increases in productivity may then have been passed on to flexible-working employees in the form of pay rises above the mean.

Second, our model may neglect important social trends. The R2R legislation may have accompanied shifting attitudes towards flexible working, which spurred an increase in the compensation afforded to flexible workers. Future research examining historical trends in the remuneration of employees in FWAs could provide more detail on this.

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

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

In this coronavirus crisis, do families have enough savings to make ends meet?

Article by George Bangham ’17 (Economics of Public Policy)

In an article for the Resolution Foundation, George Bangham ’17 (Economics of Public Policy) looks at data on UK family finances in the period before the coronavirus pandemic and thinks about policy measures for those who may lose their primary source of income during the crisis.

Here is an excerpt:

We won’t know exactly how many people have lost their jobs due to coronavirus until at least the summer, when official statistics come out. But as well as monitoring the ongoing impact of the crisis, it’s equally important to consider the state of the country as the economic downturn hit home…

Amid the horror of the pandemic, and the legitimate fears of many families for their finances, it might seem frivolous to worry about statistics for the time being. But the lessons from the data are vital. They point us to new issues that the Government must fix. In a crisis, statistics can save livelihoods and save lives.

George Bangham ’17 is an Economist at the Resolution Foundation. He is an alum of the Barcelona GSE Master’s in Economics of Public Policy.

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Measuring horizontal inequity in healthcare utilisation

Publication by Mohammad Habibullah Pulok ’12 (HEP)

My first paper from PhD is out in the European Journal of Health Economics: “Measuring horizontal inequity in healthcare utilisation: a review of methodological developments and debates”

Paper abstract

Equity in healthcare is an overarching goal of many healthcare systems around the world. Empirical studies of equity in healthcare utilisation primarily rely on the horizontal inequity (HI) approach which measures unequal utilisation of healthcare services by socioeconomic status (SES) for equal medical need. The HI method examines, quantifies, and explains inequity which is based on regression analysis, the concentration index, and the decomposition technique. However, this method is not beyond limitations and criticisms, and it has been subject to several methodological challenges in the past decade.

This review presents a summary of the recent developments and debates on various methodological issues and their implications on the assessment of HI in healthcare utilisation. We discuss the key disputes centred on measurement scale of healthcare variables as well as the evolution of the decomposition technique. We also highlight the issues about the choice of variables as the indicator of SES in measuring inequity. This follows a discussion on the application of the longitudinal method and use of administrative data to quantify inequity.

Future research could exploit the potential for health administrative data linked to social data to generate more comprehensive estimates of inequity across the healthcare continuum. This review would be helpful to guide future applied research to examine inequity in healthcare utilisation.

About the author

alumni

Mohammad Habibullah Pulok ’12 is a post-doc researcher at Dalhousie University in Canada. He is an alum of the Barcelona GSE Master’s in Health Economics and Policy (now EPP).

Women’s Status in Rural Bangladesh: Exploitation and Empowerment

Economics of Public Policy master project by Agrima Sahore, Ah Young Jang, and Marjorie Pang ’19

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

Using household survey data from rural Bangladesh, we explore determinants of domestic violence. We propose two hypotheses: first, women suffer more domestic abuse as a result of marrying young; and second, women who are empowered suffer less gender-based violence. We isolate the causal effect of marriage timing using age at first menstruation and extreme weather as instruments; and the effect of empowerment using the number of types of informal credit sources as instrument. We find robust evidence contrary to our hypotheses. Our findings highlight that mere empowerment or increasing age at first marriage are insufficient mediums to combat gender-based violence and can in fact be counterproductive to reducing domestic violence against women, if the socio-economic context is not carefully considered.

Conclusion

Interestingly, we find a positive relationship between age at first marriage and domestic violence; and empowerment and domestic violence. This highlights the complexity of the nature of domestic violence against women in a highly conservative setting like rural Bangladesh.

Violence against women continues to be a social and economic problem Bangladesh struggles with. Although the government had aimed to eliminate gender based violence in the country by 2015, their efforts have not achieved the desired results. However, if the empowerment of women (an improvement in their economic and social status) and violence against them follows an inverted U-shaped curve, it is possible that Bangladesh is still adjusting to egalitarian gender norms and expectations and is stationed somewhere on the positive slope of the curve, wherein increase in empowerment initially would increase violence against women, before reducing it.

In order to design successful policies to combat violence against women, our study highlights the importance of understanding traditional cultural norms – especially prevailing gender norms – economic conditions, and how the interplay of various socio-economic factors contribute to domestic violence against women. Ultimately, actions and practices aimed at improving women’s condition in societies should work towards confronting existing circumstances and environments that underlie women’s risk of experiencing domestic violence.

Authors: Agrima Sahore, Ah Young Jang , and Marjorie Pang

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

Certain uncertainty? The response of Venezuelan banks to a political dilemma

Economics of Public Policy master project by Mary Armijos and Guillem Cuberta ’19

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

Our work focuses on the analysis of the Venezuelan banks, which have become more vulnerable. The leading causes of this vulnerability have been oil price shocks, political instability, pro-cyclical monetary conditions (i.e., interest rates), low level of financial intermediation, changing structure (e.g., consolidation, closure or nationalization), non-traditional bank transactions, high exposure to the public sector, and government intervention in their operations.  (Blavy R., 2014) Hence, studying the response of banks to policy uncertainty becomes relevant. However, even more critical, in Venezuela’s context, would be to ask: do banks respond differently to uncertainty if they are politically connected?

To address this question, we construct two indices: the policy uncertainty index and political connection index. Our uncertainty index is in a monthly basis and bank-invariant; it is developed following the work previously done by Baker, Bloom, and David, on the Economic Policy Uncertainty Index (EPU Index) and by Ahir, Bloom, and Furceri, on the World Uncertainty Index (an extension of the EPU).  Similar to Xu and Zhou (2008), for the case of the political connection index, we define the dummy variable connected bank equal one based on whether it is a state-owned bank. Alternatively, in case it is a private one if at least one of the board members has any connection with someone from the government. We adapt these criteria to the information there is available from Venezuela. We also look if one of the members is part of the ‘bolibourgeoisie’ ( a combination of the words Bolivarian and bourgeoisie, a term used to classify the businessmen and public officials linked to the government). For our dependent and micro-control variables (i.e., bank characteristics), we use monthly data from 2006 to 2018 obtained from SUDEBAN (Venezuela’s Superintendence of Banks). Moreover, for the macro-control variables, we obtain monthly data from the International Financial Statistics of the International Monetary Fund (IMF).  The variables we choose for our specifications are based on the works done by Vera et al. (2019) and Bordo et al. (2016).

Our central hypothesis is that when there is high policy uncertainty, political connections may allow connected banks to smooth the effects of uncertainty. We believe that connected banks might respond differently to uncertainty because they have privileged information or preferential treatment from the government, which grants them a competitive advantage over non-connected banks. To test the response of banks, we look at their behavior respect to credit supply and provisions, and we also investigate banks’ profitability in periods of uncertainty through the ROA. Our identification strategy to investigate the causal effect of policy uncertainty and political connection considers the fact that the uncertainty index is a high-frequency time series, which makes it be almost an exogenous variable. Also, the political connection index is not endogenous as it does not vary over time.

In addition to that, we control for bank-invariant and time-specific factors that affect both the right-hand side and left-hand-side variables by adding bank and time fixed effects. Furthermore, to separate the impact of our primary explanatory variable (interaction) from other confounding factors, we control for a block of bank-specific covariates. We also consider different specifications with and without lags of these controls to mitigate the potential reverse-causality concern. Even though we know that all of these adjustments might not entirely correct for omitted variable bias, we consider it adjusts well enough to investigate this relationship. We consider that one of the significant sources of potential bias comes from monthly macro changes (i.e., exogenous shocks like oil prices or U.S. sanctions, and government decisions) that are accounted by including time fixed-effects.

Figure 1: Monthly Economic Policy Uncertainty Index for Venezuela (EPUV)

Results

In our main results, we find that politically connected banks acquire more risks when there is higher uncertainty as an increase of 10 percent in our uncertainty measure leads them to give on average, 0.0262 percent more credits than non-politically connected banks. This result corroborates similar results from the literature that establishes a positive value from being politically connected (Kostovetsky 2015).  Also, we observe that an increase in the uncertainty index induces politically connected banks to hold more loss provisions in their portfolio than non-politically connected banks. A 10 percent increase in our uncertainty index prompts politically connected banks to hold 0.0192 percent more loss provisions than non-politically connected banks. Lastly, the effect of economic policy uncertainty for politically connected banks on ROA has a positive sign. A 10 percent increase in uncertainty increases the average returns on assets of politically connected banks by almost 11 percent compared to non-politically connected banks.

Summing up, connected banks can give more credit to the public in periods of higher uncertainty, at the same time that they hold more loss provisions. The first result is consistent with the ones shown by Cheng et al. (2017), where they find that banks supply much more credit when there is high uncertainty. However, our result of provisions does not coincide with theirs. Contrarily, they find that under higher uncertainty, connected banks reserve lower provisions than unconnected banks. In the case of the profitability analysis, connected banks have lower profits when there is high uncertainty. These results go along with the ones found by Dicko (2016).

We consider that this study presents new relevant findings regarding the literature of political connection and policy uncertainty, and for the Venezuelan economy overall. The political connection matters in periods of high uncertainty but until one point. From our results, we find that politically connected banks seem pro-risk as they give more credit when there is more policy uncertainty. However, on another level, it appears that they do receive privilege information form the government (bad news about the future) that makes them risk-averse at the same time as they also reserve more provisions. Additionally, the result of the relationship between uncertainty and profitability indicators, like ROA, indicates that being politically connected might not be extremely helpful to banks if they only benefit from having more information and do not receive any tangible benefit from the government. For further studies, it would be interesting to analyze how economic agents respond to policy uncertainty depending on the type of benefit they receive from being politically connected to some institutions.

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

The Zero Lower Bound was irrelevant

Blog post for AIER by Brian C. Albrecht ’14 (Economics of Public Policy)

empty building floor

Brian Albrecht is a PhD candidate at the University of Minnesota and a graduate of the Barcelona GSE Master’s Program in Economics of Public Policy, as well as a past editor of the Barcelona GSE Voice. He is also a contributor to the Sound Money Project, a blog from the American Institute for Economic Research (AIER).

In a recent post, Brian talks about a recent paper by Barcelona GSE professors Davide Debortoli, Jordi Galí, and Luca Gambetti, “On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint.” He writes:

Many economics writers, including Ben BernankeNeil Irwin, and Justin Wolfers, worry that the Fed will not be able to combat the next recession. Current interest rates, the sad story goes, are already close to zero. Since a downturn will push the economy to the zero lower bound (ZLB), the Fed will not be able to lower rates further, thereby prolonging the recession.

Of course, for such a story to make sense, the ZLB must be a fundamental constraint that inhibits monetary policy. In a new NBER working paper, Davide Debortoli, Jordi Galí, and Luca Gambetti consider whether the ZLB was actually the problem during the last recession. They say the ZLB was irrelevant. The authors come to this conclusion by studying two types of evidence: measures of macro volatility, and the response of macro variables to aggregate shocks through a vector autoregression.

Brian C. Albrecht for Sound Money

Read Brian’s full post on this paper and find a list of all his recent posts over on the AIER website.

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Brian C. Albrecht ’14 is a PhD candidate in Economics at the University of Minnesota. He is an alum of the Barcelona GSE Master’s in Economics of Public Policy.

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Green Public Procurement as a Leverage for Sustainable Development: Documental Analysis of 80 Practices in European Union

Book chapter by Daniele Alimonti ’16 (Economics of Public Policy)

book cover

While working as a research assistant at the Barcelona GSE, Daniele Alimonti ’16 (Economics of Public Policy) co-authored this chapter of the book “Green Public Procurement Strategies for Environmental Sustainability” curated by Rajesh Kumar Shakya (The World Bank, USA) and published by IGI Global. His co-authors are professors and researchers from Tor Vergata University in Rome, Italy.

Daniele shares this summary of the article:

The article aims to highlight the advantages of Green Public Procurement (GPP) practices to address the environmental and economic problems during the different stages of the tendering procedure. Laying on the experiences of the European countries, the research has the objective to reconstruct the state of the art of green public procurement through the lens of a cross-country comparative analysis. After introducing a systematic review of the literature and the core regulations of the GPP practice, the article underlines the results of a multidimensional analysis on a cluster of 80 practices, identified by the European Union and implemented by governments in 25 countries at a central, regional, or local government level. The framework of the analysis builds on several dimensions, mapping the main results on the following levels: geographic origin, government level, implementation period, main criteria used for implementation, as well as environmental and economic impact of such practices.

Daniele Alimonti is currently a research analyst at the Institute for Political Economy and Governance (IPEG) in Barcelona.

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

Happy now? Lessons for economic policy makers from a focus on subjective well-being

Master’s in Economics of Public Policy alum George Bangham ’17 currently works as a policy analyst at the Resolution Foundation, an influential London-based think tank focused on living standards. In February George published a new report on subjective well-being in the UK, which marked the Foundation’s first detailed analysis of subjective well-being data and its lessons for economic policymakers.

The report received widespread media coverage in the UK GuardianTimes and elsewhere, as well as international coverage in France and India among other countries.

It was launched at an event in Westminster where speakers included the LSE’s Professor Paul Dolan, UK Member of Parliament Kate Green and former head of the UK Civil Service Lord Gus O’Donnell.

George Bangham ’17 presents his report for the Resolution Foundation in Westminster

Speaking to the Barcelona GSE Voice, George said that while researching and writing the paper he had drawn closely on the material he covered while studying for the Master’s in Economics of Public Policy, particularly the courses on panel data econometrics, on the analysis of social survey microdata, and on the use of subjective well-being data for policy analysis.

You can see more of George’s publications and blog posts on the Resolution Foundation website. Follow George on Twitter @georgebangham