Knowledge that Transforms

This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemploymentvacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation.

In recent financial crises and in recent theoretical studies of them, abrupt declines in capital inflows, or sudden stops, have been linked with large drops in output. Do sudden stops cause output drops? No, according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country?s collateral constraint on foreign borrowing. In this model, in fact, sudden stops lead to output increases, not decreases. An examination of the quantitative effects of a well-known sudden stop, in Mexico in the mid-1990s, confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone. To generate an output drop during a financial crisis, as other studies have done, the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop.

Skill-Sorting, Self-Selectivity, and Immigration Policy Regime Change: Two Surveys of Chinese Graduate Students' Intention to Study Abroad by Yiu Por Chen. Published in volume 95, issue 2, pages 66-70 of American Economic Review, May 2005

During the last four decades the average total fertility rate in OECD countries witnessed a dramatic fall: from 2.9 in 1960 to 2.0 in 1975 and then to 1.6 in the late 1990s (reaching 1.25 in Southern Europe). With the exception of the United States, all advanced countries now have fertility rates well below the replacement rate of 2.1. In the absence of either sharp changes in fertility behavior or large inflows of immigrants, their populations are set to shrink, particularly in Europe. Still, within this generalized fall, cross-national differences in fertility behavior have remained significant. By 2000, fertility rates ranged from 2.1 in the United States and over 1.8 in France and Norway to less than 1.3 in Greece, Italy, and Spain. Most standard accounts attribute the fall in fertility rates to a shift in personal preferences over the size of the family due to either changes in religious beliefs or growing female participation in the labor market. Yet, even though the ideal number of children for men and women 20–34 years old has declined, it is fairly similar across the European Union at around the replacement level of 2.1 (Eurostat, 2001). Hence, the sources of cross-national variation in fertility behavior must lie somewhere else. As women have joined the labor force, fertility rates have adjusted as a function of the institutional structures that shape the job market and determine its long-run unemployment rate. Exploiting the considerable variation of fertility rates and employment conditions across industrial countries, this paper shows that the current demographic transition is ultimately associated with the constraints of the labor market where fertility decisions are taken.

“Does increasing women's schooling raise the schooling of the next generation?” is the question posed by Jere R. Behrman and Mark R. Rosenzweig (2002). Their answer to the question is no. In fact, they conclude that raising women's schooling may lower the schooling of the next generation. We show that Behrman and Rosenzweig's results are not robust to alternative coding schemes and sample selection rules, and argue that their policy inference may be misguided.

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We show that individuals with identical preferences and abilities can self-organize into communities with starkly different civic environments. Specifically, we consider a multi-community city where community quality depends upon residents' efforts to prevent crime, improve local governance, etc. Homeownership raises incentives for such civic efforts, but is beyond the reach of the poor. Within-community externalities lead to segregated cities: the rich reside in healthy homeowner communities, while the poor live in dysfunctional renter communities. Tenure segregation in the United States accords well with our prediction. We study alternative tax-subsidy policies to expand homeownership and to promote integration of homeowners and renters.

New medical technologies hold tremendous promise for improving population health, but they also raise concerns about exacerbating already large differences in health by socioeconomic status (SES). If effective treatments are more rapidly adopted by the better educated, SES health disparities may initially expand even though the health of those in all groups eventually improves. Hypertension provides a useful case study. It is an important risk factor for developing cardiovascular disease, the condition is relatively common, and there are large differences in rates of hypertension by education. This paper examines the short and long-term diffusion of two important classes of anti-hypertensives - ACE inhibitors and calcium channel blockers - over the last twenty-five years. Using three prominent medical surveys, we find no evidence that the diffusion of these drugs into medical practice favored one education group relative to another. The findings suggest that - at least for hypertension - SES differences in the adoption of new medical technologies are not an important reason for the SES health gradient.

Using a new international dataset of trade-weighed exchange rates, this paper highlights a neglected adjustment mechanism in the classical gold standard literature. Since gold-pegged countries traded extensively with economies operating more flexible monetary regimes and where parity change was a common adjustment device to systemic shocks, we show that such parity adjustments induced worldwide swings in nominal effective exchange rates. These translated into real exchange rate variations to which trade balances responded with an average elasticity of unity and in the direction of restoring external disequilibria. We conclude that some nominal exchange rate flexibility thus present in the pre-1914 system was instrumental to international payments adjustment.