Knowledge that Transforms

Abstract We show that intergenerational mobility changed rapidly by race and class in recent decades in the United States and study the causal mechanisms underlying those changes. Between the 1978 and 1992 birth cohorts, earnings increased for white children from high-income families relative to white children from low-income families, increasing earnings gaps by parental income (class) by 30%. Earnings increased for Black children at all parental income levels, reducing white-Black earnings gaps for children from low-income families by 30%. Class gaps grew and race gaps shrank similarly for nonmonetary outcomes such as educational attainment, standardized test scores, and mortality rates. Using a quasi-experimental design, we show that the divergent trends in economic mobility were caused by differential changes in childhood environments, as proxied by parental employment rates, in local communities defined by race, class, and childhood county. Outcomes improve across birth cohorts for children who grow up in communities with increasing parental employment rates, with larger effects for children who move to such communities at younger ages. Children’s outcomes are most strongly related to the parental employment rates of peers they are more likely to interact with, such as those in their own birth cohort, suggesting that the relationship between children’s outcomes and parental employment rates is mediated by social interaction.

Abstract In this article, we establish a causal connection between two of the most salient social developments in the United States over the past decades: the opioid epidemic and the political realignment between the Republican and Democratic parties. Drawing on unsealed records from litigation against Purdue Pharma, we uncover rich geographic variation in the marketing of prescription opioids that serves as a quasi-exogenous source of exposure to the epidemic. We use this variation to document significant increases in drug-related mortality and greater reliance on public transfer programs. This induced economic hardship led to substantial changes in the political landscape of the communities most affected by the opioid epidemic. We estimate that from the mid-2000s to 2022, exposure to the opioid epidemic continuously increased the Republican vote share in House, presidential, and gubernatorial elections. By the 2022 House elections, a one-standard-deviation increase in our measure of exposure led to a 4.5 percentage point increase in the Republican vote share. From 2012 until 2022, this increase in the House vote share translated into Republicans winning additional seats.

Abstract Aspirations may condition the future-oriented choices of individuals and thus may play a role in the persistence of poverty or the effort to break out of it. We run a randomized controlled trial in remote, rural Ethiopia to explore this and evaluate an intervention that aims to change how poor people perceive their future opportunities, alter their aspirations, and through that, modify their investment decisions. A treatment group was shown video documentaries featuring individuals from similar communities who escaped poverty through their own efforts and who serve as relatable role models. Five years after the screening took place, the treated households had increased future-oriented investments in agriculture, children’s education, and assets. The results can be explained by an increase in aspirations in terms of lifetime goals. Overall, this research uniquely provides evidence that a light-touch behavioural intervention can have persistent economic impacts on a poor population.

Abstract Has the dominance of the dollar in global trade rendered monetary policy ineffective? An emerging view contends that if a country invoices its exports in dollars, exchange rates cannot stabilize economic activity, as the classical expenditure-switching channel is muted. This view rests on the premise that export prices are sticky in dollars, breaking the link between export demand and depreciations. But this assumption is not borne out by the data: goods priced in dollars tend to have more flexible prices, along with higher elasticities of substitution. We propose a model with more realistic assumptions and show that even with dollar pricing, depreciating the currency by loosening monetary policy can still boost exports and activity materially. The limit to any expansion is not demand, but supply capacity. We also show that low exchange rate pass-through to dollar prices is not informative about price stickiness. The price response to exchange rates is small when demand elasticities are high, even with flexible prices: low pass-through is an equilibrium result, not evidence of a nominal friction.

Abstract This article examines the global adoption of technology in the late nineteenth century. We construct several novel data sets to test the idea that the codification of technical knowledge in the vernacular was necessary for countries to absorb the technologies of the first Industrial Revolution. We find that comparative advantage shifted to industries that could benefit from these technologies in countries and colonies with access to codified technical knowledge, but not in other regions. Using the rapid and unprecedented codification of technical knowledge in Meiji Japan as a natural experiment, we show that this pattern emerged only after the Japanese government codified vast amounts of technical knowledge. Our findings shed new light on the frictions associated with technological diffusion and offer a novel explanation for why Meiji Japan was unique among non-Western countries in successfully industrializing during the first wave of globalization.

Abstract Empirical studies find that the pass-through of input cost changes to prices is incomplete: a 10% increase in costs causes downstream prices to rise less than 10%, even at long horizons. Using microdata from gas stations, food products, and manufacturing industries, I find that incomplete pass-through in percentages often disguises complete pass-through in levels: a $1/unit increase in input costs leads to $1/unit higher downstream prices. Pass-through appears incomplete in percentages due to a gap between prices and costs. Complete pass-through in levels contrasts with workhorse macroeconomic models that feature homothetic industry demand systems. I identify an alternative class of demand systems that yields pass-through in levels and highlight four implications. First, measuring pass-through in percentages can lead to spurious evidence of asymmetry and size dependence. Second, pass-through in levels leads to systematic fluctuations in relative price and markup dispersion that are not associated with changes in allocative efficiency. Third, pass-through in levels can explain dynamics of industry gross margins, operating profits, and entry in the data that are at odds with workhorse models. Finally, incorporating pass-through in levels into an input-output model of the U.S. economy better matches the volatility of consumer price inflation and the response of inflation to identified shocks.

Abstract We develop a model that integrates modern theories of labor market flows with nominal wage rigidities to study the consequences of inflation on the labor market. Nominal wage stickiness incentivizes workers to engage in job-to-job transitions after an unexpected increase in the price level. Such dynamics lead to a rise in aggregate vacancies associating a seemingly tight labor market with lower real wages—two facts observed during the recent inflation period. The calibrated model jointly matches aggregate and cross-sectional trends in worker flows and wages during the 2021–2024 period. Using historical data, we show that prior periods of high inflation were also associated with increasing vacancies and upward shifts in the Beveridge curve. Our results suggest that policy makers and academics should be cautious about viewing the rise in the vacancy-to-unemployment rate as a sign of a tight labor market during inflationary periods without holistically looking at other labor market indicators.

Abstract This article studies the returns to enrolling in U.S. public universities by comparing the long-term outcomes of barely admitted versus barely rejected applicants. I use administrative admission records spanning all 35 public universities in Texas, which collectively enroll 10% of all American public university students, to systematically identify and employ decentralized cutoffs in SAT/ACT scores that generate discontinuities in admission and enrollment. The typical marginally admitted student gains an additional year of education in the four-year sector, becomes 12 percentage points more likely to ever earn a bachelor’s degree, and eventually earns 8% more than their marginally rejected but otherwise identical counterpart. Marginally admitted students pay no additional tuition costs thanks to offsetting grant aid; cost-benefit calculations show internal rates of return of 26% for the marginal students themselves, 16% for society (which must pay for the additional education), and 7% for the government budget. Earnings gains are similar across admitting institutions of varying selectivity, but smaller for students from low-income families, who spend more time enrolled but complete fewer degrees and major in less lucrative fields. Finally, I develop a method to separately identify effects for students on the extensive margin of attending any university versus those on the margin of attending a more selective one, revealing larger effects on the extensive margin.

Abstract We trace the evolution of the language of science, religion, and political economy in the centuries leading to the British Industrial Revolution. Using textual analysis of 264,443 works printed in England between 1500 and 1900, we test whether British culture manifested a belief in progress associated with science and industry. Our analysis yields three main findings. First, there was a separation in the languages of science and religion beginning in the mid-eighteenth century. Second, volumes using language at the nexus of science and political economy became more progress-oriented during the Enlightenment. Third, volumes using industrial language—especially those at the science-political economy nexus—were more progress-oriented beginning in the eighteenth century.

Abstract We use novel surveys of firms and workers, linked to administrative employer-employee data, to study the prevalence and importance of individual bargaining in wage determination. We show that simple survey questions accurately elicit firms’ bargaining strategies. Using the elicited strategies for 772 German firms, we document that the majority of firms are willing to engage in individual wage bargaining. Labor market factors predict firms’ strategies better than firm characteristics. Survey responses from nearly 10,000 full-time workers indicate that most workers provide their salary expectations before they receive a job offer. Most outside offers are rejected, with the worker remaining at the incumbent firm. There is substantial heterogeneity in workers’ bargaining behavior, which translates into within-firm wage inequality. Firms that set pay via individual bargaining have a 3 percentage point higher gender wage gap.