Knowledge that Transforms

Labor market conditions at the time and place of potential entry into the labor market are shown to have a substantial and persistent effect on adult employment prospects. Individuals who face particularly depressed local labor markets when they graduate from secondary education, are—other things equal—subject to relatively high rates of nonemployment during their whole prime-age work career. Building on a unique combination of micro and macro data from Norway, we show that these effects are robust with respect to model specification and conditioning variables, and that they are not limited to individuals with a particularly disadvantaged background.

Using a unique set of household level panel data, we estimate the effect of capital gains on saving by asset type, controlling for observable and unobservable household specific fixed effects. The results suggest that the decline in the personal saving rate since 1984 is largely due to the significant capital gains in corporate equities experienced over this period. Over five-year periods, the effect of capital gains in corporate equities on saving is substantially larger than the effect of capital gains in housing or other assets. Failure to differentiate wealth affects across asset types results in a significant understatement or overstatement of the size of their impact, depending on the asset.

Multiple proxy variables are typically available for an unobserved explanatory variable in a regression. We provide a procedure by which the coefficient of interest can be estimated from a regression in which all the proxies are included simultaneously. This estimator is superior in large samples to the common practice of creating a summary measure of the proxy variables. We examine the relationship between parents' income and children's reading test scores in the United States, and between parents' assets and children's school enrollment in India, and demonstrate that the reduction in attenuation bias from a better use of proxy variables can be significant.

This note documents the diverging trends in volatility of the growth rate of sales at the aggregate and firm levels. We establish that the upward trend in firm volatility is not simply driven by a compositional bias in the sample studied.We argue that this new fact brings into question the proposed explanations for the decline in aggregate volatility and that, given the symmetry of the diverging trends at the micro and macro levels, a common explanation is likely. We conclude by describing one such theory.

We examine the relationship between casinos and crime using county-level data for the United States between 1977 and 1996. Casinos were nonexistent outside Nevada before 1978, and expanded to many other states during our sample period. Most factors that reduce crime occur before or shortly after a casino opens, whereas those that increase crime, including problem and pathological gambling, occur over time. The results suggest that the effect on crime is low shortly after a casino opens, and grows over time. Roughly 8% of crime in casino counties in 1996 was attributable to casinos, costing the average adult $75 per year.

This note implements two research designs that attempt to isolate the effect of class size on achievement. A first strategy focuses on variation in class size in rural schools with fewer than 30 students, and hence only one classroom, per grade. Second, an approach similar to Angrist and Lavy's exploits regulations that allow schools with more than 30 students in a given grade to obtain an additional teacher. Both designs suggest class size negatively affects test scores.

The protrade effect of immigrants on the bilateral export performance of the 50 American states and the District of Columbia with respect to 87 foreign countries is studied. This effect, which posits that a greater number of immigrants in a host location leads to increased trade between the host and the immigrants' origin country, has been supported in a number of studies. Here, we extend this approach and find that the immigrant effect is greater when the origin country's political system is more corrupt and less important when Spanish or English is the language of the origin country. State-level export data averaged over the 1990–1992 period are used.

We construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity—which we show roughly matches the data—minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings.

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for self-selection bias, because countries with liberalized capital accounts may also have sounder economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity-score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises.

This paper applies the recently developed econometric methods of panel unit root tests and nonlinear mean reversion to investigate price convergence in China--the largest transitional economy in the world. We find that prices did converge to the law of one price in China for an overwhelming majority of goods and services, based on a large panel data set. The finding sheds light on the extent of the market economy in China, and casts doubt on Young's proposition that the economic reform has led to the fragmentation of Chinese domestic markets.