Luminosity as an indicator of economic activity

When working with worldwide data, it si often frustrating that data quality and availability is far from uniform across countries. Especially for developing countries, or those with large informal sectors or notable self-sustenance, we have a very imperfect idea of how much economic activity there is. Hence, looking at other indicators that GDP can give us interesting clues.

Xi Chen and William Nordhaus make the case for luminosity. By looking at how brightly various locations shine at night, it allows you to infer something about economic activity and the level of development. Also, it allows to say something about regional distribution of economic activity. Of course, this is not going to be perfect, especially for developed economies where data is of much better quality to start with.

The standard data set for international macroeconomics data is the Penn World Tables. It also grade grades to its data, telling us how reliable it is. Unfortunately, these grades are largely ignored in empirical work. Chen and Nordhaus ask whether they can increase the quality of output measured with their luminosity data and they claim this is only useful for those labeled D and E. Yet they do not advocate using luminosity data for countrywide analysis. Indeed, data collection methods will eventually improve and traditional data will move up in the quality ladder. Luminosity data is far from perfect, it is just that in some countries official data is even worse at the moment. Chen and Nordhaus are more confident with luminosity as a proxy for regional activity in some cases, even if measurement error is even larger there.

Overinvestment in financial expertise

One conventional story about the 2007-2008 financial crisis is that some bright financial bankers created complex financial instruments that have then been traded by people who did not understand them, thus leading to mispricing and ultimately to a major market correction. In other words, financial advisors were not too bright. No, Wall Street has hired a lot of PhDs, so how could this happen?

Vincent Glode, Richard Green and Richard Lowery present a theory that would yield identical outcomes, but because there is too much investment in financial expertise. They build a model where financial intermediaries hire experts to create, manage and trade complex financial instruments. This allows them to extract some of the consumer surplus created by these instruments. But the intermediaries are competing with others that do the same thing. The fact that this investment in expertise is made may make the surplus disappear under some circumstances, for example some information shocks.

Thus the competition between financial intermediaries boils down to an arms race, where each move is privately beneficial but socially neutral, and sometimes even harmful. All the bright people hired by Wall Street have created very complex instruments and information systems that lead to adverse-selection problems. When a shock occurs, the fact that they have more information makes that others think they are going to sell lemons, and nobody trusts them. Markets come to a halt. In a sense, the financial intermediaries suddenly wish they would not have all this expertise, so that they do not come under the suspicion of offering bad assets. Maybe firing all of them is the solution.

Women stay longer

It is widely documented that women have a much higher tendency to drop out of the labor force than men and that they quit jobs more often. It is obvious that fertility and marriage have a major impact here. And nobody disputes that. But apparently nobody looked into more details by differentiating genders for job market transitions.

Boris Hirsch and Claus Schnabel do it for Germany using excellent panel data that included many job and workplace characteristics along with some details about the workers. Hence, they can factor in a good chunk of heterogeneity. The interesting results is that once you control for the wage, women are less likely to quit their job for another one or non-employment. As women take jobs that pay less, a composition effect is hiding the loyalty of women to their employer.

Men last longer

Women live longer, yet paradoxically they can claim pension benefits earlier in many countries, where there is strong resistance to equalizing the retirement age (let alone increasing it, see last week's post). Would true believers in markets and efficient politics still find an explanation of this paradox?

Wolfgang Maennig and Michael Stobernack offer one: the physical performance of men declines much slower with age than for women. They base this on the worldwide top performers by age on rowing machines. The latter are of uniform quality, thus environmental factors do not matter and everyone competes on level ground. This is better than previous studies relying on track-and-field records, that more susceptible to whether influences (and doping). From the 40's to the 60's, the physical performance of men declines by about 15%. This is less than the productivity decrease that would be implied from wage changes (and labor productivity does not depend solely on physical performance, one could think older workers have in fact better non-physical qualities like experience). For women, this is more in the order of 20%. The difference is even more pronounced for those in the "lightweight" category.

The study does not go beyond the 70's (and I suppose the records pertain to the younger ones among those). So it must be that at some point the men start declining really fast. It also be that the age differences among the best rowers are simply not representative of the age differences among the general population. These elite athletes maintain their body, whereas the general population may not, and especially there may strong gender differences in doing so.

Why Greece will never make it: self-fulfilling expectations about social security

Mediterranean countries have many things in common, one of them is an early retirement age. You certainly read about the uproar when the Germans learned that they had to bail out the Greeks who enjoy retirement many years earlier. Now there is much pressure on Greece to lower and delay pensions, but there is tremendous resistance from the street. The same is happening right now in France as well. Yet, initiative to delay retirement in Northern Europe or North America, where retirement age is already higher, do not generate much discussion.

Ryo Arawatari and Tetsuo Ono may have an explanation for this dichotomy: self-fulfilling expectations. The story is very intuitive. If you expect pensions to be generous, there is no point in accumulating savings for retirement, and you do not invest in education either. And once you are low skill, you will vote for generous pensions. The opposite happens with expectations of small pensions. And once you are in such an equilibrium, it is very very difficult to get out of it: people want generous pensions, and the newcomers know this and thus expect this not to change, and make the appropriate (non)investments. To change this, you need to massively lower expectations during a whole generation or more. No Greek government can have that much staying power. And neither does the French one.

When should amniocentesis be performed?

Every pregnant woman past some age is recommended to perform an amniocentesis to check whether her fetus suffers from Down syndrome. The reason is that the risk of this syndrome increases with the age of the mother. But the test is risky, as it can lead to miscarriage, thus it is only performed for higher (syndrome) risk pregnancies.

Eduardo Fajnzylber, Joseph Hotz and Seth Sanders tell us that the logic that the medical profession has adopted is wrong. The basic idea is that the risk of miscarriage is constant with the mother's age, while the risk of Down syndrome is increasing. At first sight you would only want to test older women. That is the logic from the perspective of the physician. They now propose to see this from the perspective of the mother. An older women will have fewer opportunities to conceive, thus a miscarriage is much more costly to her compared to a young woman. This would make her to want to avoid the risk of miscarriage. The recommended strategy becomes much less obvious and could in fact be that young women carry out the test and older ones bypass it. It all boils down to a personal evaluation of the cost of miscarriage, Down syndrome and abortion. Not as easy as the physicians say it is.

Worker overconfidence and unemployment duration

The current (well, some say it is over now) recession is different from others because it has unusually long unemployment durations, among other things. This can be explained by a really poor labor market. But there could also be other reasons.

René Böheim, Gerard Thomas Horvath and Rudolf Winter-Ebner explore using Austrian data the components of a wage: one part comes from firm fixed-effects and the other from worker fixed-effects. In other words, the wage depends on the productivity of the firm and of the worker. They find then that those workers who had larger firm fixed-effects later end up having longer unemployment durations. This means that they misinterpreted their high wage as their own doing, and became overconfident and set a reservation wage that is too high.

In the current US context, it is clear that real wages need(ed) to decrease to clear the labor market. But many of those who were laid off may not have been understanding this and have (had) too high reservation wages, and thus have been at least initially rejecting some job offers, thus prolonging the duration of their unemployment. I have no hard evidence for this conjecture, may be someone has for or against it.