Trans-Atlantic Public Economics

A seminar on Trans-Atlantic Public Economics co-sponsored by the NBER and the Toyota International Centre for Economics and Related Disciplines (STICERD) at the London School of Economics (LSE) took place on June 4-5 in London. Research Associate Hilary W. Hoynes of University of California, Berkeley, and Camille Landais and Johannes Spinnewijn, both of LSE, organized the meeting. These researchers' papers were presented and discussed:

Session 1: Social Insurance
Jenna E. Stearns, University of California, Davis

The Long-Run Effects of Wage Replacement and Job Protection: Evidence from Two Maternity Leave Reforms in Great Britain
Stearns examines the effects of maternity leave coverage on women's employment and career trajectories in Great Britain using data from the British Household Panel Survey. Using a difference-in-differences identification strategy and two changes to the national maternity leave policy, Sterns distinguishes between the effects of expanding access to wage replacement benefits and the additional effects of providing job protection benefits. Access to paid maternity leave increases the probability of returning to work after childbirth in the short run, but has no effect on long-run employment. Expanding the amount of job protection available to new mothers results in substantial increases in maternal employment rates and job tenure more than five years later. However, job-protected leave expansions lead to fewer women holding management positions and other jobs with the potential for promotion. Although these maternity leave policies have large employment effects on the extensive margin, there is little evidence of effects on average earnings.

Andreas Kuhn, Swiss Federal Institute for Vocational Education and Training; Stefan Staubli, University of Calgary and NBER; and Jean-Philippe Wuellrich and Josef Zweimueller, University of Zurich

Fatal Attraction? Extended Unemployment Bene ts, Labor Force Exits, and Mortality

Kuhn, Staubli, Zweimueller, and Zweimueller estimate the causal effect of permanent and premature exits from the labor force on mortality. To overcome the problem of negative health selection into early retirement, they exploit an exogenous change in unemployment insurance rules in Austria that allowed workers in eligible regions to withdraw permanently from employment up to 3.5 years earlier than workers in non-eligible regions. The researchers find that the reduction in the retirement age increases mortality for men but not for women. The effect is statistically significant and quantitatively large for men in blue collar occupations, for men with less work experience or low earnings, and for men with pre-existing health impairments. For blue collar men, one additional year in early retirement increases the probability of death before age 73 by 2.4 percentage points (or 8.8 percent) and reduces the overall life span by 0.2 years.

Session 2: Inequality and the Business Cycle
Michael Graber, University of Chicago

Labor Income Dynamics over the Business Cycle

What do labor income dynamics look like over the business cycle? How does exposure to aggregate income risk change over the life cycle and with education? To what extent do taxes, transfers and the family attenuate aggregate income risk? Graber uses Norwegian population panel data to answer these important questions. He first provides a detailed statistical analysis of the income process to answer these important questions. He models the income process as a first order quantile-autoregressive process and let individuals with different education levels have a separate income process, and within each skill group and cohort and allows the conditional quantile functions to vary unrestrictively over time. Graber finds that exposure to cyclical income risk varies substantially across skill groups and over the life-cycle. He also finds that the skewness of the distribution of income decreases in response to a drop in GDP and as he conditiosn on higher quantiles of the earnings distribution. The study then aims to show that a structural representation of a frictional job ladder model with heterogeneous agents and aggregate shocks can explain these facts.

Session 3: Early-Life Education and Skills
Orazio Attanasio, University College London and NBER; Richard Blundell, University College London and IFS; and Gabriella Conti and Giacomo Mason, University College London

Inequality in Noncognitive Skills: a Cross-Cohort Comparison

Joseph P. Ferrie, Northwestern University and NBER; Claudia Goldin, Harvard University and NBER; Quentin O. Brummet, U.S. Bureau of the Census; Claudia Olivetti, Boston College and NBER; Karen Rolf, University of Nebraska, Omaha; and Elizabeth Mokyr Horner, American Institutes for Research

Early-Life Education and Late-Life Outcomes: Exposure to Pre-School 1943-46 and Well-Being After Age 50

Session 4: Taxation and Labor Market Responses
Hyejin Ku, Uta Schonberg, and Ragnhild C. Schreiner, University College London

Do Place-Based Tax Incentives Create Jobs?

Large and persistent disparities in regional employment is a main driver of inequality in income and wellbeing. To reduce these regional inequalities, programs of geographically differentiated payroll taxes have been widely used in Nordic countries. Ku, Schonberg, and Schreiner evaluate the effects of payroll tax changes on firm behavior, by exploiting a unique policy setting in Norway, where a system of geographically differentiated payroll taxes was suddenly abolished due to an EU regulation. The researchers' key finding is that the increase in regional payroll taxes had only a small impact on the wages of workers. Instead, firms responded to the tax increase primarily by reducing employment. The findings suggest that in settings characterized by rigid wage setting, place-based tax incentives may be effective in stimulating local employment.

Fabian Kindermann, University of Bonn; Lukas Mayr, European University Institute; and Dominik Sachs, University of Munich

Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs

The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue on top of direct bequest tax revenue. Kindermann, Mayr, and Sachs first show theoretically that a simple back-of-the-envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to a change in the distribution of net bequests. The researchers quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state of the art life-cycle model calibrated to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. The researchers find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 7.6 cents of labor income tax revenue (in net present value) through higher labor supply of (non-)heirs.

Session 5: Education and Spillovers
Camille Terrier, MIT, IZA, CEP, and Matthew W. Ridley, MIT

Fiscal and Education Spillovers from Charter Expansion

The fiscal and educational consequences of charter expansion for non-charter students are central issues in the debate over charter schools. Does the charter sector drain resources and high-achieving peers from non-charter schools? Terrier and Ridley answer these questions using an empirical strategy that exploits a 2011 reform that lifted caps on charter schools for underperforming districts in Massachusetts. They use complementary synthetic control instrumental variable (IV-SC) and differences-in-differences instrumental variables (IVDiD) estimators. The results suggest increased charter attendance encourages districts to shift expenditure in the traditional sector from support services to instruction and salaries. At the same time, charter expansion has a small positive effect on non-charter students' achievement.

Session 6: Consumption Inequality and Measurement
Bruce D. Meyer, University of Chicago and NBER, and James X. Sullivan, University of Notre Dame

Inequality in the Joint Distribution of Consumption and Time Use

Meyer and Sullivan examine inequality in both leisure and consumption over the past four decades. Using time use surveys stretching from 1975 to 2016, they estimate the distribution of leisure time conditional on hours worked and other individual level and family level characteristics. The researchers show that with these characteristics, especially work hours, are strong predictors of leisure within our time use samples. They then use these estimates to predict the distribution of leisure using work hours and other characteristics in the Consumer Expenditure Survey, a survey that also provides detailed information on consumption. The advantage of this approach is that it provides measures of consumption and leisure at the family level within a single data source. Combining consumption and leisure allows us to characterize more accurately changes in the distribution of well-being. The researchers find that leisure time is highest for families at the bottom of the consumption distribution, and typically declines monotonically as consumption rises. However, the consumption-leisure gradient is small. The researchers find noticeable differences within family types, with the gradient being largest for single parent families and single individuals and smallest for families with a head age 65 or older. The negative relationship between consumption and leisure appears strongest during the period around the Great Recession. Overall, the results indicate that including both leisure and consumption, as opposed to just consumption, in a measure of economic well-being will result in less inequality. However, because the consumption-leisure gradient is not very steep, the dampening effect of leisure on overall inequality is small.

Lorenz Kueng, Northwestern University and NBER; Scott R. Baker, Northwestern University; Michaela Pagel, Columbia University and NBER; and Steffen Meyer, University of Hannover

Measurement Error in Imputed Consumption

Survey-based measures of consumption are the basis of a great deal of empirical work despite suffering from considerable measurement error. For that reason, Koijen et al. (2014) and a number of follow-up papers develop and use an alternative measure commonly referred to as "imputed consumption." The basic idea is to measure consumption as a residual from the household's budget constraint: consumption is the part of total income that was not invested. As another alternative, a number of recent papers use high-frequency transaction-level spending as a measure of consumption (Kuchler, 2015, Gelman et al., 2014, Baker, 2014, Olafsson and Pagel, 2016, Kueng 2017). Kueng, Baker, Pagel, and Meyer use transaction-level data on balances, asset trades, and asset holdings to document the short-comings in using even the most detailed annual registry snapshots of wealth in imputing consumption. They show that substantial discrepancies between imputed and actual spending arise whenever investors buy and sell assets at different points within the year and whenever they incur trading costs. The reason is that asset prices fluctuate considerably over any given year and Barber and Odean (2000) find that many retail investors 1) have very large turnover, 2) have significantly different levels of returns, and 3) incur substantial trading costs that eat up to the entire historical risk premium.

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