Market vs. Institutions: The Trade-off Between Unemployment and Wage Inequality Revisited

The trade-off hypothesis suggests that high wage inequality in the US and the UK and high unemployment in countries of continental Europe are consequences of the same negative change in the demand for the low skilled under different degrees of wage rigidity. This paper uses a labor supply and labor demand model with heterogenous types of labor in order to test the trade-off hypothesis and to analyze the effect of market forces and wage rigidity on changes in the between-group variation in earnings, employment, unemployment, and inactivity in France, the UK, and the US between 1990 and 2002. The results provide clear evidence in favor of the trade-off hypothesis when France is compared to the US as well as to the UK. We also find that labor supply and labor demand are more wage elastic in the UK than in the other two countries. Counterfactual simulations based on the estimated model reveal that exogenous changes in the relative demand for skills dominated in France, while supply shifts had more impact in the US over the studied period. In the UK, the opposite effects of the supply and the demand shifts were of similar magnitude, even though the supply effects dominated for the least and the most educated. In addition, an extended version of the trade-off hypothesis is proposed which considers not only wage inequality and unemployment but also labor supply. If labor force participation is sensitive to wages, then rising wage inequality is likely to be accompanied by an increase in the inactivity rate. We find that wage elasticity of labor force participation is positive and significant in all three countries, and suggest that depending on the institutions that affect wage rigidity, there is trade-off between unemployment on one hand, and wage inequality and inactivity on the other.Unemployment and Wage Inequality Trade-off; Wage Rigidity; Inactivity

Mortgage Market Maturity and Homeownership Inequality among Young Households: A Five-Country Perspective

This paper uses the newly constructed Luxembourg Wealth Study data to document cross-country variation in homeownership rates and the homeownership-income inequality among young households in Finland, Germany, Italy, the UK and the US, and relate it to cross-country differences in mortgage market maturity. We find that aside from Italy, homeownership rates and inequality in the four countries correspond to their mortgage take up rates and its distribution across income, reflecting the different degree of development of their respective mortgage markets. In Italy, alternative ways of financing, such as family transfers, substitute the limited mortgage availability and explains the second highest homeownership rate in our sample, despite the lowest mortgage take up. The mortgage market in the UK is the most open and the most equal, which leads to the highest and most equally distributed homeownership in this country as well. The mortgage market in Germany is on the other side of the spectrum with very low mortgage take-up rates and strong dependence of homeownership and mortgage take up on household income. Finland and the US are in-between. Counterfactual predictions suggest that although household characteristics play some role in explaining the variation in home ownership rates across the five countries, it is mostly the country specific effects of these characteristics determined by the institutional environment as well as the functioning of the housing and mortgage markets that drive the main result.Homeownership, credit constraints, mortgage market

Who Borrows and Who May Not Repay?

In this paper we use Household Budget Survey data to analyze the evolution of the household credit market in the Czech Republic over the period 2000–2008. While the share of households that borrow remained stable and below 40%, the amount of debt outstanding increased. We estimate a series of models of the determinants of borrowing. We next merge our data with the Statistics on Income and Living Conditions in 2005–2008, which contain direct information on repayment behavior, in order to test the validity of the standard debt burden measure as a predictor of default. We propose an alternative indicator – the adjusted debt burden (ADB), defined as the ratio of loan repayments to discretionary income, constructed as net income minus the living minimum (the minimum cost of living for a given household composition as set by the Czech Statistical Office), which turns out to be a superior predictor of default risk. Limited by the data, we use a fairly broad concept of default, namely, the inability to make loan repayments on time. Based on the distribution of default risk across the levels of the adjusted debt burden, we suggest that a 30% ADB threshold should be used as the definition of overindebtedness, with an average default risk of 17%. Finally, we show that overindebtedness and local economic shocks are closely related, suggesting that default risk should be always considered in the context of regional economic conditions.Debt burden, household credit, regional default risk, repayment.

Mortgage Market Maturity and Homeownership Inequality among Young Households: A Five-Country Perspective

This paper uses the newly constructed Luxembourg Wealth Study data to document cross-country variation in homeownership rates and the homeownership-income inequality among young households in Finland, Germany, Italy, the UK and the US, and relate it to cross-country differences in mortgage market maturity. We find that aside from Italy, homeownership rates and inequality in the four countries correspond to their mortgage take up rates and its distribution across income, reflecting the different degree of development of their respective mortgage markets. In Italy, alternative ways of financing, such as family transfers, substitute the limited mortgage availability and explains the second highest homeownership rate in our sample, despite the lowest mortgage take up. The mortgage market in the UK is the most open and the most equal, which leads to the highest and most equally distributed homeownership in this country as well. The mortgage market in Germany is on the other side of the spectrum with very low mortgage take-up rates and strong dependence of homeownership and mortgage take up on household income. Finland and the US are in-between. Counterfactual predictions suggest that although household characteristics play some role in explaining the variation in home ownership rates across the five countries, it is mostly the country specific effects of these characteristics determined by the institutional environment as well as the functioning of the housing and mortgage markets that drive the main result.Homeownership, credit constraints, mortgage market

Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market

Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.consumer credit, default, adverse selection, moral hazard

Field-of-Study Homogamy

This paper reports evidence on the strong tendency of the college educated to match with partners who graduated in the same field of study – a dimension of assortative matching that has been overlooked thus far. We employ Labor Force Survey data covering most EU countries to measure the extent of field-of-study homogamy in prevailing married and cohabiting couples within several years of college graduation. We find that field-of-study homogamy increases almost immediately after graduation to reach very high levels, especially for spouses working in the same industry, and that it varies dramatically across countries. Graduates in Social Sciences display a particularly strong tendency towards homogamy and also have the highest matching theory-implied match gains from homogamous matches

Mortgage Market Maturity and Homeownership Inequality Among Young Households: A Five-Country Perspective

This paper uses the newly constructed Luxembourg Wealth Study data to document cross-country variation in homeownership rates and the homeownership-income inequality among young households in Finland, Germany, Italy, the UK and the US, and relate it to cross-country differences in mortgage market maturity. We find that aside from Italy, homeownership rates and inequality in the four countries correspond to their mortgage take up rates and its distribution across income, reflecting the different degree of development of their respective mortgage markets. In Italy, alternative ways of financing, such as family transfers, substitute the limited mortgage availability and explains the second highest homeownership rate in our sample, despite the lowest mortgage take up. The mortgage market in the UK is the most open and the most equal, which leads to the highest and most equally distributed homeownership in this country as well. The mortgage market in Germany is on the other side of the spectrum with very low mortgage take-up rates and strong dependence of homeownership and mortgage take up on household income. Finland and the US are in-between. Counterfactual predictions suggest that although household characteristics play some role in explaining the variation in home ownership rates across the five countries, it is mostly the country specific effects of these characteristics determined by the institutional environment as well as the functioning of the housing and mortgage markets that drive the main result

The Quiet Revolution and the Family: Gender Composition of Tertiary Education and Early Fertility Patterns

It is well known that highly 'female' fields of study in tertiary education are characterized by higher fertility. However, existing work does not disentangle the selection-causality nexus. We use variation in gender composition of fields of study implied by the recent expansion of tertiary education in 19 European countries and a difference-in-differences research design, to show that the share of women on study peer groups affects early fertility levels only little. Early fertility by endogamous couples, i.e., by tertiary graduates from the same field of study, declines for women and increases for men with the share of women in the group, but non-endogamous fertility almost fully compensates for these effects, consistent with higher early fertility in highly 'female' fields of study being driven by selection of family-oriented students into these fields. We also show that the EU-wide level of gender segregation across fields of study has not changed since 2000

Market vs. Institutions: The Trade-off Between Unemployment and Wage Inequality Revisited

The trade-off hypothesis suggests that high wage inequality in the US and the UK and high unemployment in countries of continental Europe are consequences of the same negative change in the demand for the low skilled under different degrees of wage rigidity. This paper uses a labor supply and labor demand model with heterogenous types of labor in order to test the trade-off hypothesis and to analyze the effect of market forces and wage rigidity on changes in the between-group variation in earnings, employment, unemployment, and inactivity in France, the UK, and the US between 1990 and 2002. The results provide clear evidence in favor of the trade- off hypothesis when France is compared to the US as well as to the UK. We also find that labor supply and labor demand are more wage elastic in the UK than in the other two countries. Counterfactual simulations based on the estimated model reveal that exogenous changes in the relative demand for skills dominated in France, while supply shifts had more impact in the US over the studied period. In the UK, the opposite effects of the supply and the demand shifts were of similar magnitude, even though the supply effects dominated for the least and the most educated. In addition, an extended version of the trade-off hypothesis is proposed which considers not only wage inequality and unemployment but also labor supply. If labor force participation is sensitive to wages, then rising wage inequality is likely to be accompanied by an increase in the inactivity rate. We find that wage elasticity of labor force participation is positive and significant in all three countries, and suggest that depending on the institutions that affect wage rigidity, there is trade-off between unemployment on one hand, and wage inequality and inactivity on the other