Consumption complementarities, monopolies and coordination

Price-coordination and investment coordination are analyzed in a monopolistic multi-sector general equilibrium model with consumption complementarities. Possible solutions to the investment coordination problem are consistent with historical examples of government intervention in investment, the different roles of banking sectors in different countries, and the effect of optimism on the development of new sectors. Price coordination within sectors between monopolists of complementary intermediaries lowers prices and increases welfare because the competition between the final goods of different sectors then becomes the paramount concern of each monopolist. With no price coordination, each monopolist sets infinite prices as the effect of price increases on demand is shared by all other intermediary monopolists due to the complementarities.

The effect of a minimum wage on unemployment in a model of team production.

To summarise the arguments in this paper, a case will be made for and against an increase in the minimum wage. First the case for the defence of a minimum wage increase. An increase in a minimum wage will, if the increase is within bounds, only increase the percentage of the output that low-skilled workers receive, without altering their employment numbers. If the marginal utility of income decreases with income, a minimum wage will thus increase social welfare in the short term. In the short term it is even possible that the reduction in the wages of the high-skilled workers will increase the labour supply of the high-skilled workers, thereby increasing employment of low-skilled workers and output in the short run. As to the long run: because low-skilled workers are in practice not able to borrow against future wages, a higher minimum wage may increase the education that low-skilled workers are able to afford for 19 themselves and their children, thereby increasing the number of high-skilled workers. This will increase total output in the long run. If there is a long run negative effect of a higher minimum wage on the number of low-skilled jobs, this will increase the incentives of low-skilled workers to become high-skilled, increasing output even further in the long run. Empirically, this possibility does not conflict with the findings that individual low-skilled workers increase their labour supply and their employment prospects if benefits are lowered, or that labour demand for low-skilled workers, in any particular firm or industry, decreases if the wages of the low-skilled workers increases. These are all the effect of the fact that high-skilled workers will move to those firms and industries where they can earn higher wages and will try and combine with those low-skilled workers who will accept the lowest wages. An economy-wide minimum wage will make this â€fleeing†behaviour impossible. The empirical evidence for this view comes from case studies which suggest that an increase in the minimum wage does not lead to a substantial reduction in the number of employed workers in the short run. Now the case against an increase of the minimum wage. If a large increase in the minimum wage crosses a technological â€switching pointâ€, where an existing alternative team technology becomes optimal for the high-skilled workers, the number of low-skilled workers employed will decrease dramatically. As this technology is not used before the increase of the minimum wage, there is no way to empirically tell beforehand whether such a technological switching point will be crossed or not. Even in the short run therefore, an increase in the minimum wage may unexpectedly result in a large reduction in the employment levels of low-skilled workers. In the longer run, the increased incentives for high-skilled workers to find technologies that reduce the number of low-skilled jobs in production, may reduce the long run demand for low-skilled jobs. This may explain why the US and European case studies find such a small effect of a change in the minimum wage: as it takes time to develop and implement new technologies, the effects of a minimum wage under team production will only be felt in the long run. Also, the increase in a minimum wage may reduce the incentives for low-skilled workers to become high-skilled, increasing the number of low-skilled workers and hence reducing output in the long run. A final possibility is that an increase in the minimum wage decreases the wage of high-skilled workers and reduces the labour supply of high-skilled workers, thereby reducing the demand for low-skilled workers, even in the short run11 . Both cases make arguments about what happens to technology and the number of low-skilled workers in the long run, as a result of a higher minimum wage. As it is virtually impossible in an empirical study to separate the long-run effects of a minimum wage on employment and transition probabilities, from all the other factors that influence employment levels and transition probabilities (business cycles, technology shocks, changes in the international competitive environment, government intervention in education markets, etc.), I have little hope that either of these cases can be proven convincingly.

Inside the black box of social capital: micro-models of the value of contacts

This paper attempts to look inside the black box of social capital by developing micro-models of the value of contacts, leading to production functions that depend on the number of contacts. We identify 4 sources of the value of contacts: economies of scale, comparative advantage, skill spreads, and discount rates in the presence of indivisible intermediaries. We argue that skill spreads and discount rates are more relevant to the value of social contacts in developed economies while economies of scale and comparative advantage are more likely to be important in developing economies.

Unemployment benefits and educational choices

In this paper it is argued that the risk-pooling role of unemployment benefits affects the irreversible choices of future labour market entrants. One such ex ante choice is education. Some types of education lead to general human capital that lead to almost certain employment. Other types of education are more specialised and lead to less secure employment. We address this issue in OLG search models that allow for riskaversion, heterogeneity in talents, endogenous price formation of different specialisations, and competitive wage formation. We find that in the absence of unemployment benefits, the percentage of individuals taking high-risk specialised education is inefficiently low. Those with higher innate abilities are typically found to take lower degrees of specialisation, implying that the relation between wages and risks at the individual level is the reverse from what it is at the aggregate level. We find that an unemployment benefit (UB) system raises efficiency and welfare because it promotes efficient specialisation. Because education takes time, it takes a long time before the composition of the workforce has adapted to changing incentives. With a calibrated model we explore such lags between unexpected changes in circumstances and outcomes.Child Allowances, Altruism, Exchange, Inter-Household, Intra-Household

Why the US and not Brazil? Old Elites and the Development of a Modern Economy

Old elites can block changes, but not all do. Why is it that stronger elites may allow more changes than weaker elites? Why do economies with larger stocks of natural resources not grow faster than economies poorer in natural resources? We argue that old elites hold some power to extract rents from the economy. Whereas old sectors (i.e. agriculture or extraction of natural resources) are not affected by rent extraction, modern sectors require investments that do react to rent extraction. At the same time, a modern sector relies on networks of firms. These structures form the basis of political power of a new elite, which reduces the ability of the old elite to extract rents. We show that countries rich in natural resources provide their old elite with incentives to extract rents so high that the private sector has no incentives to build up a modern economy. If the old elite is either politically very strong or the natural resource sector is small compared to the potential of the modern sector, the old elite will choose to extract smaller rents from a growing sector. Some empirical evidence completes the paper.

Materialism on the March: From Conspicuous Leisure to Conspicuous Consumption?

This paper inserts Veblen’s (1898) concepts of conspicuous leisure and conspicuous consumption into a very simple model. Individuals have the choice to either invest their time into working, leading to easily observable levels of consumption, or into conspicuous leisure, whose effect on utility depends on how observable leisure is. We let the visibility of leisure depend positively on the amount of time an individual and her neighbors have lived in the same area. Individuals optimize across conspicuous leisure and conspicuous consumption. If population turnover is high, individuals are made worse off, since the visibility of conspicuous leisure then decreases and the status race must be played out primarily via conspicuous consumption. Analyzing interstate mobility in the US, we find strong support for our hypothesis: a 1 percentage point rise in population turnover increases the average work week of non-migrants by 7 minutes. The negative externality of population turnover on the visibility of conspicuous leisure is an argument for higher transport taxes.conspicuous leisure, conspicuous consumption, mobility, labour supply, status races

CHOOSING TO BECOME A ‘LOST CAUSE’:THE PERVERSE EFFECTS OF BENEFIT PRECONDITIONS

This paper argues that preconditions for welfare benefit entitlements based on labour market prospects can be counterproductive when they create an incentive for individuals to abstain from any investment earlier in life that could improve future prospects. Benefit entitlements based partly on investments made prior to labour market entry are then Pareto-improving.Benefits, job search, irreversible investments

Economic Choices and Status: Measuring Preferences for Income Rank

In this paper we report on the trade-offs that 1,068 Australian university students make between absolute income and the rank of that income in hypothetical income distributions. We find that income rank matters independently of absolute income, with greater weight given to rank by males, migrants, and individuals from wealthy families. Rank-sensitive individuals require as much as a 200 per cent increase in income to be compensated for going from the top to the bottom of the income distribution. In terms of reference groups, we find migrants who reside abroad for longer periods of time, and with more affluent job titles, are more likely to compare themselves to others at the destination. This allows us to derive a dynamic choice model of compensating incomes that allows for endogenous tastes and rates of assimilation. The model predicts the average respondent to need a permanent increase in income of up to $10,000 when moving from a society with a mean income of$14,000 (e.g. Mexico) to a society with a mean income of $46,000 (e.g. the USA).relative utility, status, income rank, stated-preferences, migrants

The mystery of the U-shaped relationship between happiness and age.

In this paper we address the puzzle of the relation between age and happiness. Whilst the majority of psychologists have concluded there is not much of a relationship at all, the economic literature has unearthed a possible U-shape relationship. In this paper we replicate the U-shape for the German SocioEconomic Panel (GSOEP), and we investigate several possible explanations for it.Happiness methodology, unobservables, latent variable

Jobs, working hours, and remuneration packages for migrants and urban residents

In this chapter we look at the working conditions and remuneration of migrants versus incumbent urban residents in China in the 2008 wave of the RUMiCI project. We find that the average hourly compensation for an urban worker is more than double that of migrants. Inequality of non-wage compensation is higher than that of hourly wages, mainly because urban workers are much more likely to benefit from various insurance schemes than migrants. Nearly three-quarters of the hourly compensation differences can be explained by observable characteristics. Returns to education and experience are lower for the migrants. They also have less education and accumulate less experience, perchance due to the temporary nature of the migration. We find strong differences between cities. For example, total compensation in Wuxi, Hefei, Ningbo and Chengdu is roughly the same for migrants as for the equivalent urban city dweller with the same characteristics. This equal treatment is also reflected in non-wage remuneration components. Yet in Chongqing and several other cities, a migrant is paid less than half the equivalent urban city dweller. This suggests that some cities ‘compete’ for migrants whilst others do not, and it also suggests that there are many city dwellers who would be better off if they move to other cities.Australian Research Council, AusAID, IZA, Ford Foundatio