Accounting for Changes in Inequality

The Berkeley macroeconomics reading group has three themes for this semester: (1) factor shares, wealth, and inequality, (2) misallocation, and (3) financial stability. Each week, a different student presents a paper from one of the topic areas. Today, as part of the first topic, I am presenting the paper "Accounting for Changes in Between-Group Inequality" by Ariel Burstein, Eduardo Morales, and Jonathan Vogel (2013).

Here are my slides. And here is the abstract:

We provide a framework with multiple worker types (e.g. gender, age, education), to decompose changes in aggregated and disaggregated between-group inequality into changes in (i) the supply of each worker type, (ii) the importance of different tasks, (iii) the extent of computerization, and (iv) other labor-specific productivities (a residual to match observed relative wages). The model features three forms of comparative advantage: between worker types and computers, between worker types and tasks, and between computers and tasks. We parameterize the model to match observed changes in worker type allocation and wages in the United States between 1984 and 2003. The combination of changes in the importance of tasks and computerization explain the majority of the rise in the skill premium as well as rising inequality across more disaggregated education types, whereas labor-specific productivity changes drive between-worker wage polarization.

The paper is motivated by the rise in the skill premium, fall in the gender premium, and rise in wage polarization (i.e. relative decline of wages in the middle.) The authors want to know about the role of computerization in these trends. An important idea of the paper is that certain types of workers (e.g. females) may either have a direct comparative advantage at using computers, or might have an indirect comparative advantage in the sense that they have a comparative advantage in occupations in which computers have a comparative advantage. In the first case, we would observe female workers using computers more than males within the same occupation. In the second case, we would observe females being over-represented in the occupations in which all workers use computers a lot.

Using data on computer use and occupations for several years between 1984 and 2003, the authors find that, while women use computers more than men, this is due to indirect comparative advantage. Women are more often in occupations in which all workers use computers more. In contrast, highly educated workers have direct comparative advantage with computers-- they use computers more than less educated workers within the same occupations.

As the price of computers falls, the relative wages of workers with direct comparative advantage in computers rises. So computerization can explain some of the rise in the skill premium (that is, the rise in wages of more educated compared to less educated workers.) A major part of the rise in the skill premium is also attributed to "task shifters," that is, factors like structural changes and international trade that alter the relative demands for workers across occupations.

Computerization does not raise the relative wages of workers with indirect comparative advantage in computers, so computerization does not explain the fall in the gender premium (that is, the fall in male compared to female wages). Both the fall in the gender premium and the relative decline of wages in the middle are attributed to changes in "labor productivity," which in this model is a residual term, meaning it is not actually explained by the model.

Suzanne Scotchmer (1950-2013)

Suzanne Scotchmer, an economics and law professor at Berkeley, recently passed away. From Brad DeLong, here is the note sent out to the Berkeley Law community. An excerpt:

"Suzanne was particularly inspirational as one of very few women writing in the field of theoretical economics. Friends, colleagues and students across the campus and across her disciplines shared a deep appreciation for Suzanne's tirelessly creative mind, her enthusiasm for intellectual engagement at the highest level, and her preternatural ability to see to the heart of a complex problem immediately and describe it with clarity and insight."

The Toulouse School of Economics, where Scotchmer sat on the Scientific Council since 2007, also wrote a very nice tribute.

Joshua Gans leaves a summary of Scotchmer's work in innovation economics. Gans' article also includes some moving recollections of Scotchmer from her former student Neil Gandal. Another of Scotchmer's former students, Diane Coyle, was a graduate student at Harvard in the early 1980s when Scotchmer was there as an assistant professor. Coyle writes, "Then, as now, economics was very male-dominated and it was unspeakably encouraging to have a female role model who was highly supportive of students – and a normal human being too, warm, funny, with outside interests."

In addition to her work in innovation economics and patent law, Scotchmer made numerous contributions in mathematical economics, game theory, and public finance. In one interesting paper, "On the Evolution of Attitudes towards Risk in Winner-Take-All Games" (1999) with Eddie Dekel, she studies endogenous preference formation:

"Economists typically take preferences as given. This sets them apart from other social scientists, such as psychologists, who often try to explain preferences. In this paper we explore an evolutionary model where preferences, in particular attitudes toward risk, are endogenously determined."

In another paper, "The short-run and long-run benefits of environmental improvement," she suggests a technique for calculating the social value of nonmarginal improvements to social goods such as environmental improvement. Another interesting paper is "Risk taking and gender in hierarchies" (2008), which sheds some light on the controversy about gender differentials labor market outcomes. Suzanne Scotchmer left a tremendous intellectual and personal legacy and will be greatly missed.

In with Foreign Currency, Out with Foreign Businesspeople: Trouble in Zimbabwe

In February 2009, facing 500 billion percent inflation, Zimbabwe abandoned its currency, replacing it with a multi-currency system. The U.S. dollar, South African rand, British pound, and Botswana pula were all made legal tender. On Wednesday, the Reserve Bank of Zimbabwe (RBZ) announced the addition of four more currencies to its legal tender collection: the Australian dollar, Chinese yuan, Japanese yen and Indian rupee.

Charity Dhliwayo, acting Governor of the RBZ, remarked that "Trade and investment ties between Zimbabwe, China, India, Japan and Australia have grown appreciably...It is against this background of growth in trade and investment ties that in the 2014 national budget, the minister of finance and economic development underscored the importance of including other currencies in the basket of already circulating currencies."

The lip service to international trade and investment ties sounds less than sincere in the context of Zimbabwe's "indigenisation policy." Last year, President Robert Mugabe announced that retail business should be owned and run by indigenous Zimbabweans from the start of 2014. The majority of foreign shop owners in Zimbabwe are Nigerian and Chinese-- so although the Chinese yuan is given a status boost as a new legal tender, Chinese business owners are told to get out. Not exactly a great signal for trade and investment ties.

The inclusion of additional currencies as legal tender may actually be a feeble attempt to address what is becoming a fairly severe liquidity crisis. As investors pull funds out of emerging markets, the crisis is deepening. Maybe the idea is that more kinds of money means more money. Critics say that more kinds of money will only mean more chaos.

What makes the whole situation a lot scarier, in my opinion, is that when Zimbabwe gave up its own currency, the RBZ gave up its role as lender of last resort (LOLR). If I remember one thing from Brad DeLong's economic history class, it is "Lend freely, at penalty rate." The RBZ plans to restore its LOLR function by March, but is struggling to recapitalize the LOLR facility in the amount of $150 to $200 million. (Yep, million with an m. Startling when there are 1,426 billionaires in the world.) Possibly too little, probably too late.