nep-ltv New Economics Papers
on Unemployment, Inequality and Poverty
Issue of 2007‒07‒07
fourteen papers chosen by
Maximo Rossi
University of the Republic

  1. The Marginal Utility of Income By Richard Layard; Guy Mayraz; Stephen Nickell
  2. The Effect of Marital Breakup on the Income Distribution of Women with Children By Elizabeth O. Ananat; Guy Michaels
  3. Culture Clash or Culture Club? The Identity and Attitudes of Immigrants in Britain By Alan Manning; Sanchari Roy
  4. The Beveridge Curve By Eran Yashiv
  5. How Immigration Affects U.S. Cities By David Card
  6. Perspectives from the Happiness Literature and the Role of New Instruments for Policy Analysis By Bernard M.S. van Praag
  7. New Directions in the Analysis of Inequality and Poverty By Stephen P. Jenkins; John Micklewright
  8. Subjective Beliefs and Schooling Decisions By Christian Belzil
  9. Inequality and the GB2 Income Distribution By Stephen P. Jenkins
  10. Comparing the Effectiveness of Employment Subsidies By Alessio J. G. Brown; Christian Merkl; Dennis J. Snower
  11. Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles By Andrew E. Clark; Paul Frijters; Michael Shields
  12. The Economics, Technology and Neuroscience of Human Capability Formation By James J. Heckman
  13. Does Immigration Affect the Phillips Curve? Some Evidence for Spain By Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno
  14. Cross-Country Variation in Obesity Patterns among Older Americans and Europeans By Pierre-Carl Michaud; Arthur van Soest; Tatiana Andreyeva

  1. By: Richard Layard; Guy Mayraz; Stephen Nickell
    Abstract: In both public economics and welfare analysis it is crucial to know how fast the marginal utility ofincome declines as income increases. One needs this parameter for cost-benefit analysis, for optimaltaxation and for the (Atkinson) measurement of inequality. We estimate this parameter using fourcross-sectional surveys of subjective well-being and two panel surveys. Altogether, we use data fromover 50 countries, and in a period extending from 1972 to 2005. In all six surveys we find aremarkably consistent relationship between reported well-being and income. We estimate theelasticity of marginal utility with respect to income at around (minus) 1.25. Thus, marginal utilitydeclines somewhat faster than in the case (assumed by Dalton and others) when well-being is linear inlog income. In the second part of the paper, however, we ask whether true well-being may not have aconvex relationship to reported well-being, making it less concave with respect to income. We findsome evidence of this, so that the correct elasticity of marginal utility with respect to income isroughly (minus) 1.15. These figures show that Dalton's theoretical assumption was not far from thetruth revealed by empirical evidence, and provide scientific estimates which can be used in allbranches of economics applied to public policy.
    Keywords: Marginal utility, income, life satisfaction, happiness, public economic, welfare, inequality,optimal taxation, reference-dependent preferences
    JEL: I31 H00 D1 D61 H21
    Date: 2007–03
  2. By: Elizabeth O. Ananat; Guy Michaels
    Abstract: Having a female firstborn child significantly increases the probability that a woman's first marriage breaks up. Recent work has exploited this exogenous variation to measure the effect of marital breakup on economic outcomes, and has concluded that divorce has little effect on women's average household income. Employing an Abadie (2003) technique that allows us to look at the impact of marital breakup throughout the income distribution, however, we find that divorce greatly increases the probability that a woman lives in a household with income in the bottom quartile. While women partially offset the loss of spousal earnings with child support, welfare, combining households, and substantially increasing their labor supply, divorce significantly increases the odds that a woman with children is poor.
    Keywords: marital breakup, earnings of women, poverty, children
    JEL: J12 J16
    Date: 2007–04
  3. By: Alan Manning; Sanchari Roy
    Abstract: There is economic evidence that diversity has consequences for economic performance (see Alesinaand La Ferrara, 2005). This might have consequences for immigration policy - how many immigrantsto allow into a country and from what cultural background. But, central to such a discussion is thepace of cultural assimilation among immigrants - this under-researched topic is the focus of thispaper. It investigates the extent and determinants of British identity among those living in Britain andthe views on rights and responsibilities in societies. We find no evidence for a culture clash in general,and one connected with Muslims in particular. The vast majority of those born in Britain, of whateverethnicity or religion, think of themselves as British and we find evidence that third-generationimmigrants are more likely to think of themselves as British than second generation. Newly arrivedimmigrants almost never think of themselves as British but the longer they remain in the UK, themore likely it is that they do. This process of assimilation is faster for those from poorer and lessdemocratic countries, even though immigrants from these countries are often regarded as a particularcause for concern. Our analysis of rights and responsibilities finds much smaller differences in viewsbetween the UK-born and immigrants than within the UK-born population.
    Keywords: Immigration, Identity, Assimilation
    JEL: J61
    Date: 2007–04
  4. By: Eran Yashiv
    Abstract: The Beveridge curve depicts a negative relationship between unemployed workers and jobvacancies, a robust finding across countries. The position of the economy on the curve givesan idea as to the state of the labour market. The modern underlying theory is the search andmatching model, with workers and firms engaging in costly search leading to randommatching. The Beveridge curve depicts the steady state of the model, whereby inflows intounemployment are equal to the outflows from it, generated by matching.
    Keywords: business cycle, job search, matching function, Phillips curve, unemployment,vacancies, wage inflation
    JEL: E24 E32 J63 J64
    Date: 2007–06
  5. By: David Card (UC Berkeley)
    Abstract: In the past 25 years immigration has re-emerged as a driving force in the size and composition of U.S. cities. This paper describes the effects of immigration on overall population growth and the skill composition of cities, focusing on the connection between immigrant inflows and the relative number of less-skilled workers in the local population. The labor market impacts of immigrant arrivals can be offset by outflows of natives and earlier generations of immigrants. Empirically, however, these offsetting flows are small, so most cities with higher rates of immigration have experienced overall population growth and a rising share of the less-skilled. These supply shifts are associated with a modest widening of the wage gap between more- and less-skilled natives, coupled with a positive effect on average native wages. Beyond the labor market, immigrant arrivals also affect rents and housing prices, government revenues and expenses, and the composition of neighborhoods and schools. The effect on rents is the same magnitude as the effect on average wages, implying that the average “rent burden” (the ratio of rents to incomes) is roughly constant. The local fiscal effects of increased immigration also appear to be relatively small. The neighborhood and school externalities posed by the presence of low-income and minority families may be larger, and may be a key factor in understanding native reactions to immigration.
    Keywords: Immigration, Labour Market Impact, Skill Groups
    JEL: J21 J31 J61
    Date: 2007–06
  6. By: Bernard M.S. van Praag (University of Amsterdam)
    Abstract: After having been ignored for a long time by economists, happiness is becoming an object of serious research in 21st century economics. In Section 2 we sketch the present status of happiness economics. In Section 3 we consider the practical applicability of happiness economics, retaining the assumption of ordinal individual utilities. In Section 4 we introduce a cardinal utility concept, which seems to us the natural consequence of the happiness economics methodology. In Section 5 we sketch how this approach can lead to a normative approach to policy problems that is admissible from a positivist point of view. Section 6 concludes.
    Keywords: Happiness economics; subjective well-being; equivalence scales; economic policy
    JEL: D63
    Date: 2007–06–25
  7. By: Stephen P. Jenkins; John Micklewright
    Abstract: Over the last four decades, academic and wider public interest in inequality and poverty has grown substantially. In this paper we address the question: what have been the major new directions in the analysis of inequality and poverty over the last thirty to forty years? We draw attention to developments under seven headings: changes in the extent of inequality and poverty, changes in the policy environment, increased scrutiny of the concepts of 'poverty' and inequality' and the rise of multidimensional approaches, the use of longitudinal perspectives, an increase in availability of and access to data, developments in analytical methods of measurement, and developments in modelling.
    Keywords: Inequality, poverty, distribution of income
    JEL: D31 I32
    Date: 2007
  8. By: Christian Belzil (Centre National de la Recherche Scientifique, CIRANO, CIREQ and IZA)
    Abstract: This paper considers the estimation of sequential schooling decisions made by agents who are endowed with subjective beliefs about their own ability. I use unique Italian panel data which provide information on i) the curvature of the per-period utility function, ii) schooling decisions, iii) post-schooling earnings, in order to estimate the future component of the differences in intertemporal utilities of school and work independently from the present component, (as in Geweke and Keane, 1995, 2001), and evaluate the importance of "present bias". Under certain conditions, which include imposing equality between the modal belief and true ability, I recover individual specific subjective probability distributions. I estimate both the degree of confidence (a measure of spread) and the incidence of over (and under) estimation. I find that the future component of intertemporal utilities dominates schooling decisions. I find a strong incidence of under-estimation among the more able and a much smaller incidence of over-estimation among the low ability group. At the medium ability spectrum, there is evidence of some over-estimation. The degree of confidence is high and implies that agents have a substantial amount of inside information (36% of the population act on a degenerate subjective distribution). Overall, the variance of the objective ability heterogeneity distribution is 4 times as large the variance of the distribution characterizing subjective beliefs.
    Keywords: subjective distributions, expectation parameterization, rational expectation, schooling, dynamic programming, present bias, over-confidence
    JEL: J24
    Date: 2007–05
  9. By: Stephen P. Jenkins (ISER, University of Essex, DIW Berlin and IZA)
    Abstract: The generalized entropy class of inequality indices is derived for Generalized Beta of the Second Kind (GB2) income distributions, thereby providing a full range of top-sensitive and bottom-sensitive measures. An examination of British income inequality in 1994/95 and 2004/05 illustrates the analysis.
    Keywords: inequality, generalized entropy indices, generalized Beta of the second kind distribution, GB2 distribution, Singh-Maddala distribution, Dagum distribution
    JEL: C16 C46 D31
    Date: 2007–06
  10. By: Alessio J. G. Brown (Kiel Institute for the World Economy and University of Kiel); Christian Merkl (Kiel Institute for the World Economy and University of Kiel); Dennis J. Snower (Kiel Institute for the World Economy, University of Kiel and IZA)
    Abstract: This paper analyses theoretically and empirically how employment subsidies should be targeted. We contrast measures involving targeting workers with low incomes/abilities and targeting the unemployed under the criteria of "approximate welfare efficiency" (AWE). Thereby we can identify policies that (a) improve employment and welfare, (b) do not raise earnings inequality and (c) are self-financing. We construct a microfounded, dynamic model of hiring and separations and calibrate it with German data. The calibration shows that hiring vouchers can be AWE, while low-wage subsidies do not satisfy AWE. Furthermore, hiring vouchers targeted at the long-term unemployed are more effective than those targeted at low-ability workers.
    Keywords: low wage subsidy, hiring voucher, targeting, employment, unemployment, duration, self-financing
    JEL: J23 J24 J38 J64 J68
    Date: 2007–06
  11. By: Andrew E. Clark (Paris School of Economics and IZA); Paul Frijters (Queensland University of Technology); Michael Shields (University of Melbourne and IZA)
    Abstract: The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains.
    Keywords: income, happiness, utility, comparison, habituation
    JEL: D01 D31 H00 I31 J28
    Date: 2007–06
  12. By: James J. Heckman (University of Chicago, American Bar Foundation, University College Dublin and IZA)
    Abstract: This paper begins the synthesis of two currently unrelated literatures: the human capital approach to health economics and the economics of cognitive and noncognitive skill formation. A lifecycle investment framework is the foundation for understanding the origins of human inequality and for devising policies to reduce it.
    Keywords: critical periods, sensitive periods, early childhood, Barker hypothesis
    JEL: I12 I21
    Date: 2007–06
  13. By: Samuel Bentolila; Juan J. Dolado; Juan F. Jimeno
    Abstract: This paper examines the evolution of the Phillips Curve (PC) for the Spanish economy since 1980. In particular, we focus on what has happened since the late 1990s. Since 1999 the unemployment rate has fallen by almost 7 percentage points, while inflation has remained relatively subdued around a plateau of 2%- 4%. Thus, the slope of the PC has become much flatter. We argue that this favorable evolution is largely due to the huge rise in the immigration rate, from 1% of the population in 1994 to 9.3% in 2006. We derive a New Keynesian Phillips curve accounting for the e¤ects of immigration, a variable which is found to shift the curve if preferences and bargaining power of immigrants and natives di¤er. We then estimate this curve for Spain since 1980 and find that while the fall in unemployment over the last 8 years comes along with an increase in inflation of 2.2 percentage points per year, the increase of the relative unemployment rate of immigrants vis-à-vis natives accounts for an ofsetting 0.9 percentage points drop in the inflation rate per year.
    Keywords: Phillips curve, immigration
    JEL: E31 J64
    Date: 2007–06
  14. By: Pierre-Carl Michaud; Arthur van Soest; Tatiana Andreyeva
    Abstract: While the fraction of obese people is not as large in Europe as in the United States, obesity is becoming an important issue in Europe as well. Using comparable data from the Survey of Health, Aging and Retirement in Europe (SHARE) and the Health and Retirement Study in the U.S. (HRS), we analyze the correlates of obesity in the population ages 50 and above, focusing on measures of energy intake and expenditure as well as socio-economic status. Our main results are as follows: 1) Obesity rates differ substantially on both sides of the Atlantic and across European countries, with most of the difference coming from the right tail of the weight distribution. 2) Part of the difference in obesity prevalence between the U.S. and Europe is explained by a higher fraction of food eaten away from home and notably lower time devoted to cooking in the U.S. 3) Sedentary lifestyle or a lack of vigorous and moderate physical activity may also explain a substantial share of the cross-country differences. 4) Differential SES patterns of energy intake and expenditure across countries cannot fully account for the observed cross-country variation in the SES gradient in obesity.
    Keywords: Body Mass Index, International Comparison, SHARE
    JEL: I12
    Date: 2007–05

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