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  • Author: Robert Z. Lawrence
  • Publication Date: 06-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Over the past decade, the US economy has been plagued by sluggish wage growth and rising income inequality. The debate over inequality in the 1980s and 1990s focused on the growing disparity between the earnings of skilled and unskilled workers and the earnings of the super-rich. Growing inequality between capital and labor income has now been added to these concerns. Remarkably, the growth in real GDP per worker over the decade of the 2000s, which averaged 1.7 percent annually, was actually more rapid than in the 1970s, 1980s, or 1990s, yet in the 2000s workers saw almost no increase in their take-home pay. Consistent with this gap between labor productivity and wage growth was a pronounced decline in the share of US national income earned by workers. As labor's share has declined, the share of capital has risen and has been especially concentrated in corporate profits. As profits are far less equally distributed than wages, this increase has contributed to rising income inequality. There are several plausible reasons for this development—globalization, automation, weak bargaining power of labor, political capture, higher markups—but the natural starting point for explaining factor income shares is the neoclassical theory of the functional distribution of income enumerated by John Hicks and Joan Robinson in the 1930s. In this framework there are two possible explanations for labor's recent declining share. The first is that capital and labor are gross substitutes, and the second is that capital and labor are gross complements. Several papers have explained the recent decline in labor's share in income by claiming that capital has been substituted for labor. Lawrence puts forward the alternative "gross complements" explanation for the declining US labor share. He shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that the elasticity of substitution is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.
  • Topic: Economics, Globalization, Markets, Labor Issues
  • Political Geography: United States
  • Author: David G. Blanchflower, David N. F. Bell
  • Publication Date: 08-2013
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: One of the factors that may inhibit reductions in unemployment as the economy recovers is the extent to which existing workers would like to work more hours and employers may prefer to let them work longer hours before making new hires. This phenomenon suggests that the unemployment rate does not capture the full extent of excess capacity in the labor market. But how should it be measured? In this paper we argue that the United States does not have the necessary statistical tools to calibrate this form of underemployment. We describe an index that captures the joint effects of unemployment and underemployment and provides a more complete picture of labor market excess capacity. We show how this index can be implemented using British data and describe its evolution over the Great Recession. Comparisons of our index with unemployment rates suggest that unemployment rates understate differences in labor market excess capacity by age group and overstate differences by gender. We also show that being unable to work the hours that one desires has a negative effect on well-being. Finally, we recommend that the Current Population Survey conducted by the US Bureau of Labor Statistics might be extended to enable the construction of an equivalent US index.
  • Topic: Economics, International Trade and Finance, Markets, Labor Issues
  • Political Geography: United States, Europe
  • Author: Olivier Jeanne
  • Publication Date: 05-2012
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Has the US dollar delivered the benefit that the rest of the world is expecting from its holdings of international liquidity? US government debt has been liquid and safe, and it is supplied in sufficient quantity. But it has given a low return to the countries that accumulated the most reserves, especially when those returns are measured in terms of the countries' own consumption. Jeanne argues that countries that accumulate the most reserves should expect a low return in terms of their own consumption and that international monetary reform can do little to change that fact.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Carmen M. Reinhart
  • Publication Date: 04-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of "financial repression." Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In this paper, the authors describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historical standards). For the advanced economies in Reinhart and Sbrancia's sample, real interest rates were negative roughly half of the time during 1945–80. For the United States and the United Kingdom, their estimates of the annual liquidation of debt via negative real interest rates amounted on average to 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).
  • Topic: Debt, Economics, International Trade and Finance, Markets
  • Political Geography: United States, United Kingdom
  • Author: Arvind Subramanian
  • Publication Date: 09-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Against the backdrop of the recent financial crisis and the ongoing rapid changes in the world economy, the fate of the dollar as the premier international reserve currency is under scrutiny. This paper attempts to answer whether the Chinese renminbi will eclipse the dollar, what will be the timing of, and the prerequisites for this transition, and which of the two countries controls the outcome. The key finding, based on analyzing the last 110 years, is that the size of an economy—measured not just in terms of GDP but also trade and the strength of the external financial position—is the key fundamental correlate of reserve currency status. Further, the conventional view that sterling persisted well beyond the strength of the UK economy is overstated. Although the United States overtook the United Kingdom in terms of GDP in the 1870s, it became dominant in a broader sense encompassing trade and finance only at the end of World War I. And since the dollar overtook sterling in the mid-1920s, the lag between currency dominance and economic dominance was about 10 years rather than the 60-plus years traditionally believed. Applying these findings to the current context suggests that the renminbi could become the premier reserve currency by the end of this decade, or early next decade. But China needs to fulfill a number of conditions—making the reniminbi convertible and opening up its financial system to create deep and liquid markets—to realize renminbi preeminence. China seems to be moving steadily in that direction, and renminbi convertibility will proceed apace not least because it offers China's policymakers a political exit out of its mercantilist growth strategy. The United States cannot in any serious way prevent China from moving in that direction.
  • Topic: Economics, Markets, Monetary Policy
  • Political Geography: United States, China
  • Author: J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, Stephen J. Redding
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which US exports and imports flow through wholesalers and retailers versus producing and consuming firms.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Robert Z. Lawrence, Lawrence Edwards
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Concerns that growth in developing countries could worsen the US terms of trade and that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech. Judged by export shares, the United States and developing countries specialize in quite different product categories that, for the most part, do not overlap. Moreover, even when exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitutes—developed country products are far more sophisticated.
  • Topic: Development, Emerging Markets, International Trade and Finance, Markets, Science and Technology, Labor Issues
  • Political Geography: United States
  • Author: Adam S. Posen
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Japan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
  • Topic: Economics, Markets, Monetary Policy, Financial Crisis
  • Political Geography: United States, Japan, United Kingdom
  • Author: J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, Stephen J. Redding
  • Publication Date: 05-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Recent research in international trade emphasizes the importance of firms' extensive margins for understanding overall patterns of trade as well as how firms respond to specific events such as trade liberalization. In this paper, we use detailed US trade statistics to provide a broad overview of how the margins of trade contribute to variation in US imports and exports across trading partners, types of trade (i.e., arm's length versus related party) and both short and long time horizons. Among other results, we highlight the differential behavior of related-party and arm's-length trade in response to the 1997 Asian financial crisis.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, Stephen J. Redding
  • Publication Date: 05-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper examines the determinants of intra-firm trade in US imports using detailed country-product data. We create a new measure of product contractibility based on the degree of intermediation in international trade for the product. We find important roles for the interaction of country and product characteristics in determining intra-firm trade shares. Intra-firm trade is high for products with low levels of contractibility sourced from countries with weak governance, for skill-intensive products from skill-scarce countries, and for capital-intensive products from capital-abundant countries.
  • Topic: Economics, Industrial Policy, International Trade and Finance, Markets
  • Political Geography: United States