Why is it so difficult to find a job in France?

For anybody thinking about labor market policy, France is a basket case of how you should not give in to the pressure from the street and rigidify the labor market to almost everyone's disadvantage. With such extreme job protections, do then labor market status transitions look markedly different from other countries?

Jean-Olivier Hairault, Thomas Le Barbanchon and Thepthida Sopraseuth use administrative and labor market survey data to build time series for job separation and job finding rates. While their analysis is somewhat limited by the fact that they cannot capture a third state, "not in the labor force," the results are strong enough to conclude that contrarily to, say, the US the job finding rate is the major driver in changes to the unemployment rate. In other words, employment protection is effective and the job separation rate fluctuates little with economic activity. However, hiring fluctuates a lot, and given the high average unemployment rate, it is a clear indication that employers are scared to hire workers they could not get rid of if necessary. This is a clear indictment of excessive employment protection.

Test statistics and the publication game

It is well known that journals do not like replications or confirmations of hypotheses. They are looking for the empirical results that contradict popular wisdom, and this must be influencing the way researchers look for test results. To increase your chances of success, you want to only mention highly significant results and ignore the so-so ones.

Abel Brodeur, Mathias Lé, Marc Sangnier and Yanos Zylberberg look at the distribution of p-values in articles published in the top three economics journals. I am not quite sure what the distribution of p-values would be if the publication process were unbiased, but it would probably look like a Poisson distribution and it would be monotonic on each side of the mode. What the authors find does not look at all like this. There is a distinct lack of test results that just miss the 5% or 10% significance, and distinctively more that just pass those thresholds, making the distribution bimodal. Interestingly, this problem is less present when stars are not used to highlight significance or when the authors are tenured.

These results indicate that there is more than a selection bias. This is an inflation bias by the researcher when he only presents the most significant results, which were obtained by finding the specification that allows to pass the magic significance thresholds. I do not think this is ethical, but the publishing game makes it unavoidable, so the profession is apparently fine with it. I guess we have to tolerate this and take it into account when reading papers much like we know there is grade inflation when looking at transcripts or there is similar inflation when reading recommendation letters.

PS: This paper is a strong candidate for the best paper title of the year. Bravo!

PS2: What is really unethical is claiming results are significant when they are not. The case of Ulrich Lichtenthaler comes to mind, who added "significance stars" to his results when they were not warranted. The fact that he still managed to publish widely is an indictment of the quality of research in business journals, too.

Economics Teaching Conference

For information about submitting papers or registering, click here.

Fathers are drinking away their time with their children

It is no secret that growing up with an alcoholic parent is no fun. It is even worse for single parents. How bad this is is difficult to evaluate, as one would need data on alcohol consumption by parents and a measure of outcomes for children. Maybe some proxies can help here.

Gianna Claudia Giannelli, Lucia Mangiavacchi and Luca Piccoli take time spent with the children as a proxy for child wellbeing. They use a Russian survey and look at how much time each parent spends with the children, along with their alcohol consumption. They find that fathers care less about their children when they drink more, but there is no effect for mothers. In some ways, this reminds me of the paper by Siwan Anderson and Jean-Marie Baland that shows that mothers in Kenya use ROSCAs to keep money away from their (drinking) husbands, despite the fact that ROSCAs are a very inefficient savings technology.

But let us get back on topic. Is time spent with your children the best measure of child wellbeing? Certainly not, but it is supposed to be a proxy. But on theoretical grounds, I need a lot of convincing here. Indeed, if my parents had been alcoholic, I would have preferred, all else being equal, that they spent the least possible time with me. This would reverse the conclusion of the paper ("negative impact of fathers' alcohol consumption on child welfare," implying no impact of the mothers' alcohol consumption).

"Overfinance": Iceland, Cyprus...Now Luxembourg?

The modern world has enabled many things to grow far larger than they ought to be through rather unnatural processes. Below is an alleged photo of a 30 pound "goldfish" supposedly caught in a lake in France. I still cannot believe my eyes so many weeks after first seeing this photograph, but if it's real and not Photoshopped, I am truly gobsmacked.

In a similar way, financial crises in Europe are roiling countries whose banking sectors have grown unnaturally large relative to the "real" economy. What does it matter if your financial services industry is unusually large compared to GDP? Well, go ask Iceland from a few years back or Cyprus now. Interestingly enough, the tiny country of Luxembourg which has the highest GDP per capita in the world according to some is being placed in the same category. Despite Luxembourg having an AAA credit rating, however, several European Union members have complained about its status as a low-tax destination alike Lichtenstein or Cyprus. I've even coined a term for the phenomenon that you, dear readers, ought to appreciate: "overfinance."

Now there's another "giant goldfish" sort of complaint going on among EU members that with a similarly outsized financial services sector, Luxembourg is another Cyprus-in-waiting. Luxembourg naturally disdains the comparison--we're a different case, we're special, etc--but the concern is understandable: In one sense it's highly derivative of portfolio theory or that an economy should not put all of its eggs in one basket since, if that industry becomes moribund, it will take the rest of the nation along with it. Hence the usual calls for economic diversification. But still...

As the European Union's wealthiest country, Luxembourg could have been forgiven for thinking that it would never find itself on the bloc's financial risk list. With just half a million people living on a tiny patch of lush land nestled between Belgium, France and Germany, Luxembourg is as tranquil as a buzzing financial center gets. Still, some of Europe's regulators and politicians have started wondering aloud whether its banks might be holding the 17-nation eurozone's next ticking bomb.

Following the chaotic bailout for Cyprus last week, European officials have been drawing worrying comparisons between the two countries' oversized financial industries. Mario Draghi, president of the European Central Bank, cautioned on Thursday that "the recent experience shows that countries where the banking sector is several times bigger than the economy are countries that, on average, have more vulnerabilities." 

"Financial shocks hit these countries stronger, simply because of the size of their banking sector." The increased scrutiny has taken Luxembourg's government by surprise and put it on the defensive. It has rejected calls to shrink its country's main source of wealth to a more manageable size, claiming that its banking industry is much more secure than Cyprus's and any crackdown would not only harm its own economy but that of the wider eurozone...

In comparison, the balance sheets of the banks in Luxembourg have swollen to about 22 times the country's annual economic output of 44 billion euros — making it Europe's richest country per capita. The country is also the world's second-largest center for investment funds, with about 3,800 funds holding assets worth €2.5 trillion ($3.2 trillion) — about 55 times the country's gross domestic product. It has 141 banks based there, with five of them domestic institutions and the remainder being mainly divisions of foreign banks. "There are no parallels between Cyprus and Luxembourg, and we don't allow any parallels to be forced on us," Prime Minister Jean-Claude Juncker said last week. "Cyprus is a special case; other financial hubs in Europe don't have these problems."

Just as the UK keeps complaining that the EU is trying to suffocate its financial services industry, so does Luxembourg:

Stung by the comparison with Cyprus and concerned for the future of its banking industry, Luxembourg's leaders have begun to fight back. They have accused EU officials, and Germany in particular, of bullying smaller countries and seeking to "strangulate" its financial industry — which represents 27 percent of the country's annual economic output, a third of the tax revenues and employs 20 percent of the workforce. German Finance Minister Wolfgang Schaeuble, representing Europe's biggest economy, openly wondered last month whether a business model relying too heavily on banks can still be seen as viable after the Cyprus debacle. That immediately prompted an outcry in Luxembourg.

"Germany does not have the right to define the business models for other countries in the EU," said Foreign Minister Jean Asselborn. Luxembourg's government says its financial sector "acts as an important gateway for the euro area by attracting investments, thus enhancing the eurozone's competitiveness as a whole while being effectively supervised".

The government rejects the idea of looking at the size of its financial sector only in relation to its GDP. "What matters are primarily two aspects: while the first aspect touches on the quality and solidity of the financial sector, the second element relates the size of the financial sector not to a national economy but to the euro area or single market as a whole," it said.

And there is still lingering resentment about how Luxembour's financial services industry grew so large in the first place. Call it "overfinance" meets "giant goldfish":

The success of Luxembourg's financial sector was initially fueled by lax regulation, secrecy and low taxes. This made it a popular tax haven and money-laundering spot. The country later changed many of its laws following pressure by its European partners. But critics say the financial industry still lacks the necessary transparency.

"The name Luxembourg always comes up when companies try to move profits across borders, through the so-called aggressive tax planning, to avoid paying taxes," said the president of the German tax inspectors' association, Thomas Eigenthaler. "It lacks transparency and quite often there's nothing we can do about it." Luxembourg rejects those charges and says it complies with all relevant laws. But on that front too, the pressure is increasing. 

In the wake of the publication of details on wealthy people's offshore bank accounts by several international media this week, some of which included references to shell companies based in Luxembourg, Frieden is now signaling the country's willingness to agree for the first time to automated information exchanges with other countries' tax authorities. "Unlike in the past, we no longer strictly reject that idea. We want a strengthened cooperation with the foreign tax authorities," he was quoted as telling Germany's FAS newspaper. 

Tax cheaters never win, eh?

Solow on Bernanke

In The New Republic, with thoughtful and thought-provoking commentary on the financial system.

The construction sector is key to the business cycle

It is well known that the construction sector is a very important indicator of the business cycle. In fact, residential construction has been a reliable early indicator of economic activity for many decades and this characteristic is occasionally rediscovered. What is there still to learn about the construction sector?

Michele Boldrin, Carlos Garriga, Adrian Peralta-Alva and Juan Sánchez build a business cycle model including an input-output table. Looking at the last business cycle and putting in the model only variations in housing demand, they find that the construction sector contributed to 30-60% of the increase of employment before the recession, and 8-15% for GDP. But during the recession, the importance of this sector was even more massive: 30-40% respectively 45-60%. Part of it comes from the size of the shock, and part for the inter-linkages with other sectors.

Now think about the consequences for policy: if a major part of the recession of the recession is driven by a single and relatively small sector, it makes no sense to rely solely on monetary policy as it is currently the case. Monetary policy cannot distinguish by sector (and if it does, it loses independence). One would need active fiscal policy, like what was initially intended with the stimulus program. The current austerity mood, however, goes exactly in the other direction, as public investment programs are of course the first ones to suffer from cuts. Or you can just declare that this is all a structural shift, and keep any policy out of this.