Working papers results

What is the future of social security systems in OECD countries? In our view, the answer
belongs to the realm of politics. We evaluate how political constraints shape the social
security system in six countries - France, Germany, Italy, Spain, the UK and the US -
under population aging. Two main aspects of the aging process are relevant to the
analysis. First, the increase in the dependency ratio - the ratio of retirees to workers
- reduces the average profitability of the unfunded social security system, thereby
inducing the agents to reduce the size of the system by substituting their claims
towards future pensions with more private savings. Second, an aging electorate leads
to larger systems, since it increases the relevance of pension spending on the
policy-makers' agenda. The overall assessment from our simulations is that the political
aspect dominates in all countries, albeit with some differences. Spain, the fastest aging
country, faces the largest increase in the social security contribution rate. When labor
market considerations are introduced, the political effect still dominates, but it is less
sizeable. Country specific characteristics (not accounted for in our simulations), such as
the degree of redistribution in the pension system and the existence of family ties in
the society, may also matter. Our simulations deliver a strong policy implication: an
increase in the effective retirement age always decreases the size of the system chosen
by the voters, while often increasing its generosity. Finally, delegation of pension policy
to the EC may reduce political accountability and hence help to reform the systems.

We offer a simple explanation for oligopolistic reaction based on Bayesian learning by
rival firms operating in an uncertain environment. We test the implications of the model
through a discrete choice panel data sample of MNEs that have invested in Central and
Eastern Europe over the period 1990-1997. Interacting the measure of rivals investment
in country-industry pairs with uncertainty we find strong evidence for oligopolistic reaction,
especially through the channel of Bayesian learning postulated by the model. The
findings are robust with respect to different model specifications.

This paper presents firm-level evidence on the dynamics of the relative demand for non-manual workers in Italian manufacturing during the 1990s. The analysis provides a number of interesting results. First, the rise within firms in the share of non manual workers in both employment and hours worked (within-firm skill upgrading) is the main determinant of the increase in the relative demand for skilled workers. By contrast, demand changes associated to trade have mitigated such a rise by shifting employment away from skill-intensive firms. Second, while the relative number of hours worked by skilled workers within firms has risen, the hourly wage premium has fallen. Third, within-firm skill upgrading is strongly and signi cantly related to investment in computers and R&D. Fourth, we find that technical progress has raised the relative productivity of skilled workers (the skill-bias of technical progress is positive). Finally we show that the standard approach that measures annual, rather than hourly relative wages, produces a downward bias in the estimate of the skill-bias of technical progress.

We present a dynamic comparative advantage model in which moderate reductions in
trade costs can generate sizable increases in trade volumes over time. A fall in trade
costs has two e.ects on the volume of trade. First, for given factor endowments, it
raises the degree of specialization of countries, leading to a larger volume of trade
in the short run. Second, it raises the factor price of each country's abundant
production factor, leading to diverging paths of relative factor endowments across
countries and a rising degree of specialization. A simulation exercise shows that
a fall in trade costs over time produces a non-linear increase in the trade share of
output as in the data. Even when elasticities of substitution are not particularly
high, moderate reductions in trade costs lead to large trade volumes over time.

Employees of "globalized" firms face a riskier, but potentially more rewarding,
menu of labor market outcomes. We document this neglected trade-off of
globalization for a sample of Indian manufacturing firms. On the one hand,
the employees of firms subject to foreign competition face a more uncertain
stream of earnings and riskier employment prospects. On the other, they enjoy
a more rapid career and/or have more opportunities to train and upgrade
their skills. The negative uncertainty costs and the positive incentive effects
of globalization are thus twin to each other. Concentrating on just one side
of the coin gives a misleading picture of globalization.

We document the presence of a trade-off between unemployment benefits (UB) and
employment protection legislation (EPL) in the provision of insurance against labour
market risk. The mix of quantity restrictions and price regulations adopted by the
various countries would seem to correspond to a stable politico-economic equilibrium.
We develop a model in which voters are required to cast a ballot over the strictness of
EPL and over the generosity of UB. Agents are heterogeneous along two dimensions:
employment status - there are insiders and outsiders - and skills - low and high skills.
We show that if there exists a majority of low-skill insiders, the voting game has a
politico-economic equilibrium with low UB and high EPL; otherwise, the equilibrium
features high UB and low EPL. Another testable implication of the model is that a
larger share of elderly workers increases the demand for EPL. Panel data on institutions
and on the age and educational structures of the populations are broadly in line with
our results. We also find that those favouring EPL over UB in a public opinion poll
carried in 2001 in Italy have precisely the same characteristics predicted by our model.

Policies are typically chosen by politicians and bureaucrats. This paper investigates the criteria that should lead a society to allocate policy tasks to elected policymakers (politicians) or non elected bureaucrats. Politicians tend to be preferable for tasks that have the following features: they do not involve too much
specific technical ability relative to effort; there is uncertainty ex ante about ex post preferences of the public and flexibility is valuable; time inconsistency is not an issue; small but powerful vested interests do not have large stakes in the policy outcome; effective decisions over policies require taking into account policy
complementarities and compensating the losers; the policies imply redistributive conflicts among large groups of voters. The reverse apply to the attribution of prerogatives to bureaucrats.

In this paper we compare alternative approaches for dating the Euro area business cycle and analyzing its characteristics. First, we extend a commonly used dating procedure to allow for length, size and amplitude restrictions, and to compute the probability of a phase change. Second, we apply the modified algorithm for dating both the classical Euro area cycle and the deviation cycle, where the latter is obtained by a variety of methods, including a modified HP filter that reproduces the features of the BK filter but avoids end-point problems, and a production function based approach. Third, we repeat the dating exercise for the main Euro
area countries, evaluate the degree of syncronization, and compare the results with the UK and the US. Fourth, we construct indices of business cycle diffusion, and assess how spread are cyclical movements throughout the economy. Finally, we repeat the dating exercise using monthly industrial production data, to evaluate whether the higher sampling frequency can compensate the higher variability of the series and produce a more accurate dating.

In this paper we evaluate the relative merits of three approaches to information extraction
from a large data set for forecasting, namely, the use of an automated model selection
procedure, the adoption of a factor model, and single-indicator-based forecast pooling. The
comparison is conducted using a large set of indicators for forecasting US inflation and GDP
growth. We also compare our large set of leading indicators with purely autoregressive
models, using an evaluation procedure that is particularly relevant for policy making. The
evaluation is conducted both ex-post and in a pseudo real time context, for several forecast
horizons, and using both recursive and rolling estimation. The results indicate a preference for
simple forecasting tools, with a good relative performance of pure autoregressive models, and
substantial instability in the leading characteristics of the indicators.

In this paper we evaluate the role of a set of variables as leading indicators for Euro-area
inflation and GDP growth. Our evaluation is based on using the variables in the ECB Euroarea
model database, plus a set of similar variables for the US. We compare the forecasting
performance of each indicator with that of purely autoregressive models, using an evaluation
procedure that is particularly relevant for policy making. The evaluation is conducted both expost
and in a pseudo real time context, for several forecast horizons, and using both recursive
and rolling estimation. We also analyze three different approaches to combining the
information from several indicators. First, we discuss the use as indicators of the estimated
factors from a dynamic factor model for all the indicators. Second, an automated model
selection procedure is applied to models with a large set of indicators. Third, we consider
pooling the single indicator forecasts. The results indicate that single indicator forecasts are on
average better than those derived from more complicated methods, but for them to beat the
autoregression a different indicator has to be used in each period. A simple real-time
procedure for indicator-selection produces good results.