7/12/15: CX Future of Work Summit: Dublin

Another excellent video from the CXC Corporate's "Future of Work" summit on the Gig Economy: https://vimeo.com/148042205.

You can see more on the event, including my slides here: http://trueeconomics.blogspot.ie/2015/11/111115-gig-economy-challenge.html

14/5/2013: Negative Equity and Entrepreneurship: Local Evidence from the US

I have written before about the role positive/negative home equity has on entrepreneurship and real economic activity. Remember, the Irish Government and media believe that negative equity matters only when/if the household wants or needs to move home and that it has no effect outside this scenario.

A recent (March 2013) paper (linked below) from NBER argues very clearly that positive/negative equity has a real positive/negative effect on employment and business creation and that this effect is local to property prices region. In other words, unlike FDI or other foreign investments, home equity impacts domestic investment, locally anchored, and with it - domestic jobs creation.

Adelino, Manuel, Schoar, Antoinette and Severino, Felipe paper "documents the role of the collateral lending channel to facilitate small business starts and self-employment in the period before the financial crisis of 2008. We document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in (1) industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral; (2) manufacturing industries where goods are shipped over long distances, which rules out that local demand is driving the expansion. We show that this effect is separate from an aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation."

Some more granularity to the top-level results [italics are mine]:

"Overall, the evidence we present in this paper identifies the causal effect house prices in the creation of new small firms. These results show that access to collateral allowed individuals to start small businesses or to become self-employed. We conjecture that without access to this collateral in the form of real estate assets, many individuals would not have made the transition from unemployment to starting a new business or self-employment.

We show that the effect of house prices is concentrated in small firms only and had no causal effect  on employment at large firms. [In other words, there is no measurable effect on location competitiveness from house prices. Irish Government claims that residential property prices declines improved Irish competitiveness are not supported by the evidence from the US.]

Importantly, our results also hold when we exclude industries that are most likely to be affected by local demand shocks and when we restrict our attention to manufacturing industries. The effect of house prices is also stronger in industries where the amount of capital needed to start a new firm is lower, consistent with the hypothesis that housing serves as collateral but is not sufficient to fund large capital needs." [This goes to the issue of which types of firms creation benefit most from collateral access. The evidence suggests that smaller firms do so. But the fact that capital constraints bind also suggests that by typology, services firms, which are human capital intensive and require low levels of physical capital, benefit also more than average. Now, Ireland is human capital intensive economy, so draw your own conclusions.]

Adelino, Manuel, Schoar, Antoinette and Severino, Felipe, House Prices, Collateral and Self-Employment (March 2013). NBER Working Paper No. w18868. Available at SSRN: http://ssrn.com/abstract=2230758

13/4/2013: Human Capital & Economic Development - a fascinating study

A fascinating paper, published in The Quarterly Journal of Economics (2013), 105–164, titled "Human Capital and Regional Development" by Nicola Gennaioli, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (see also NBER Working Paper No. 17158, September 2011 or in final version at http://scholar.harvard.edu/files/shleifer/files/human_capital_qje_final.pdf) looked at "the determinants of regional development" across "1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 96 percent of its GDP."

The authors "combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions." In addition, the study also extends a standard model of regional development to include a "model of the allocation of talent between entrepreneurship and work", and a "model of human capital externalities".

Top line conclusion: "The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and human capital externalities are essential for understanding the data."

More specifically:

• In the paper, human capital as measured by education attainment "emerges as the most consistently important determinant of both regional income and productivity of regional establishments.
• "…Some of the key channels through which human capital operates, includ[e] education of workers, education of entrepreneurs/managers, and externalities." 
• The authors omit other forms of human capital (e.g. creative capacity, innovation capacity, various measures of aptitude, etc), which implies that the results of the study error on cautious side when it comes to determining the full extent of the effects of human capital on economic development.
• The authors also omit from consideration "the role of human capital in shaping the adoption of new technologies. Starting with Nelson and Phelps (1966), economists have argued that human capital accelerates the adoption of new technologies." This once more implies that the numerical estimates provided by the authors error on the side of underestimating the true effects of human capital on economic development.
• The authors "do not find that culture, as measured by ethnic heterogeneity or trust, explains regional differences."
• The paper shows no effect of "institutions as measured by survey assessments of the business environment in the Enterprise Surveys" on helping to "account for cross-regional differences within a country."  
• The two points above are important for us in Ireland - and indeed in all Small Open Economies within the EU27 - because, given the extent of labour mobility and markets integration within the EU27, we are closer, on a comparative basis, to being a regional economy, rather than a separate country-level economy.
• "In contrast, differences in educational attainment account for a large share of the regional income differences within a country. The within country R2 in the univariate regression of the log of per capita income on the log of education is about 25 percent; this R2 is not higher than 8 percent for any other variable."
• Acemoglu, D, & M. Dell (2010) paper “Productivity Differences Between & Within Countries” (published in American Economic Journal, 2(1):169-188) examined "sub-national data from North and South America to disentangle the roles of education and institutions in accounting for development. The authors find that about half of the within-country variation in levels of income is accounted for by education." 
• The study also shows that "focusing [in the analysis of the role human capital plays in economic development] on worker education alone [absent separate consideration of entrepreneurial human capital] substantially underestimates both private and social returns to education. Private returns are very high but to a substantial extent are earned by entrepreneurs, and hence might appear as profits rather than wages…  …the evidence points to a large influence of entrepreneurial human capital, and perhaps of human capital externalities, on productivity."
• Key numerical finding is that "education explains 58% of between country variation of per capita income, and 38% of within country variation of per capita income."
• "Turning to institutions, some of the variables, such as access to finance or the number of days it takes to file a tax return, explain a considerable share of cross-country variation, …but none explains more than 2 percent of within country variation of per capita incomes. Indicators of infrastructure or other public good provision do slightly better: on their own many explain a large share of between country variation, while density of power lines and travel time account for up to 7% of within country variation. These variables are obviously highly endogenous, and still do much worse than education."
• The last two points summarised in the table below: