labor force participation interest rate shocks and unemployment dynamics in emerging economies abstract emerging economies emes have highly volatile unemployment and real wages standard models with interest rate shocks can generate higher unemployment volatility but still fall quantitatively short of matching the empirical volatility of unemployment a small open economy search model with endogenous participation and self employment a feature of emes generates 90 percent of the volatility of unemployment in the data highly volatile wages and quantitatively consistent cyclical aggregate dynamics amid productivity and interest rate shocks of plausible magnitudes endogenous participation amplifies shocks and plays a critical role in overcoming a key limitation of standard search models for emes

explaining cross country differences in participation rates and aggregate fluctuations abstract the empirical evidence shows that there exists a negative relationship between the ratio of employment to population and the standard deviation of log of gdp in this paper we build a real business cycle model with an underground economy sector in order to quantitatively address this issue the existence of an alternative to registered market activities for providing tradeable goods and services implies that population will be switching sectors in response to aggregate productivity shocks amplifying the response of registered output the level of participation in registered market activities will then be negatively related to fluctuations this feature does not arise in a standard one sector model

global dynamics in a model with search and matching in labor and capital markets abstract in this paper global macroeconomic dynamics are studied when search frictions are present in both labor and capital markets on the basis of the merz 1995 macroeconomic model with labor market frictions and capital accumulation our paper offers an extension to frictions in capital markets analogously modeled as a search and matching process using the merz model as limit case we consider exogenous as well as endogenous borrowing constraints we also allow the cost of issuing bonds to change endogenously as we show capital market frictions exacerbate and accentuate the interaction between the two markets and magnify the effects of shocks on output consumption employment and welfare this interaction of the frictions in labor and capital markets are also shown to give rise to multiple equilibria on the basis of numerical solution techniques instead of relying on first or second order approximations around a unique steady state our paper uses dynamic programming techniques to compute decision variables and the value function directly and assess the local and global dynamics of the model the steady state solutions are studied by using the hamiltonian and the dynamics are assessed for various model variants by using dynamic programming techniques

the quality of schooling quantity alone is misleading although much research discusses the quantity of schooling as an effective impact on productivity and earnings most such research leaves out the idea of the quality of schooling which may cause biases in the estimated returns to schooling this paper consequently attempts to extend the standard mincerian approach to incorporate school quality as well as quantity it demonstrates how exclusion of quality in the standard procedure may cause biases in the estimated returns to years of schooling probably in the upward direction the paper explores the implications of this extension of the standard model for the case of young brazilian males it shows that the estimate of the private return to years of schooling using the preferred quality inclusive specification is only one half the estimate using the standard procedure indicating substantial upward bias in the standard estimates it further outlines a method for estimating a social return to quality and finds that it exceeds substantially the social return to quantity the paper then shows why this in turn suggests there may be an equity productivity trade off in schooling investments

literacy skills and welfare effects of participation in adult literacy programs abstractthis paper examines the effect of adult literacy program participation on household consumption in ghana the adult literacy programs in ghana are of special interest because they are more comprehensive than standard literacy programs and incorporate many additional topics we use community fixed effects combined with instrumental variables to account for possible endogenous program placement and self selection into program participation for households where none of the adults have completed any formal education we find a substantial positive and statistically significant effect on household consumption our preferred estimate of the effect of participation for households without education is equivalent to a 10 increase in consumption per adult equivalent the effects of participation on welfare for other households are smaller not statistically significant and become smaller the more educated the household is we find positive and statistically significant effects of participation on litera

firing costs and business cycle fluctuations this article considers a real business cycle model with establishment level dynamics and uses it to analyze the effects of firing taxes it finds that firing taxes can have significant consequences on business cycle fluctuations that the largest effects are on aggregate employment and that even relatively small firing taxes have substantial effects a significant contribution of the article is computational it describes how to use standard linear quadratic methods to solve for a stochastic equilibrium of an s s economy with tax distortions

an equilibrium model of the business cycle with household production and fiscal policy the authors estimate a dynamic general equilibrium model of the u s economy that includes an explicit household production sector and stochastic fiscal variables they use their estimates to investigate two issues first the authors analyze how well the model accounts for aggregate fluctuations they find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables second the authors study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the evolution of the racial wage hierarchy in post apartheid south africa this article develops a multilateral decomposition procedure for the analysis of wage differentials and applies this to the evolution of the racial wage hierarchy in south africa over the period 1993 2001 we find evidence that the wage position of the majority african workforce improved relative to all other racial groups immediately following the transition to democratic rule in 1994 but that these gains have been largely eroded in the ensuing years of the post apartheid era we review the range of policy initiatives that have been taken by the government since 1994 in the light of our empirical findings

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

does informality facilitate inflation stability abstract informality is a structural trait in emerging economies affecting the behavior of labor markets financial access and economy wide productivity this paper develops a simple general equilibrium closed economy model with nominal rigidities labor and financial frictions to analyze the transmission of shocks and of monetary policy in the model the informal sector provides a flexible margin of adjustment to the labor market at the cost of a lower productivity in addition only formal sector firms have access to financing which is instrumental in their production process in a quantitative version of the model calibrated to mexican data we find that informality i dampens the impact of demand and financial shocks as well as of technology shocks specific to the formal sector on wages and inflation but ii heightens the inflationary impact of aggregate technology shocks the presence of an informal sector also increases the sacrifice ratio of monetary policy actions from a central bank perspective the results imply that informality mitigates inflation volatility for most type of shocks but makes monetary policy less effective

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

primary schooling cognitive skills and wages in south africa using a fairly rich data set from south africa the paper finds that despite the sobriquet gutter education the african schooling systems help to create cognitive skills and these skills are a determinant of wage levels various robust estimators are used but the influential outlier problem does not turn out to be serious computational skills appear to be more important than comprehension skills in influencing wages the african primary schooling system was an extremely poor generator of computational skill the seven year course raising the computational test score by 13 if that a policy implication is that productivity could be raised by certain near costless reallocations of resources in favour of mathematical learning

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

imperfect mobility of labor across sectors a reappraisal of the balassa samuelson effect this paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two sector open economy model with imperfect substitutability in hours worked across sectors the balassa samuelson 1964 model predicts that a rise in the sectoral productivity ratio by 1 raises the relative price of non tradables by 1 while leaving the non traded wage traded wage ratio unchanged applying cointegration methods to a panel of fourteen oecd countries over the period 1970 2007 our estimates show that the relative price rises by only 0 78 and the relative wage falls by 0 27 while our first set of empirical findings cast doubt on the quantitative predictions of the balassa samuelson model our second set of evidence highlights the role of imperfect labor mobility the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor we show that the ability of the two sector model to account for our evidence quantitatively relies upon two ingredients i imperfect mobility of labor across sectors and ii physical capital accumulation finally our numerical results reveal that the model predicts the relative price response fairly well and to a lesser extent the relative wage response

the determinants of earnings a behavioral approach we survey the determinants of earnings and propose a framework for understanding labor market success we suggest that the advantages of the children of successful parents go considerably beyond the benefits of superior education the inheritance of wealth or the genetic inheritance of cognitive ability we suggest that noncognitive personality variables such as attitudes towards risk ability to adapt to new economic conditions hard work and the rate of time preference affect both earning and the transmission of economic status across generations

energy gdp relationship and capital intensity in ldcs abstract this study provides an updated estimate of the gdp elasticity of energy consumption for ldcs it uses a production function approach in determining this elasticity energy consumption is explained in terms of economic activity capital intensity and structure of economy the elasticity is found to be less than unitary this suggests that the earlier estimates for ldcs were biased

the cyclicality of separation and job finding rates this paper uses cps gross flow data to analyze the business cycle dynamics of separation and job finding rates and to quantify their contributions to overall unemployment variability cyclical changes in the separation rate are negatively correlated with changes in productivity and move contemporaneously with them while the job finding rate is positively correlated with and tends to lag productivity contemporaneous fluctuations in the separation rate explain between 40 and 50 percent of fluctuations in unemployment depending on how the data are detrended this figure becomes larger when dynamic interactions between the separation and job finding rates are considered

technology shocks and job flows we consider a version of the solow growth model where technological progress can be investment specific or investment neutral the labour market is subject to search frictions and the existing productive units may fail to adopt the most recent technological advances technological progress can lead to the destruction of technologically obsolete jobs and cause unemployment we calibrate the model to replicate the high persistence that characterizes the dynamics of firms neutral technology and the frequency of firms capital adjustment we find that neutral technological advances increase job destruction and job reallocation and reduce aggregate employment investment specific technological advances reduce job destruction have mild effects on job creation and are expansionary hence neutral technological progress prompts schumpeterian creative destruction while investment specific technological progress operates essentially as in the standard neoclassical growth model using structural var models we provide support to the key dynamic implications of the model copyright 2007 wiley blackwell

unemployment and market size without strong empirical support labour market matching models typically assume constant returns to scale in matching we construct a tractable equilibrium random matching model with a general matching technology introducing market size effects the job finding rate varies with unemployment stable steady states may occur in regions of increasing or decreasing returns and multiple equilibria are welfare ranked by market size while the standard model relies on high frequency shocks to the steady state to explain the co movement of unemployment and job finding locally decreasing returns in matching generate plausible adjustment dynamics and slower convergence lastly an extension of the hosios condition internalises search externalities

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

evidence on the validity of cross sectional and longitudinal labor market data this article investigates error properties of survey reports of labor market variables we use the panel study of income dynamics psid validation study a two wave panel survey of workers employed by a large firm that shared its detailed payroll records individuals reports of annual earnings are fairly accurate errors are negatively related to true earnings reducing bias due to measurement error when earnings are used as an independent variable biases are moderately larger for changes in earnings earnings per hour are less reliably reported than annual earnings biases in estimating earnings functions are relatively small but those in labor supply functions may be important

are ols estimates of the return to schooling biased downward another look the authors examine evidence on bias in ols estimates of the economic return to schooling to study omitted ability bias they use test scores available in the national longitudinal survey of youth as proxies for ability allowing for measurement error in these test scores the authors also explore biases from the endogeneity of schooling or experience or measurement error in these variables in their data ols estimation including test scores appears to be appropriate and indicates an upward bias of roughly 40 percent in the ols estimate ignoring ability this contrasts with evidence from other recent research using different statistical experiments to purge schooling of its correlation with the wage equation error copyright 1995 by mit press

public inputs and child schooling in brazil household data from a one percent sample of the 1970 brazilian census are used to analyze the effect of public inputs i e the supply of schooling on children s school attainment in brazil the household data are combined with measures of school availability and quality derived directly from the same census data the measures are based on the number and education of schoolteachers in each of 169 different areas of the country elasticities of demand with respect to these public inputs are estimated these elasticities are high in both rural and urban areas in urban areas the positive effect of public inputs is greater for children from households with poorer and less educated parents in rural areas the positive effect of public inputs is greater if anything for children from households that are relatively better off at least compared to other rural households

job matching and propagation in the u s labor market the vacancy unemployment ratio and employment react sluggishly to productivity shocks we show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses extending the model to incorporate sunk costs for vacancy creation yields highly realistic dynamics creation costs induce entrant firms to smooth the adjustment of new openings following a shock leading the stock of vacancies to react sluggishly

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

unemployment dynamics in britain we examine the inter related dynamics of the unemployment flows and stock our model allows them to be linked through the standard accounting identity but also through behavioural relationships we find that for the uk the bulk of the correlation between duration and the unemployment stock arises from the dependence of duration on unemployment taking careful account of the inter temporal identity outflow shocks have contributed little to the evolution of unemployment since the late 1960s given that the correlation of duration and unemployment arises from the behavioural relationship we show that unemployment dynamics arise mostly from shocks to the inflow unemployment remains one of europe s more pressing economic and social problems as highlighted in the eu s lisbon declaration of 2000 a dynamic approach to unemployment starts from the recognition that unemployment is a stock and changes through shocks to the outflow and inflow the research and policy focus has generally been on the outflow process or equivalently unemployment duration a glance at figure 1 shows why this might be so it reveals a very strong co movement of the unemployment rate and the proportion of the unemployed out of work for a year or more analysts have used data like this to argue that the source of unemployment fluctuations has been changes in the outflow process 1 possibly as a consequence of this most policies directed at reducing unemployment focus on improving the search effectiveness and employability of the currently unemployed the unemployment flows and stock are related in quite complex ways and in this paper we focus on these inter related dynamics the model we use allows them to be linked in two ways first there is the simple accounting relationship whereby shocks to the flows accumulate in the stock second search and matching models suggest behavioural relationships of the flows depending on unemployment the presence of the nonlinear accounting identity in the model makes the analysis of the joint system problematic so we proceed sequentially investigating first one link and then the other we find that for the uk the bulk of the correlation between duration and the unemployment stock displayed in figure 1 arises from the dependence of the former on the latter we find a strong dependence of the outflow rate on unemployment taking careful account of the inter temporal identity on the other hand outflow shocks have contributed little to the evolution of unem

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

real and nominal propagation of nominal shocks the role of real and nominal propagation mechanisms in generating persistent real effects of nominal shocks is analysed analytically in a fully specified intertemporal general equilibrium model while neither a real propagation mechanism capital acccumulation with one period nominal contracts nor nominal propagation staggered nominal contracts in the absence of any real propagation can generate plausible impulse responses with strong persistence it is shown that the two mechanisms interact so as to strengthen persistence possibly unit roots and generate more plausible impulse responses

job search and cyclical unemployment a model economy is described that integrates job search and signal extraction analysis equilibrium differs from search models without signal extraction in that even with a fixed real sector unemployment fluctuates stochastically it differs from standard signal extraction models because search introduces persistence in fact unemployment follows a second order difference equation with coefficient that are functions of current and lagged values of the stochastic shocks thus the model has the potential to mimic actual business cycle data despite the fact that the underlying shocks are independently and identically distributed policy implications are discussed

the economics of schooling production and efficiency in public schools n recent years public and professional interest in schools has been heightened by a spate of reports many of them critical of current school policy these policy documents have added to persistent and long standing concerns about the cost effectiveness and fairness of the current school structure and have made schooling once again a serious public issue as in the past however any renewed interest in education is likely to be short lived doomed to dissipate as frustration over the inability of policy to improve school practice sets in this frustration about school policy relates directly to knowledge about the educational production process and in turn to underlying research on schools although the educational process has been extensively researched clear policy prescriptions flowing from this research have been difficult to derive 2 there exists however a consistency to the research findings that does have an immediate application to school policy schools differ dramatically in quality

the energy gdp relationship in developing countries empirical evidence and stability tests abstract the elasticity of energy consumption with respect to gdp is an important element in projecting energy needs in economic development this study uses cross section and pooled cross section time series data to find that the elasticity of energy consumption with respect to gdp in developing countries is in the neighbourhood of 1 35 and significantly above one over the period covered 1970 to 1976 the relationships appear to have remained stable there are significant differences between areas of the world but the differences in the elasticities between different continents are not large

estimates of the economic returns to schooling from a new sample of twins this paper uses a new survey to contrast the wages of genetically identical twins with different schooling levels multiple measurements of schooling levels were also collected to assess the effect of reporting error on the estimated economic returns to schooling the data indicate that omitted ability variables do not bias the estimated return to schooling upward but that measurement error does bias it downward adjustment for measurement error indicates that an additional year of schooling increases wages by 12 to 16 percent a higher estimate of the economic returns to schooling than has been previously found copyright 1994 by american economic association

the labor wedge as a matching friction abstract we use a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role for the labor wedge and unemployment we find that there is an asymmetric effect of labor market frictions on the labor wedge and unemployment while the wedge is to a large extent explained by changes in matching efficiency unemployment is accounted for by the combination of frictions to matching efficiency job destruction and bargaining if search and matching frictions give rise to the labor wedge then it is relevant for explaining unemployment mainly through changes in matching efficiency

an exploratory stochastic framework to analyse the relationship between macro oil price shocks and economic development abstract the paper investigates the impact of the oil price shocks of 1973 and 1978 on the economies of industrial and developing countries empirical results reveal that the severity of the impact of macro price oil shocks has been quite different on the two groups of countries the regression results based on the new exploratory model corroborate clearly that the low income group sustained a drastic blow compared to the high income group countries moreover within the group of developing nations the severity of impact varies according to their dependency on the use of energy sources development levels and the degree of aggregate capital intensity

the energy demand elasticity in relation to gross domestic product a relevant indicator abstract the value of the ratio of energy consumption growth to economic growth forms the subject of strenuous debates particularly in france this article attempts to show by taking data over an extended period for the industrialized countries that one should treat with caution the values this indicator can have any resulting energy forecast would be fragile consequently one may say that it is the notion of the elasticity itself which is most often used improperly this indicator is too global and is useful only ex post

informality labor regulation and the business cycle abstract we ask how labor regulation and informality affect macroeconomic volatility and the propagation of shocks in emerging economies for this we propose a small open economy business cycle model with frictional labor markets endogenous labor participation and an informal sector our own calculations from the enoe national household survey reveal that these three margins are important to account for the labor market dynamics in mexico the model is calibrated to the mexican economy in particular to business cycle moments for employment and informality we show that interest rate shocks which affect specifically job creation in the formal sector are key to obtain a countercyclical informality rate in our model the presence of an informal sector might help to mitigate the impact of a stringent labor regulation on employment and consumption fluctuations in that sense it adds flexibility to the economy in its adjustment to shocks but at the cost of a lower productivity and an excess tfp and output volatility reducing the burden of labor regulation to the formal sector might achieve the goal of reducing output volatility while improving at the same time the efficiency in the allocation of resources

gross worker flows over the business cycle we build a hybrid model of the aggregate labor market that features both standard labor supply forces and frictions in order to study the cyclical properties of gross worker flows across the three labor market states employment unemployment and nonparticipation our goal is to assess the relative importance of frictions and labor supply in accounting for fluctuations in labor market outcomes our parsimonious model is able to capture the key features of the cyclical movements in gross worker flows and indicates an important role for both frictions and labor supply

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

non graduation and the earnings function an inquiry on self selection abstract we model schooling careers in the dutch educational systems including the decision to drop out as a discrete sequential choice in which expected earnings play an important role selectivity biasd from correlation between the errors in the decision function and the earnings function appears empirically relevant and we correct for it by applying a proper maximum likelihood estimation procedure the results indicate that drop outs behave differently from graduates in the decision functions on schooling careers expected earnings based on estimated earnings functions in mid career are never significant yet the educational choices appear ex post consistent with choices according to comparative earnings advantage

equilibrium in a production economy with an income tax this paper develops a method to study an infinite horizon production economy distorted by a state dependent income tax this setting permits taxes to depend on the capital stock an endogenous state variable and thus captures situations where the evolution for capital and taxes is jointly determined to solve this model the consumption function is represented as a fixed point of a nonlinear monotone operator that is defined such that its nth iteration computes the consumption function n steps away from the horizon for a corresponding finite horizon economy the oparator s monotonicity is exploited in proving the existence of and constructing an equilibrium copyright 1991 by the econometric society

trade unions v statistical discrimination theory and application to post apartheid south africa a simple model of statistical discrimination is analyzed which captures some stylized facts of the south african labor market it shows that this type of discrimination disappears when the wage rates are determined by efficient bargaining between a representative firm and a union with endogenous membership this may explain why the wage gap between black and white workers in post apartheid south africa is smaller among unionized workers than among non unionized ones

on the job search and cyclical unemployment crowding out vs vacancy effects incorporating on the job search otjs into a real business cycle model has been shown to increase the cyclical volatility of unemployment using a particularly simple model of otjs we show that the increased search of employed workers during expansions induces firms to open more vacancies but also crowds out unemployed workers in the job search resulting in an ambiguous overall effect on unemployment volatility we show analytically and numerically that the difference between the employer s share of the match surplus with an employed versus an unemployed job seeker determines the degree to which otjs increases unemployment volatility we use this result to re consider some related papers of otjs and explain the amplification of volatility they obtain finally we show that a plausible calibration of the otjs model allows us to reproduce most significant features of the us labor data

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

what do twins studies reveal about the economic returns to education a comparison of australian and us findings conventional estimates of rates of return to education are constrained because they are unable to isolate the returns to schooling from the contribution of individual ability and the influence of family background potentially studies using a sample of twins may overcome these problems monozygotic twins are genetically identical and if they have been reared together share the same family background differences in income between identical twins can therefore be associated with differences in the amount of education they have undertaken in order to estimate the independent influence of education comparisons of such estimates with estimates made from a sample of dizygotic twins who are genetically similar but not identical and who are also reared together may permit evaluation of the biases associated with ability and family background in conventional estimates of the return to education in an important paper jere behrman et al 1977 analyzed data from a sample of male world war ii veteran twins and found that of the overall rate of return to schooling of 8 percent 2 7 percentage points could be attributed to schooling per se 3 2 percentage points could be attributed to genetic factors and 2 1 percentage points could be attributed to shared family environment in a recent paper however orley ashenfelter and alan krueger 1994 have estimated the economic returns to education using data on a new sample of twins which permitted them to adjust their estimate for omitted ability variables and measurement error on this basis they find that family and genetic effects make virtually no contribution to the returns to schooling measurement error however biases the estimated return to schooling downward the findings of ashenfelter and krueger 1994 are very different from previous work in this field and there is now some confusion as to what analysis of twins data really reveals about the economic returns to schooling ashenfelter and krueger s results are based on analysis of data for a sample of 298 individuals 149 pairs of identical twins who attended a twins festival in 1991 they remark at the end of their paper only additional data collection is likely to lead to better estimates of the returns to schooling p 1171

the effects of labour market policies in an economy with an informal sector in this article we build an equilibrium search and matching model of an economy with an informal sector our model extends mortensen and pissarides 1994 by allowing for ex ante worker heterogeneity with respect to formal sector productivity we use the model to analyse the effects of labour market policy on informal sector and formal sector output on the division of the workforce into unemployment informal sector employment and formal sector employment and on wages finally we examine the distributional implications of labour market policy specifically we analyse how labour market policy affects the distributions of wages and productivities across formal sector matches in this article we construct a search and matching model that we use to analyse the effects of labour market policies in an economy with a significant informal sector what we mean by an informal sector is a sector that is unregulated and hence not directly affected by labour market policies such as severance or payroll taxes we find that labour market policies that apply only to the formal sector nonetheless affect the size and the composition of employment in the informal sector this is important since there is substantial economic activity in the informal sector in many economies particularly in developing countries estimates for some latin american countries put the informal sector at more than 50 of the urban work force 1 the informal sector is also important in many transition countries as well as in some developed economies 2 although much of the literature treats the informal sector as a disadvantaged sector in a segmented labour market framework this interpretation is not consistent with recent empirical evidence from latin america under a segmented or dual labour market interpretation one would expect jobs to be rationed in the primary sector and workers to be in the secondary or informal sector involuntarily and to be queuing for formal sector jobs maloney 2004 presents evidence for several latin american countries that challenges this view and instead interprets the informal sector as an unregulated micro entrepreneurial sector similarly using data from the argentinian household survey pratap and quintin 2006 reject the notion that labour markets are segmented in the greater buenos aires area concluding that there is no evidence of a formal sector wage premium after controlling for individual and establishment we thank mauricio santamaria for stimulating conversations that inspired our interest in this topic we also thank bob hussey and fabien postel vinay as well as our editor steve pischke and two anonymous

endowments and the allocation of schooling in the family and in the marriage market the twins experiment 03 we show how comparisons between the within twin correlations of human capital outcomes across identical and nonidentical twins can be used to identify the variability in the individual specific component of endowments and the responsiveness of schooling to individual specific endowments in the family and in the marriage market even when schooling is measured with error estimates from two twins samples indicate that 27 42 percent of the variance in log earnings obesity is due to variability in individual specific endowments allocations of schooling reinforce specific endowments and individual specific earnings endowments of men and their wives schooling are negatively associated

household income and child schooling in vietnam the stronger are the associations between household income and child schooling the lower is intergenerational social mobility and the less equal is opportunity this study estimates the associations between household income and children s school success in vietnam the estimates indicate that these associations are considerable this article also investigates some ways in which policies relate to household incomes school fees are progressive but school fees are only about one third of what households pay directly to schools and are a much smaller proportion of a household s total school related expenditures total household expenditures paid directly to schools increase with household income less proportionately than do school fees alone so the overall structure of such payments is less progressive than is the structure of school fees because school enrollment is positively related to household income moreover the structure of school fees is less progressive for the entire population than for the selected subset that has children enrolled in school further the two school quality measures that have the strongest positive association with children s school success are much more available to higher income households meaning that higher income households have greater school expenditures in part because they are obtaining higher quality schooling and not because charges for the same quality schooling are progressive across income classes

shared literacy and employment in the nonfarm sector this article empirically examines the external effect of family literacy on the earnings of illiterate workers considering recent findings that rural nonfarm sectors in developing countries are becoming more important in determining the welfare of households this article tests two hypotheses 1 an illiterate person living with literate members i e a proximate illiterate person is more likely to find a job in the nonfarm sector than is an illiterate person living with no literate person i e an isolated illiterate person and 2 wage income of a proximate illiterate worker is higher than that of an isolated illiterate worker the empirical results suggest that proximate illiterate persons earn higher wages than isolated illiterate persons because they are more likely to be employed in the nonfarm sector

educational homogamy positive assortative mating and income inequality in south africa an unconditional quantile regression analysis apart from being the first attempt at investigating the impact of education based homogamy and positive assortative mating on income inequality in a developing country context with very high levels

data watch the world bank s living standards measurement study household surveys since 1985 the world bank has been collecting household survey data in developing countries that provide a rich source of information for assessing household welfare understanding household behavior and evaluating the impact of government policies this article describes these household surveys known as living standards measurement study lsms surveys and explains how to obtain their data lsms surveys have been implemented in over twenty developing countries and have been used to analyze poverty labor markets health and education pricing policies determinants of school performance savings and consumption smoothing health and nutrition policies and gender and fertility issues

effect of oil price increases on developing countries a comment in a recent paper dick et al 2 argued that differences in the impact of the second oil price shock on gdp in four selected developing countries were mainly determined by the openness of each country s economy this comment suggests that for the countries in question the cost share of oil in gdp is likely to be the more significant variable

payroll taxes social insurance and business cycles payroll taxes represent a major distortionary influence of governments on labor markets this paper examines the role of time varying payroll taxes and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance when the latter is only imperfectly related to search effort a balanced social insurance budget induces countercyclical payroll taxation renders gross wages more rigid over the cycle and strengthens the model s endogenous propagation mechanism for conventional calibrations the model generates a negatively sloped beveridge curve and countercyclical unemployment as well as substantial volatility and persistence of vacancies and unemployment

earnings schooling ability and cognitive skills conventional estimates now available for a large number of countries generally indicate that the social returns to education are positive large and competitive with returns to investment in physical capital that such estimates are good guides for public resource allocation has however been questioned the heart of the problem lies in the interpretation of the positive relationship between the education and the earnings of workers whether as the conventional estimates assume the coefficient of the education variable in the earnings function measures the effect on the productivity of workers of human capital acquired in school it has been hypothesized that education in part or instead represents screening for native ability and motivation or credentialism and that as a consequence conventional measures of the social benefit of education are substantially upward biased 2 in this paper we attempt to distinguish the influence on earnings of cognitive achievement native ability and years of education as a means of adjudicating the human capital screening and credentialist hypotheses our econometric analysis is based on two rigorously comparable micro data sets from kenya and tanzania generated by surveys of the urban wage labor force specifically for this study these data sets contain the usual variables found in earnings function estimates of the benefits of schooling individual earnings years of education and years of employment experience in addition they contain two variables measures of the worker s cognitive skills and of his or her reasoning ability not previously found in studies of developing countries and only rarely found in studies of the education earnings relationship in developed countries 3 with these variables we can estimate the direct effects on earnings of cognitive skills ability and years of schooling by using them to estimate educational production functions and educational attainment functions and linking these functions with the earnings function in a recursive framework we can also assess the various indirect effects on earnings of ability and years of schooling having data sets from two countries very similar with respect to size resource endowments structure of production and employment and level of development means that not only can we subject our results to the usual statistical tests but we can also assess their replicability both kenya and tanzania have nearly achieved the objective of universal primary education while university enrollments remain at less than 1 percent of the relevant age group the important policy issues re boissiere development research department the world bank 1818 h street washington d c 20433 knight institute of economics and statistics oxford university sabot williams college williamstown ma 01267 we are grateful to the educational testing service of princeton for the design of tests used in this study and to j armitage j behrman j hausman d hendry d jamison and an anonymous referee for their insights and advice helpful comments were also received from participants in seminars at oxford and yale universities the views presented here are our own they should not be interpreted as reflecting those of the world bank george psacharopoulos 1973 1981 contains a listing of 44 countries in which rate of return studies had been conducted and of the estimates obtained 2for instance kenneth arrow 1973 mark blaug 1976 samuel bowles and herbert gintis 1976 john riley 1979 michael spence 1976 and lester thurow 1975 3for attempts to control for ability and or for cognitive achievement in studies for the united states see jere behrman et al 1980 gary chamberlain and zvi griliches 1977 griliches and william mason 1972 michael olneck 1977 paul taubman and terence wales 1974 taubman 1975 and david wise 1975 see also the survey articles by griliches 1977 1979 in most instances the data refer to special subgroups in the population and clear distinction cannot be made between natural ability and cognitive skills acquired in school

business cycles with costly search and recruiting a business cycle model is developed in which output is traded on lucas phelps islands and labor services on each island are exchanged through costly search and recruiting with transactions externalities the model exhibits persistent involuntary unemployment and inefficient equilibria even though there are no nominal rigidities and no unexploited privately attainable gains from trade it also exhibits employment fluctuations without any real wage fluctuations it yields a lucas aggregate supply curve to a linear approximation it also implies that the natural rate of unemployment depends positively upon the variability and persistence of relative price shocks

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances