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Inequality, Unemployment Benefits And Pollution

inthepapersEvery Monday, the National Bureau of Economic Research, a nonprofit organization made up of some of North America’s most respected economists, releases its latest batch of working papers. The papers aren’t peer-reviewed, so their conclusions are preliminary (and occasionally flat-out wrong). But they offer an early peek into some of the research that will shape economic thinking in the years ahead. Here are a few of this week’s most interesting papers.

Title: “Wage Inequality and Firm Growth”

Authors: Holger M. Mueller, Paige P. Ouimet, Elena Simintzi

What they found: The increasing dominance of large companies may be contributing to income inequality.

Why it matters: Rising income inequality has emerged as a major political issue in the United States and other developed nations, but there’s widespread disagreement about what explains the trend. In this paper, the authors offer one possible factor: the rising role of large companies. Using data from the United Kingdom, they find that for highly skilled workers, bigger companies pay better wages. But the same isn’t true for low- and medium-skilled workers, possibly because larger companies are more likely to automate or outsource low-skilled jobs. Moreover, the earnings gap between high- and low-skilled workers at large firms is growing. As a result, big companies are more unequal than small ones and are becoming more unequal over time. That could be contributing to overall levels of income inequality because in the U.S. and other Western nations, big companies account for a growing share of total employment.

Key quote: “Altogether, our results suggest that firm growth, especially of larger firms, may contribute to rising wage inequality in two ways. First, it may act as a catalyst for already existing explanations that, as such, are not necessarily linked to firm growth. For instance … if larger firms are more likely to automate routine job tasks, then firm growth may act as a catalyst for task-replacing technological change. Second, firm growth may contribute to rising wage inequality through channels that are inherently linked to firm size. For instance, if larger firms exhibit wider spreads between top- and entry-level wages, then firm growth may directly contribute to rising wage inequality through this channel.”

Data they used: Company-level data on employee pay in the U.K. provided by Income Data Services, a private-sector research firm. Data on company size is from Bureau van Dijk’s Amadeus database.

Title: “The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?”

Authors: Marcus Hagedorn, Iourii Manovskii, Kurt Mitman

What they found: The elimination of emergency unemployment benefits at the end of 2013 played a major role in spurring the subsequent acceleration in job growth in 2014.

Why it matters: When the recession struck in 2008, Congress voted to extend unemployment benefits beyond the standard 27 weeks offered by most states. The program was gradually pared back during the recovery, and at the end of 2013, Congress allowed it to expire entirely. Many conservative economists said the program was doing more harm than good by providing the long-term jobless an incentive not to look as hard for work. Liberal economists were more skeptical, as was I; in an article last spring, I found little evidence that the end of emergency benefits was pushing the jobless back to work. But in this paper, the authors argue that conservatives were right and that the cutoff of benefits helps explain the surge in hiring in 2014. They use county-level data to show that places where the reduction in benefits was greatest also experienced the greatest job gains. They estimate that the policy change led to the creation of 1.8 million jobs in 2014, and that nearly 1 million of those jobs were filled by workers who otherwise would have stayed out of the labor market.

Key quote: “The analysis based on this simple inference implies that the cut in benefits in 2014 can explain nearly all of the observed aggregate employment growth in 2014. The abrupt reversal in the relative employment growth trend of high benefit states and border counties in December 2013, right at the time when the benefit durations were cut, strongly suggests that our analysis indeed identifies the implications of this particular policy change. There were no other policy changes at the turn of 2014 likely to have significant labor market implications. Moreover, we are not aware of any policy changes that could have differentially affected states depending on their pre-reform benefit duration.”

Data they used: Local Area Unemployment Statistics from the Bureau of Labor Statistics.

Title: “Why is Pollution from U.S. Manufacturing Declining? The Roles of Trade, Regulation, Productivity, and Preferences”

Authors: Joseph S. Shapiro, Reed Walker

What they found: Air pollution from U.S. factories is declining primarily because of stricter regulation, not the outsourcing of dirty industries.

Why it matters: American factories are polluting less while manufacturing more: Between 1990 and 2000, U.S. manufacturing output increased by a third even as emissions of major air pollutants fell by 35 percent on average. The same basic trend has continued since 2000. Yet this trend doesn’t necessarily mean that factories have become cleaner. It’s possible the dirtiest industries have simply shifted overseas or shut down altogether, either because of stricter regulation or other factors. In this paper, however, the authors find that the improvement is real: The decline in emissions was driven almost entirely by falling rates of pollution for individual products, not by a “composition effect” as cleaner industries displaced dirtier ones. Moreover, the improvement was not explained by gains in overall productivity; it isn’t just that plants can produce more products in the same amount of time. Rather, the key factor was regulation. The authors find that stricter environmental rules explain at least three-quarters of the post-1990 decline in emissions.

Key quote: “The paper obtains three main conclusions. First, the fall in pollution emissions is due to decreasing pollution per unit output in narrowly defined manufacturing product categories, rather than reallocation across products or changes in the scale of real manufacturing output. Second, environmental regulation has grown increasingly stringent, and the pollution tax that explains U.S. data more than doubled between 1990 and 2008. Third, environmental regulation explains 75 percent or more of the observed reduction in pollution emissions from manufacturing. Trade costs, productivity improvements, and preferences play relatively smaller roles.”

Data they used: The Annual Survey of Manufacturers from the U.S. Census Bureau for output and productivity data; the Pollution Costs and Abatements Survey and the Environmental Protection Agency’s National Emissions Inventory for pollution data; and the Structural Analysis Database from the Organization for Economic Cooperation and Development for international data.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.