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Begin New Search Political Geography United States Content Type Working Paper Publishing Institution Peterson Institute for International Economics Publication Year within 25 Years

1. Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account

Author:
Robert Z. Lawrence
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Over the past decade, the US economy has been plagued by sluggish wage growth and rising income inequality. The debate over inequality in the 1980s and 1990s focused on the growing disparity between the earnings of skilled and unskilled workers and the earnings of the super-rich. Growing inequality between capital and labor income has now been added to these concerns. Remarkably, the growth in real GDP per worker over the decade of the 2000s, which averaged 1.7 percent annually, was actually more rapid than in the 1970s, 1980s, or 1990s, yet in the 2000s workers saw almost no increase in their take-home pay. Consistent with this gap between labor productivity and wage growth was a pronounced decline in the share of US national income earned by workers. As labor's share has declined, the share of capital has risen and has been especially concentrated in corporate profits. As profits are far less equally distributed than wages, this increase has contributed to rising income inequality. There are several plausible reasons for this development—globalization, automation, weak bargaining power of labor, political capture, higher markups—but the natural starting point for explaining factor income shares is the neoclassical theory of the functional distribution of income enumerated by John Hicks and Joan Robinson in the 1930s. In this framework there are two possible explanations for labor's recent declining share. The first is that capital and labor are gross substitutes, and the second is that capital and labor are gross complements. Several papers have explained the recent decline in labor's share in income by claiming that capital has been substituted for labor. Lawrence puts forward the alternative "gross complements" explanation for the declining US labor share. He shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that the elasticity of substitution is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.
Topic:
Economics, Globalization, Markets, and Labor Issues
Political Geography:
United States

2. Sustainability of Public Debt in the United States and Japan

Author:
William R. Cline
Publication Date:
10-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper applies the probabilistic debt sustainability model developed for the euro area in Cline (2012, 2014) to sovereign debt in the United States and Japan. The results indicate that to avoid further increases in the expected ratio of public debt to GDP over the next decade, average annual primary deficits will need to be reduced by about 0.75 percent of GDP in the United States and by about 3 percent of GDP in Japan from the likely baselines as of mid-2014.
Topic:
Debt, Diplomacy, and International Trade and Finance
Political Geography:
United States, Japan, and East Asia

3. The Federal Reserve Engages the World (1970–2000): An Insider's Narrative of the Transition to Managed Floating and Financial Turbulence

Author:
Edwin M. Truman
Publication Date:
08-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve's role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
Topic:
Economics, Foreign Exchange, and Financial Crisis
Political Geography:
United States

4. Demographic versus Cyclical Influences on US Labor Force Participation

Author:
William R. Cline and Jared Nolan
Publication Date:
07-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper applies time series analysis to distinguish between cyclical and demographic causes of the decline of the labor force participation rate. Some public discussions suggest that the decline of US unemployment from its 2009 peak of 10 percent to about 6 percent by mid-2014 grossly exaggerates recovery because most of the decline reflects the exit of discouraged workers from the labor force. This study finds instead that one-half to two-thirds of the decline in labor force participation by about 3 percentage points from late 2007 to early 2014 is attributable to aging of the population. Although about one-third is found attributable to the lagged influence of high, and especially long-term, unemployment, going forward the potential rebound in the participation rate from recovery is projected to be approximately offset by further aging of the population.
Topic:
Demographics, Economics, Labor Issues, and Population
Political Geography:
United States

5. How to Measure Underemployment?

Author:
David G. Blanchflower and David N. F. Bell
Publication Date:
08-2013
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
One of the factors that may inhibit reductions in unemployment as the economy recovers is the extent to which existing workers would like to work more hours and employers may prefer to let them work longer hours before making new hires. This phenomenon suggests that the unemployment rate does not capture the full extent of excess capacity in the labor market. But how should it be measured? In this paper we argue that the United States does not have the necessary statistical tools to calibrate this form of underemployment. We describe an index that captures the joint effects of unemployment and underemployment and provides a more complete picture of labor market excess capacity. We show how this index can be implemented using British data and describe its evolution over the Great Recession. Comparisons of our index with unemployment rates suggest that unemployment rates understate differences in labor market excess capacity by age group and overstate differences by gender. We also show that being unable to work the hours that one desires has a negative effect on well-being. Finally, we recommend that the Current Population Survey conducted by the US Bureau of Labor Statistics might be extended to enable the construction of an equivalent US index.
Topic:
Economics, International Trade and Finance, Markets, and Labor Issues
Political Geography:
United States and Europe

6. Transactions: A New Look at Services Sector Foreign Direct Investment in Asia

Author:
Jacob Funk Kirkegaard
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
In this paper Kirkegaard presents new micro-level data consisting of individual greenfield investment projects and mergers and acquisitions as a source for detailed analysis of services sector cross-border investment flows among the Asian Development Bank (ADB) regional membership in Asia. The new transactional foreign direct investment (FDI) data are methodologically distinct from traditional BPM5-compliant FDI data but found to yield generally comparable aggregates, when compared with the latest available International Monetary Fund (IMF) data from the Comprehensive Direct Investment Survey for the ADB regional membership. The services sectors are found to receive considerably larger amounts of foreign investment, when compared with the Asian region's manufacturing and raw materials sectors. OECD countries account for roughly three-quarters of total recorded inward services sector FDI of about $2 trillion, relatively evenly split between the United States, the EU-27, and regional OECD-level-income countries. The presence of sizable regional "upward flowing" services sector investments into OECD-level-income economies is verified. Kirkegaard draws preliminary policy conclusions based on the new transactional FDI data results concerning prospects for regional services sector liberalization, threshold income levels for inward services sector FDI, upward-flowing regional services FDI, and preferred modes of services sector investments.
Topic:
Economics, Emerging Markets, International Trade and Finance, and Foreign Direct Investment
Political Geography:
United States, Israel, and Asia

7. The Dollar and Its Discontents

Author:
Olivier Jeanne
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Has the US dollar delivered the benefit that the rest of the world is expecting from its holdings of international liquidity? US government debt has been liquid and safe, and it is supplied in sufficient quantity. But it has given a low return to the countries that accumulated the most reserves, especially when those returns are measured in terms of the countries' own consumption. Jeanne argues that countries that accumulate the most reserves should expect a low return in terms of their own consumption and that international monetary reform can do little to change that fact.
Topic:
Economics, International Trade and Finance, and Markets
Political Geography:
United States

8. Fiscal Federalism: US History for Architects of Europe's Fiscal Union

Author:
C. Randall Henning and Martin Kessler
Publication Date:
01-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
European debates over reform of the fiscal governance of the euro area frequently reference fiscal federalism in the United States. The “fiscal compact” agreed by the European Council during 2011 provided for the introduction of, among other things, constitutional rules or framework laws known as “debt brakes” in the member states of the euro area. In light of the compact and proposals for deeper fiscal union, we review US fiscal federalism from Alexander Hamilton to the present. We note that within the US system the states are “sovereign”: The federal government does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider three important caveats. First, debt brakes are likely to be more durable and effective when “owned” locally rather than mandated centrally. Second, maintaining a capacity for countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify bank regulation and create a common fiscal pool for restructuring the banking system.
Topic:
Debt, Financial Crisis, and Governance
Political Geography:
United States and Europe

9. Foreign Manufacturing Multinationals and the Transformation of the Chinese Economy: New Measurements, New Perspectives

Author:
Theodore H. Moran
Publication Date:
04-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
What is the relationship between foreign manufacturing multinational corporations (MNCs) and the expansion of indigenous technological and managerial technological capabilities among Chinese firms? China has been remarkably successful in designing industrial policies, joint venture requirements, and technology transfer pressures to use FDI to create indigenous national champions in a handful of prominent sectors: high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector. But what is striking in the aggregate data is how relatively thin the layer of horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms has proven to be. Despite the large size of manufacturing FDI inflows, the impact of multinational corporate investment in China has been largely confined to building plants that incorporate capital, technology, and managerial expertise controlled by the foreigner. As the skill-intensity of exports increases, the percentage of the value of the final product that derives from imported components rises sharply. China has remained a low value-added assembler of more sophisticated inputs imported from abroad—a “workbench” economy. Where do the gains from FDI in China end up? While manufacturing MNCs may build plants in China, the largest impact from deployment of worldwide earnings is to bolster production, employment, R, and local purchases in their home markets. For the United States the most recent data show that US-headquartered MNCs have 70 percent of their operations, make 89 percent of their purchases, spend 87 percent of their R dollars, and locate more than half of their workforce within the US economy—this is where most of the earnings from FDI in China are delivered.
Topic:
Economics, Industrial Policy, International Trade and Finance, and Science and Technology
Political Geography:
United States, China, and Israel

10. The Liquidation of Government Debt

Author:
Carmen M. Reinhart
Publication Date:
04-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of "financial repression." Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In this paper, the authors describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historical standards). For the advanced economies in Reinhart and Sbrancia's sample, real interest rates were negative roughly half of the time during 1945–80. For the United States and the United Kingdom, their estimates of the annual liquidation of debt via negative real interest rates amounted on average to 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).
Topic:
Debt, Economics, International Trade and Finance, and Markets
Political Geography:
United States and United Kingdom

11. Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition

Author:
Arvind Subramanian
Publication Date:
09-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Against the backdrop of the recent financial crisis and the ongoing rapid changes in the world economy, the fate of the dollar as the premier international reserve currency is under scrutiny. This paper attempts to answer whether the Chinese renminbi will eclipse the dollar, what will be the timing of, and the prerequisites for this transition, and which of the two countries controls the outcome. The key finding, based on analyzing the last 110 years, is that the size of an economy—measured not just in terms of GDP but also trade and the strength of the external financial position—is the key fundamental correlate of reserve currency status. Further, the conventional view that sterling persisted well beyond the strength of the UK economy is overstated. Although the United States overtook the United Kingdom in terms of GDP in the 1870s, it became dominant in a broader sense encompassing trade and finance only at the end of World War I. And since the dollar overtook sterling in the mid-1920s, the lag between currency dominance and economic dominance was about 10 years rather than the 60-plus years traditionally believed. Applying these findings to the current context suggests that the renminbi could become the premier reserve currency by the end of this decade, or early next decade. But China needs to fulfill a number of conditions—making the reniminbi convertible and opening up its financial system to create deep and liquid markets—to realize renminbi preeminence. China seems to be moving steadily in that direction, and renminbi convertibility will proceed apace not least because it offers China's policymakers a political exit out of its mercantilist growth strategy. The United States cannot in any serious way prevent China from moving in that direction.
Topic:
Economics, Markets, and Monetary Policy
Political Geography:
United States and China

12. A Generalized Fact and Model of Long-Run Economic Growth: Kaldor Fact as a Special Case

Author:
Daniel Danxia Xie
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper provides new evidence on the long-run relationship between economic growth and labor's share in national income, based on a comprehensive panel data set for 123 countries from 1950 to 2004. Xie's primary finding is that labor's share follows a cubic relationship with real GDP per capita over the long process of development. At the beginning of the modern economic growth process, the share of labor in national income first decreases until an initial threshold is reached. After that, labor's share keeps increasing until the country's GDP per capita reaches a second threshold before falling again. Xie argues that these dynamics apply not only to the less developed countries in the postwar years, but also to the advanced countries like the United States and the United Kingdom during their early economic take-offs, starting in the late 18th and 19th century, respectively. Finally, he proposes a two-sector constant elasticity of substitution (CES)-type growth model and simulate the model to replicate and explain the possible mechanism behind such a nonlinear pattern of movements in labor's share.
Topic:
Economics, International Trade and Finance, Labor Issues, and Monetary Policy
Political Geography:
United States and United Kingdom

13. Too Big to Fail: The Transatlantic Debate

Author:
Morris Goldstein and Nicolas Véron
Publication Date:
01-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Although the United States and the European Union were both seriously impacted by the financial crisis of 2007, resulting policy debates and regulatory responses have differed considerably on the two sides of the Atlantic. In this paper the authors examine the debates on the problem posed by "too big to fail" financial institutions. They identify variations in historical experiences, financial system structures, and political institutions that help one understand the differences of approaches between the United States, EU member states, and the EU institutions in addressing this problem. The authors then turn to possible remedies and how they may be differentially implemented in America and Europe. They conclude on which policy developments are likely in the near future.
Topic:
Economics and Financial Crisis
Political Geography:
United States, America, and Europe

14. Delivering on US Climate Finance Commitments

Author:
Trevor Houser and Jason Selfe
Publication Date:
11-2011
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
At the United Nations climate change conference in Copenhagen in 2009 and Cancun in 2010, the United States joined other developed countries in pledging to mobilize $100 billion in public and private sector funding to help developing countries reduce greenhouse gas emissions and adapt to a warmer world. With a challenging US fiscal outlook and the failure of cap-and-trade legislation in the US Congress, America's ability to meet this pledge is increasingly in doubt. This paper identifies, quantifies, and assesses the politics of a range of potential US sources of climate finance. It finds that raising new public funds for climate finance will be extremely challenging in the current fiscal environment and that many of the politically attractive alternatives are not realistically available absent a domestic cap-and-trade program or other regime for pricing carbon. Washington's best hope is to use limited public funds to leverage private sector investment through bilateral credit agencies and multilateral development banks.
Topic:
Climate Change, Development, Economics, Energy Policy, Politics, and Foreign Direct Investment
Political Geography:
United States, America, Washington, and United Nations

15. Wholesalers and Retailers in US Trade

Author:
J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, and Stephen J. Redding
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which US exports and imports flow through wholesalers and retailers versus producing and consuming firms.
Topic:
Economics, International Trade and Finance, and Markets
Political Geography:
United States

16. US Trade and Wages: The Misleading Implications of Conventional Trade Theory

Author:
Robert Z. Lawrence and Lawrence Edwards
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Conventional trade theory, which combines the Heckscher-Ohlin theory and the Stolper-Samuelson theorem, implies that expanded trade between developed and developing countries will increase wage equality in the former. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality.
Topic:
Economics, Political Theory, and Labor Issues
Political Geography:
United States

17. Do Developed and Developing Countries Compete Head to Head in High Tech?

Author:
Robert Z. Lawrence and Lawrence Edwards
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Concerns that growth in developing countries could worsen the US terms of trade and that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech. Judged by export shares, the United States and developing countries specialize in quite different product categories that, for the most part, do not overlap. Moreover, even when exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitutes—developed country products are far more sophisticated.
Topic:
Development, Emerging Markets, International Trade and Finance, Markets, Science and Technology, and Labor Issues
Political Geography:
United States

18. The Realities and Relevance of Japan's Great Recession: Neither Ran nor Rashomon

Author:
Adam S. Posen
Publication Date:
06-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Japan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, Japan, and United Kingdom

19. The Margins of US Trade

Author:
J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, and Stephen J. Redding
Publication Date:
05-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Recent research in international trade emphasizes the importance of firms' extensive margins for understanding overall patterns of trade as well as how firms respond to specific events such as trade liberalization. In this paper, we use detailed US trade statistics to provide a broad overview of how the margins of trade contribute to variation in US imports and exports across trading partners, types of trade (i.e., arm's length versus related party) and both short and long time horizons. Among other results, we highlight the differential behavior of related-party and arm's-length trade in response to the 1997 Asian financial crisis.
Topic:
Economics, International Trade and Finance, and Markets
Political Geography:
United States

20. Intra-Firm Trade and Product Contractibility

Author:
J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, and Stephen J. Redding
Publication Date:
05-2010
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper examines the determinants of intra-firm trade in US imports using detailed country-product data. We create a new measure of product contractibility based on the degree of intermediation in international trade for the product. We find important roles for the interaction of country and product characteristics in determining intra-firm trade shares. Intra-firm trade is high for products with low levels of contractibility sourced from countries with weak governance, for skill-intensive products from skill-scarce countries, and for capital-intensive products from capital-abundant countries.
Topic:
Economics, Industrial Policy, International Trade and Finance, and Markets
Political Geography:
United States