Both Sides of the Story: Skill-biased Technological Change, Labour Market Frictions, and Endogenous Two-Sided Heterogeneity

This paper presents a stylised framework to examine how skill-biased technological change and labour market frictions affect the relationship between economic expansion and unskilled unemployment. The first part of the analysis focuses on the investment decisions in skill-acquisition and technology adoption activities faced by workers and firms in response to the introduction of an innovative technology. The second part examines how endogenous two-sided heterogeneity in the labour market affects the macroeconomic outcomes in terms of unemployment, technological diffusion, and economic expansion. To conclude, the framework is used to discuss the effects of alternative forms of policy intervention on agents' investment decisions and on the macroeconomic outcomes.

Optimal taxation and the skill premium

The stylized facts suggest a negative relationship between tax progressivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demographic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.

Beyond Intermediates: The Role of Consumption and Commuting in the Construction of Local Input-Output Tables

It is a well-established fact in the literature on simulating Input-Output tables that mechanical methods for estimating intermediate trade lead to biased results where cross-hauling is underestimated and Type-I multipliers are overstated. Repeated findings to this effect have led to a primary emphasis on advocating the accurate estimation of intermediate trade flows. This paper reviews previous research and argues for a qualification of the consensus view: When simulating IO tables, construction approaches need to consider spill-over effects driven by wage and consumption flows. In particular, for the case of metropolitan economies, wage and consumption flows are important if accurate Type-II multipliers are to be obtained. This is demonstrated by constructing an interregional Input-Output table, which captures interdependencies between a city and its commuter belt, nested within the wider regional economy. In addition to identifying interdependencies caused by interregional intermediate purchases, data on subregional household incomes and commuter flows are used to identify interdependencies from wage payments and household consumption. The construction of the table is varied around a range of assumptions on intermediate trade and household consumption to capture the sensitivity of multipliers.

Confidence and Competence in Communication

This paper studies information transmission between an uninformed decision maker (receiver) and an informed player (sender) who have asymmetric beliefs ("con fidence") on the sender s ability ("competence") to observe the state of nature. We fi nd that even when the material payoffs of are perfectly aligned, the sender s over- and underconfi dence on his information give rise to information loss in communication, although they do not by themselves completely eliminate information transmission in equilibrium. However, an underconfi dent sender may prefer no communication to informative communication. We also show that when the sender is biased, overconfi dence can lead to more information transmission and welfare improvement.

Arch and Structural Breaks in United States Inflation

United States Phillips curves are routinely estimated without accounting for the shifts in mean inflation. As a result we may expect the standard estimates of Phillips curves to be biased and suffer from ARCH. We demonstrate this is indeed the case. We also demonstrate that once the shifts in mean inflation are accounted for the ARCH is largely eliminated in the estimated model and the model defining expected rate of inflation in the New Keynesian model plays no significant role in the dynamics of inflation.