Thursday, March 30, 2006

French Unemployment - Some Conjectural Responses to Prof. Romer

1. Students across France have been protesting a new law that would make it easier for French employers to fire young workers. How might the passage of such a law affect the unemployment rate and the labor force participation rate? Why?

ANS: The passage of the law would increase unemployment rate because, as more young people are likely to fired the labor force participation would increase - as previously discouraged workers might fancy a chance of finding a job which was earlier filled by one of their contemporaries. So job search increases --> LFPR increases --> unemployment increases. But this is not a bad thing -- a more dynamic labor market leads to a higher probability of better fits between employer and employee that leads to higher output.

2. France has an unusually high minimum wage. Consider two groups: young people who have completed high school and drop outs who haven’t. Which group would you expect to have more unemployment because of the minimum wage? Would you expect this unemployment to be short-term or long-term?

ANS: A minimum wage results in firms internalizing a productivity threshold, upon crossing which it hires newer people. Arguably, high school completed individuals have "higher" productivity than drop outs. So, a minimum wage might result in the lower quality individuals being "non employable" given the productivity standards that firms have. Of course, I assume rather naively, that wages are equal to the marginal product of their respective labor. In presence of continued minimum wages, one might observe a remarkable divergence in productivity between high school educated and drop outs - given the ex-ante fact of high school educated get employed and learn on the job; while the drop outs end up with dynamic decline in productivity over time.

(3) Suppose the poor labor market for French youth encourages French students to stay in school longer than they would otherwise choose to, earning postgraduate degrees. What long-term effect would this have on the French economy?

ANS: All else equal, the failure to enter into the labor force results in lowered output and lowered per capita income. However, an alternate scenario is that increased post-graduate degrees and students might result in higher levels of innovation and, inevitably, a transition in the economy towards skill-biased production mechanism & less labor intensive. On the whole, a cleavage in the society between the "skilled" and the "unskilled" seems inevitable.

Monday, March 20, 2006

Indentured Labor and Indian Economic Development

It is widely acknowledged that the biggest problems vis-a-vis the functioning of the Indian state - in terms of taxation, jurisdictional capacities and provision of public goods -- in the future comes from how the BIMARU states evolve/devolve relative to the others. (BIMARU = Bihar + Madhya Pradesh + Rajasthan + Uttar Pradesh. BIMARU is a sly abbreviation which means, literally, "sickly" in Hindi/Awadhi/Maithili etc.). (Note, the BIMARU description subsumes the newly founded states of Jharkand, Uttaranchal, Chattisgarh. It also doesn't include Orissa - perhaps the most blighted of all the above states.) Travelling in the second-class compartment in the interiors in any of these states reveals the institutional collapse, the abysmal human development index and all in all a pervasive sense of deprivation.

(As an aside, just finished reading "The Elusive Quest for Growth" by Professor William Easterly - after reading Professor Sen's B+/A- review of Easterly's new book in the Foreign Affairs. Easterly writes of something macabre called "Rawlings Necklace" - to a milder extent, these states form a bureaucratic equivalent of the Rawlings Necklace.)

To a very large extent, the problems that lie there are due to (a) systematic institutional malfeasance and under-investment in human capital and over-investment in strategic, and expedient, white-elephant projects that follow the political cycle (b) an overabundance of natural resources that led to a quid-pro-quo nexus between the Delhi based technocrats and the local elites who allowed minerals/resource extraction in so far as the local power structures were not disturbed. Most of this analysis is well known and largely agreed upon to varying degrees from the Jaswant Singh led Right to the Prakash Karat led Left.

My conjecture is that there is a deeper historical problem in terms of institutional quality in these parts of India -- that cannot be just limited to the last 50 years. An obvious start in this regard is the primary historical evidence of this presented in the difference-in-difference based estimators by Professors Banerjee & Iyer who investigate the impact of property rights regimes on subsequent public investments. In essence, they find that extractive property rights regimes in certain areas results in systematic lowered public goods investment. To my best knowledge, there have not been other such rigorously done empirical studies that study Indian institutional quality and their effect on the concommitant economic growth.

Following is possibly an alternative test, along the lines of the fun and insightful paper by Professor Nathan Nunn of the University of British Columbia. Many of the indentured laborers taken from India to Fiji, South Africa, Mauritius, the Carribean etc were from (a) the economically backward classes (note caste distinction is unclear) (b) they were struggling under the yoke high usury and exorbitant credit market rates (c) the domestic agricultural lands were out of their hands. Data on the number of migrants extracted from India over a period of one-and-half centuries is available in libraries across Australia - as far as I know.

The effect of institutional quality (IQ) on economic growth (G) is typically tested in the
G_{it} = \alpha + IQ_{it} + \epsilon_{it}
framework. However the Corr(\epsilon_{it}, IQ_{it}) is not equal to zero. i.e., the unaccounted factors of growth, subsumed in \epsilon_{it} are most likely driving IQ_{it}.

So, one needs a valid instrument. A valid instrument for Institutional Quality must fulfill two criterion. It must not be correlated with the epsilon terms (i.e., not correlated with drivers of present economic circumstances), and it must be correlated with institutional quality. My sense is that, and aided by Nunn's claim and demonstration, is that locales of India where indentured labor was extracted were precisely those where extractive institutions were already in place. I think, a valid instrument for institutional quality is thus number of indentured laborers extracted over the 1700s & 1800s & early 1900s as an instrument for institutional quality.

I do not know what the results might be- but have a suspicion that the results might validate the Banerjee-Iyer results.