Department of Economics

Blankenau Publications

The ‘Time-Release’, Crime-Reducing Effects of Education Spending, with Bebonchu Atems

Abstract: We analyze the response of violent and property crime to shocks in government education spending. The effects are significant, delayed, and persistent. This is consistent with government education spending working through the human capital channel in a time-release fashion. Back to Top

Sick and Tell: Analyzing the Effects of Explaining an Illness Related Employment Gap Using a Field Experiment, with Sheryll Namingit and Benjamin Schwab

Abstract: Using a randomized audit study design, we find that the job callback rate for applicants with a long, illness-related employment gap caused by cancer is lower than that of the newly unemployed but significantly higher than those whose employment gap is unexplained. Our results suggest that a credible explanation of an employment gap can substantially reduce its scarring effect and that workers with a previous illness do not face a uniquely large rehiring penalty. While previous research shows that jobless spells reduce employment prospects, our results and model provide new insight into the signaling process underlying those findings.
Back to Top

'Time-Release' Output Responses to Public Education Expenditures," with Bebonchu Atems

Abstract: This paper argues that output can respond to public education spending in a delayed and persistent manner through human capital accumulation. We refer to this as a ‘time-release’ response, reflecting that the output response grows as students exposed to increased expenditures sequentially enter the labor market. We first develop and calibrate a stochastic overlapping generations model to formalize the propagation of spending shocks over a long time horizon. We then empirically explore this time-release aspect of shocks to government education expenditures on output using U.S. state-level data for the period 1963-2016, and a panel structural VAR methodology. Consistent with the model, our empirical results show that the dynamic response of output to shocks to government education expenditures is positive, significant, and long-lasting.
Back to Top

Early Childhood Education and the Intergenerational Persistence of Earnings. With Xiayan Youderian

Abstract: We consider the extent to which cross-country differences in the intergenerational persistence of income can be explained by differences in government spending on early childhood education. We build a life-cycle model where human capital is accumulated in early, middle, and late childhood. Both families and the government can increase the human capital of young agents by investing in education at each stage of childhood. Ability in each dynasty and wages per unit of human capital are stochastic. Different realizations of these values and the resultant education spending histories generate a stochastic steady-state distribution of income. Government spending can reduce persistence by weakening the link between parental income and education spending for a child. Our results show that doubling early childhood spending in the U.S. to match levels in Norway and Denmark eliminates less than 9 percent of the gap in intergenerational income persistence. Increased government education spending in later childhood has almost no effect on persistence. Early childhood expenditures can have a larger effect when allocated to low income families.
Back to Top

Admission Standards, Student Effort, and the Creation of Skilled Jobs. With Yuan Gao

Abstract: We consider the implications of expanding enrollment through lower standards in a model with human capital externalities and a market failure. Workers and firms make uncoordinated investment choices prior to random matching. Investment choices depend on the expected productivity of the counterpart in production. The setting generates a potential human capital externality as a more skilled labor force induces more skilled job openings. Exploiting the externality is complicated by a market failure which may cause some workers to earn a degree but not put forth the effort required to become highly skilled. We show that beyond a threshold, increased enrollment through low standards can be poor policy. Policies which increase returns to agents and firms in best matches can improve outcomes.
Back to Top

“Government Education Expenditures in Early and Late Childhood,” with Casey Abington

Abstract: Human capital investment in early childhood can lead to large and persistent gains. Beyond this window of opportunity, human capital accumulation is more costly. Despite compelling evidence in support of this notion, government education spending is allocated disproportionately toward late childhood and young adulthood. We consider the consequences of a reallocation using an overlapping generations model with private and public spending on early and late childhood education. Taking as given the higher returns to early childhood investment, we find that the current allocation may nonetheless be appropriate. When we consider a homogeneous population, this can hold for moderate levels of government spending. With heterogeneity, this can hold for middle income workers. Lower income workers, by contrast, may benefit from a reallocation.
Back to Top

Industry Estimates of the Elasticity of Substitution and the Rate of Biased Technological Change Between Skilled and Unskilled Labor. With Steve Cassou

Abstract: We estimate the elasticity of substitution between skilled and unskilled labour and the pace of skill-biased technological change at the industry level. The data is compiled from the March extract of the Current Population Survey (CPS) from 1968 to 2006. Industry information provided by the survey is used to group workers into 13 industry categories and education levels are used to dichotomize workers as skilled or unskilled. We construct measures of the ratio of skilled to unskilled employment and the ratio of skilled to unskilled wages in each industry. Using a relationship implied by profit maximizing behaviour on the part of representative firms, this data generates estimates of structural parameters. We find considerable differences across industries in the elasticity of substitution between skilled and unskilled labour. Furthermore, while most industries have experienced skill-biased technological change, the pace of this change has varied widely across industries.
Back to Top

Industrial Dynamics and the Neoclassical Growth Model. With Steve Cassou

Abstract: This paper studies industry-level dynamics and demonstrates the ability of a modified neoclassical growth model to capture a range of empirical facts. The paper begins by using U.S. data to document skilled and unskilled labor trends within industry sector classifications as well as industry sector output trends. Using Current Population Survey data from 1968 to 2004, it is shown that the ratio of skilled workers to unskilled workers employed has risen in all industries. The absolute increase in this ratio was larger in the more skilled industries, while the growth rate was larger in the less skilled industries. Furthermore, using national income account data, it is shown that relatively high-skilled industries have accounted for an increasing share of output over time. A version of the neoclassical growth model is then constructed to match these observations. One important feature of this model is a structure that introduces new goods into the economy at each moment of time. The model is able to capture a rich set of labor market movements between sectors and between skill levels as well as changes in the relative output shares across industries, yet preserves many nice features of the neoclassical growth model.
Back to Top

Public Spending on Education and the Incentives for Student Achievement. With Gabriele Camera

Abstract: We build a model where homogeneous workers can accumulate human capital by investing in education. Schools combine public resources and individual effort to generate productive skills. If skills are imperfectly compensated, then in equilibrium students may under-invest in effort. We examine the effect on human capital accumulation of three basic education finance policies. Increased tuition subsidies may not be beneficial because they increase enrolment but they may lower the incentives for student achievement, hence the skill level. Policies directed at enhancing the productivity of education or making degrees more informative are more successful at improving educational outcomes.
Back to Top

Public Education Expenditures, Taxation, and Growth: Linking Data to Theory. With Nicole Simpson and Marc Tomljanovich

Abstract: Empirical studies have been unable to provide a consistent answer regarding the long-run relationship between government education expenditures and per-capita output growth. In this paper, we develop a simple endogenous growth model whereby growth is a function of both government education expenditures and taxation. Using pooled data from 1960 to 2000 for 83 countries, we test our growth equation and find that imposing the government budget constraint is imperative when estimating the relationship between expenditures and growth. Furthermore, we find a robust positive relationship between education expenditures and growth for rich countries when the method of finance is considered but no significant relationship for poor and middle-income countries.
Back to Top

Allocating Government Education Expenditures Across K-12 and College Education. With Steve Cassou and Beth Ingram

Abstract: As of the late 1990s, public support for education in the U.S. comprised approximately 7.1% of GDP; about 60% of that support was directed at K-12 education and the remainder at postsecondary (college) education. We study the output and welfare implications of public spending on both levels of education. The model we develop features agents who are heterogeneous with respect to ability and choose whether to pursue higher education. We show that higher-ability agents support greater expenditures at both levels. When public education expenditures are low, all agents prefer that the budget be dedicated solely to K-12 education and when expenditures are large enough, all prefer that some portion of the budget be allocated to college education. Spending increments beyond this threshold should be allocated disproportionately to college education. For some agents, utility as a function of subsidies is two-peaked so that large increases in tuition subsidies may be supported while smaller increases would not.
Back to Top

How Different is the Cyclical Behavior of Home Production Across Countries? With Ayhan Kose

Abstract: Despite the important role played by home (household) production in aggregate economic activity, our knowledge of the cyclical features of this sector is quite limited. This paper studies stylized business cycle properties of household production in four industrialized countries (Canada, the United States, Germany, and Japan). We employ a dynamic small open economy business cycle model that incorporates a household production sector. We use the model to generate data on home output, hours worked in the home sector, and hours spent in leisure. We find that in each country, home output is more volatile than market output while home sector hours are about as volatile as those in the market sector. In each country, leisure is the least volatile series. Leisure and home hours are countercyclical in all countries and home output is not highly correlated with market output. Home sector variables are generally less persistent than market variables and cross-country correlations related to home production tend to be lower than those of market production. These findings demonstrate that despite some well-known structural differences in labor markets, the cyclical features of home sector variables are similar across the countries we consider.
Back to Top

Labor Market Trends with Balanced Growth. With Steve Cassou

Abstract: Well-known stylized facts have led to widespread use of the balanced growth concept. Recently, labor market trends including rising educational attainment and share of the labor force considered skilled have cast doubt upon balanced growth as an appropriate baseline. This paper develops a version of the neoclassical growth model that allows these labor market dynamics to occur jointly with balanced growth in output. Along the balanced growth path, skill-biased technological change drives rising skill and education levels. Relative prices of goods adjust so that growth in the value of total output is unaffected by these labor market changes. Several plausible foundations for skill-biased technological change are offered.
Back to Top

A Simple Economic Theory of Skill Accumulation and Schooling Decisions. With Gabriele Camera

Abstract: We propose a model of schooling that can account for the observed heterogeneity in workers' productivity and educational attainment. Identical unskilled agents can get a degree at a cost, but becoming skilled entails an additional unobservable effort cost. Individual labor can then be used as an input in pairwise production matches. Two factors affect students' desire to build human capital: degrees imperfectly signal productivity, and contract imperfections generate holdup problems. Multiple stationary equilibria exist, some of which are market failures characterized by a largely educated workforce of low average skill. Policy implications are explored.
Back to Top

Public Schooling, College Subsidies and Growth.

Abstract: How does the mix of public expenditures across primary and secondary (K - 12) education and post-secondary (college) education influence economic growth? To address this, I build an overlapping generations endogenous growth model. Human capital is accumulated through compulsory K - 12 and through optional college education. Government uses tax revenue to provide quality in K - 12 schooling and to subsidize college tuition. When total expenditures are small, all funds should provide K - 12 quality. When expenditures are above a critical value, a positive share should subsidize tuition. The share should increase with total expenditures and with the degree of complementarity of human capital accumulated through the two types of education. Also, increased education spending is more likely to increase growth when a larger share subsidizes tuition.
Back to Top

Public Education Expenditures and Growth. With Nicole Simpson

Abstract: Empirical evidence is mixed concerning the effects of public education expenditures on economics growth. We explore this expenditure - growth relationship in the context of an endogenous growth model in which private and public investment are inputs to human capital accumulation. The positive direct effect of public education spending on growth can be diminished or even negated when other determinants of growth are negatively affected by general equilibrium adjustments. We show that the response of growth to public education expenditures may be nonmonotonic over the relevant range. The relationship depends on the level of government spending, the tax structure and the parameters of production technologies.
Back to Top

School Finance Litigation, Tax and Expenditure Limitations, and Education Spending: An Empirical Analysis. With Mark Skidmore

Abstract: Since the early 1970s, litigation in many U.S. states has led to education finance reform. Over the same period, many states have imposed new tax and expenditure limitations (TELs) on local governments. The imposition of a TEL may alter how local and state education expenditures change subsequent to court-mandated decreases in spending inequality. Similarly, the effectiveness of TELs in limiting local education expenditures may be influenced by reform. To better evaluate the effects of reform and TELs on education spending, this article considers them jointly and finds that reform has a negative effect on local own-source education expenditures only in the presence of TELs. In the absence of court-ordered reform, TELs decrease own-source expenditure, but the effect is less pronounced than when TELs are present with reform. When both are present, state government spending on education is higher. Also TELs and court-ordered reform independently increase state government spending on education.
Back to Top

The Interrelatedness of Tax and Expenditure Limitations and Education Finance Reform. With Mark Skidmore

Abstract: Since the success of Serrano v. Priest in California, at least 43 states have experienced legal challenges to their education financing formulas and in 19 states court rulings have forced changes in these formulas. A result of this litigation is a transfer of resources from districts with higher property tax values to those with lower property tax values. Over roughly the same time span, more than 30 states have imposed new restrictions limiting tax collections, tax expenditures or both (TELs) at the local level. There is evidence that the effect of education finance reform depends upon whether a TEL is in place. Thus to understand fully the impact of such litigation, one must consider whether reform makes the passage of a TEL more likely. In this paper we use data for all states in which referenda are possible over the 1978 – 1990 period to investigate whether TEL referendums are more likely to pass in states where courts have ordered education finance reform. We find that the probability of TEL success in a statewide election is significantly higher if the state has experienced education finance reform.
Back to Top

The Welfare Implications of Factor Taxation with Rising Wage Inequality. With Beth Ingram

Abstract: In recent decades, the structure of wages in the U.S. Economy has shifted to favor workers with college degrees over those without college degrees. Concurrently, there has been an increase in the share of the workforce that is college educated. We build an overlapping generations model in which skill-biased technological change drives both rising wage inequality and a rising percentage of skilled (educated) workers in the labor force. We explore the implications for agent welfare and for the distribution of income of different factor taxation choices. We find that higher tax rates on capital and lower tax rates on unskilled labor can yield steady-state welfare gains across a heterogeneous population, and that these gains increase as the economy experiences technological change that favors skilled labor. Moreover, these shifts in taxation can lower net wage inequality. Steady-state welfare gains, however, come at the expense of agents alive upon implementation.
Back to Top

Can Real World Interest Rates Explain Business Cycles in Small Open Economies? With Ayhan Kose and Kei-Mu Yi

Abstract: While the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies, much of the recent quantitative research that studies this mechanism concludes that it has little effect on output, investment, and net exports. We re-examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology. We begin with a small open economy business cycle model. But, rather than specifying the stochastic processes for the shocks and then solving and simulating the model to evaluate how well these shocks explain business cycles, we use the model to back out the shocks that are consistent with the model’s observable endogenous variables. Then we use variance decompositions to examine the importance of each shock. We apply this methodology to Canada and find that world real interest rate shocks can play and important role in explaining the cyclical variation in a small open economy. In particular, they can explain up to one-third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets.
Back to Top

A Welfare Analysis of Policy Responses to the Skilled Wage Premium.

Abstract: I build a model with heterogeneous agents which is consistent both with rising wage inequality across education levels and with an increasing relative number of college graduates. I use the model to investigate the welfare implications of policies which influence the structure of net wages. Each policy affects agents directly through taxes and subsides and indirectly as wages respond to changes in the relative supply of skilled and unskilled workers. I find that as wage inequality grows due to skill-biased technological change, policies which promote a more egalitarian wage structure can become increasingly acceptable to all agents and that for nearly all agents, education subsidies may be preferred to direct transfers as a means of decreasing wage inequality.
Back to Top