Tag Archives: economics

New research on the links between agriculture and economic growth

New research looks at the links between agriculture and economic growth

rice cultvation in India

Dr Camille Boudot-Reddy, Lecturer in Economics, is working on research entitled Watering the Seeds of the Rural Economy: Evidence from Groundwater Irrigation in India, evaluating the impact of access to groundwater irrigation on the rural economy.

Camille says, “We find that villages with access to groundwater witness a significant boost in agricultural productivity as well as an improvement in consumption (captured by an increase in household assets). Additionally, these villages draw in daily waged work from surrounding non-irrigated areas as well as a large amount of migration from poorer Scheduled Caste groups.”

rice cultivation

Groundwater is the largest source of irrigation water in India, however in recent decades the country has witnessed a depletion of its aquifers and managing this resource is high on the policy agenda. Camille’s research provides an understanding of the impact of groundwater irrigation, a critical component to the current debate.

Further information available in the paper here, and in this policy blog post.

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Research with Impact: Economics, Mathematics and Statistics

Through the REF 2021 rankings, we were pleased to see our impact results in Economics, Maths, and Statistics demonstrate a significant improvement from 2014, with 33% of our impact work ranked world-leading, 50% internationally excellent, and the remaining 17% internationally recognised. Discover our research case studies below. Visit the REF website for full details.

Demographic structure and economic trends: planning for Europe’s financial future

According to a 2019 OECD report, Fiscal Challenges and Inclusive Growth in Ageing Societies, ‘The number of people over 65 for each working-age person will at least double in most G20 countries by 2060′. This is important because age groups differ in their savings behaviour, productivity levels, labour input, contribution to innovation, and investment opportunities. Research by Professor Yunu Aksoy and Professor Ron Smith offered new insight into the specific nature of these differences as well as providing an innovative theoretical model for predicting future trends. Taken up by central banks around the world, this work has contributed to an increased focus on demographics amongst the global central banking community and influenced fiscal policy decisions in a number of countries.

Notably, a 2017 secondment to the Bank of Spain allowed Professor Aksoy to develop his research, to publish alongside Bank economist Henrique Basso, and to help answer the question of ‘how to adapt fiscal and social policies to demographic changes’, identified by the Bank’s head of research as ‘one of the most important issues’ that the Bank is currently facing. Basso went on to sit on a European Central Bank taskforce charged with investigating the future of pension schemes in the EU (a multi-billion-Euro question), which drew directly on Professor Aksoy and Professor Smith’s work to inform its research and recommendations. The work has also been invoked in German debates around immigration (where a recent policy change aimed to facilitate the entry of young, skilled workers to reinvigorate the country’s economy).

Making the right decisions for patients: competition, choice and inequality in publicly-funded healthcare

Successive UK governments have emphasised the importance of patient choice as a means for service users to voice and realise their preferences, and as a way to encourage competition in markets for publicly-funded healthcare. Dr Walter Beckert’s work on patient choice has challenged the assumption that increasing competition helps to improve care provision, showing that competition can reinforce existing inequalities between demographic groups and that patients often turn for guidance to primary healthcare practitioners who have competing priorities of their own.

Dr Beckert is an academic panel member for the Competition and Markets Authority (CMA) and his research has shaped the methodology used by the CMA to analyse the impact of hospital mergers, therefore influencing each of the eight hospital merger decisions made by that body since its first in 2013 (determining the allocation of at least £560 million in public money). More broadly, Dr Beckert’s work with the Health Foundation, a campaigning charity, has helped to change opinion within the sector as to the value of competition and has contributed to a strategic shift away from competition and towards a more collaborative approach to service delivery, as realised in the 2019 NHS Long-Term Plan. Health Foundation CEO Jennifer Dixon points out that ‘the reach of Walter’s work therefore potentially affects all the population in England – circa 55 million’.

New strategies for portfolio management: applying new estimates of equity yields and equity duration

Accurate estimates of expected rates of returns and investment time horizons are crucial for investment managers when it comes to assessing the risk and return characteristics of equity portfolios. Collaborative research originated by Birkbeck’s Dr David Schröder and continued in partnership with Florian Esterer, an asset management professional, proposed a new method for predicting returns and estimating risk on individual shares, using earnings forecasts created by analysts across the market. They also proposed for the first time the concept of equity duration, which sits alongside the well-established idea of bond duration (a measurement of sensitivity to interest rate changes).

Analysts and investment managers at asset management firms across the financial sector took up Schröder and Esterer’s work, featuring the research in internal research reports and in some cases inviting them in to deliver in-person explanations. Feedback from the Head of European Qualitative Research at one of these major international firms described Schröder and Esterer’s research as ‘crucial’ in reframing its approach ‘to measuring the duration of global stocks’, demonstrating direct impact on the billions of pounds of assets that this firm holds under its management. Esterer was also able to put the research into practice at his own workplace, which also manages tens of billions in equity holdings.

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Ageing Populations and Macroeconomy

Yunus Aksoy smiling into the camera.Professor Yunus Aksoy shares how ageing populations impact the workforce and discusses possible policy responses.

Ageing populations are a global phenomenon. They are caused by two main trends:

  1. Fertility decline: the number of children per woman in a population has been slowly decreasing since the 1990s.
  2. Declining mortality rates: people are living longer due to medical advances and lifestyle changes.

These demographic structure changes have wide-reaching impacts in the short and medium/long term. However, the fact that their impact is not visible day-to-day means that they are relatively less discussed in everyday policymaking. My work with my colleagues Professor Ron Smith at Birkbeck, Dr Henrique Basso at the Bank of Spain and Dr Toby Grasl investigates the impact of ageing populations on macroeconomy in general and brings it to the table in policy circles. I am very pleased to see that the issue has started to be taken seriously by many international organisations like the IMF, ECB, World Bank, BIS and numerous central banks. Our research has had significant impact on the debate.

Economists tend to concentrate on growth, inflation and unemployment rates, and what Central Banks and Finance Ministries can do to stabilise the economy over the short term. However, there are other deep and slowly changing forces affecting the economy about which policymakers can do little. The weak recovery after the global financial crisis has sparked renewed interest in these longer term forces, including demographics, which had often been ignored. As individuals, we are often aware of the adverse effects of ageing, as the years go by. Societies can suffer similar adverse effects from ageing, and most developed economies are ageing.

According to the UN Population Division, almost every developed economy has seen a decline in fertility rates and an increase in life expectancy. As a result, the average proportion of the population aged 60+ is projected to increase from 16% in 1970 to 29% in 2030, with most of the corresponding decline experienced in the 0-19 age group in 21 OECD economies.

In the 1960s, Simon Kuznets suggested that a society consisting of consumers, savers and producers can grow in a sustainable way if the demographic structure was a rough pyramid. Larger at the bottom, where there are the youngest – up to the age of twenty or so – the working age next – then at the top a smaller group of older people. The pyramid is now turning upside down, with the bulge at the top.

Why is the demographic structure relevant?

Our research has examined the impact of demographic structure on economic activity, productivity, and innovation. Demographic structure may affect long and short-term economic conditions in several ways. Different age groups have different savings behaviour; have different productivity levels; work different amounts (as the very young and very old tend not to work); contribute differently to the innovation process; and have different needs. Therefore, changes to the demographic structure of a society can be expected to influence interest rates and output in both the long and short-term.

Our analysis shows that the changing age profile across OECD countries has economically and statistically significant impacts and that it roughly follows a life-cycle pattern; that is, people who are likely to be dependent on state or other forms of support – generally the very young and the old populations – seem to reduce economic growth, investment and real returns in the long-run.

Demographic structure also affects innovation; the economy is less likely to develop and/or patent new innovations/inventions. Similarly, productivity, which is driven by innovation, is positively affected by young and middle aged cohorts and negatively by the dependant young and retirees.

Demographics, innovation and medium-run economic performance

When people expect to live longer, they save more for their retirement and consume less, increasing demand for investment products and causing a decline in their returns. This provides one explanation in the steady decline in real interest rates in OECD countries since the 1980s. But it leaves us with a puzzle. A decrease in long-term interest rates should increase investment, but that is not what we observe. Our estimates show that long-term investment is declining. Our solution to the puzzle is that aging has also lowered the productivity of investment, reducing the incentive to invest, because the rate of ideas production and innovation, mainly done by the young, has reduced.

With fewer younger people in the population, there will be less creativity and ideas. Thus, while the cost of investment finance may be lower due to higher savings of the aging population, there are not enough ideas worth capitalising on and so long-term investment and real output declines. An ageing population also throws up social challenges, such as the provision of care for the elderly and how this can be supported.

Are there solutions?

While immigration may address the shortage of workers in the middle of the age categories, the political problems it raises are such that governments are usually unwilling to develop immigration policies that would truly address the issue. Furthermore, as populations are aging globally, this is not an adequate long-term solution. Giving more childcare support for young parents could help increase fertility rates and this is also related to building human capital starting from a very young age.

Increases in productivity by investing in human capital, education and skills is of crucial importance, as is increased funding for research and development that could bolster a  generation of new ideas and create new innovations and investment opportunities.  At Birkbeck, we have long understood the importance of lifelong learning that is directly associated with productivity gains for the economy, which in the current climate could help to compensate for a reduced workforce and staggered productivity. Robots and AI could also address the productivity/labour supply challenges, especially if we reach a point where machines can generate innovations and robots might be used more to fill gaps in the work force and provide care for the elderly, but it might make more people unemployed.

A typical challenge is that politicians are often short sighted. Long-term investment in order to boost human capital and productivity would not be a top priority for an incumbent politician in the short term, despite the transformative effects they could have for the generations to come.  Often, what we think is happening now is the slow moving changes that started a long time back, so a long-term view is essential to tackle the economic impact of ageing populations to address the future.

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The economics of public sector employment

Our Dr Pedro Gomes has been researching public employment for nearly fifteen years. He shares why it is so important to understand how the public sector works and the key findings from his research.

Public employment is a significant consideration in any national economy. In developed countries, public employment makes up 15-30 percent of total employment and represents the large majority of government consumption. In the US, for example, the government spends 60 percent more on general government employees than on the purchase of intermediate goods and services.

The public sector also operates according to different rules than the rest of the economy, as governments do not face the same competitive forces, nor have the same objectives as private sector firms.

Considering that the public sector is responsible for delivering many key services in our society, from education to healthcare, it is essential to have a good understanding of how its employment operates. The recent COVID-19 pandemic has again put focus on the importance of having a modern public sector, with an employment force prepared to face difficult, unpredictable and unlikely crises, but its aftermath with high public debt, also puts emphasis on the costs of the public sector workforce.

Below are three of the key findings from my research into this area.

Governments hire disproportionately more educated workers

In the paper Public Employment Redux, my colleagues Pietro Garibaldi, Thepthida Sopraseuth and I explore the phenomenon whereby governments hire more educated workers than the private sector.

We noticed that governments hire very few workers with low qualifications. In the US, for example, one third of workers have a masters or a PhD qualification, and one third of these work for the government.  We documented empirical evidence for this education bias in the US, UK, France and Spain.

There are a few different explanations for this trend:

  • The government needs more educated workers to provide its highly technical goods and services, such as healthcare, education and the judicial system.
  • Higher educated workers take more of a wage penalty to work in the public sector, so are relatively less expensive to hire.
  • Public sector jobs that require low qualifications pay more than similar level jobs in the private sector, so they attract workers with more qualifications.

Within our model, we found that the technological skills needed for the public sector was the main driver of the disproportionate representation of educated workers, but that wage setting and excess underemployment explain 12-15 percent of the education bias.

Unlike other sectors, the government is able to set wages more freely, as the cost is financed from tax revenue. If the government chooses to pay very high wages, too many people will choose a skilled role in the public sector as their first choice. However, if wages are too low, too few workers will want to join the government.

In reality, a balance is needed, so the government can always attract the workers it needs, without leading to underemployment in the public sector.

Nepotism in hiring practices allows friends and family to ‘jump the queue’ for government roles

Public sector hires are often based on nepotism: Scopa (2009) found that the probability of working in the public sector is 44% higher for individuals whose parents also work in the public sector, while Colonnelli et al. (2020) found that politically connected individuals in Brazil enjoy easier access to public sector jobs.

In my research into this topic with Andri Chassamboulli, we suggest that workers can use their connections to find jobs in the public sector faster. We created a search and matching model with private and public sectors to test this theory.

Surprisingly, we encountered some positive side effects to nepotistic practices. Conditional on high public sector wages, our findings suggest that hiring through connections reduces unemployment, as people who do not have connections will instead find roles in the private sector. Conversely, if the government sets the optimal wage possible for the successful running of the public sector, nepotism is reduced.

We conclude, therefore, that nepotism is a symptom of a problem in the public sector, rather than the disease, and the problem is created when wages are set too high.

Women prefer working in the public sector

In most countries, the public sector hires disproportionately more women than men. My colleague Zoë Kuehn and I developed a model to try to make sense of this imbalance.

Our findings show that the gender imbalance in the public sector is driven by supply, meaning that women self-select to work in the public sector more than men. One explanation for this is that the type of job carried out by the government is coincidentally the type of work preferred by women, such as healthcare and education. However, even discounting these sectors, women’s public employment remains 20-25% higher than men.

This remaining imbalance can be explained by the different characteristics of public and private employment. The gender wage gap and working hours are both reduced in the public sector, making this an attractive choice for women who may be factoring family commitments alongside work opportunities in their choice of employment. Alongside reduced working hours, the public sector offers additional benefits such as more sick days, flexible hours and employer-provided childcare, ensuring an overall better work-life balance in the public sector.

 

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