The New Paradigm Papers of the Month of January

Inflation in Times of Overlapping Emergencies: Systemically Significant Prices from an Input-output Perspective

Isabella M. Weber, Jesus Lara Jauregui, Lucas Teixeira, Luiza Nassif Pires

Against the backdrop of the Russian War on Ukraine, the climate crisis, pandemic, and other geopolitical disruptions, supply shocks have become frequent again and inflation is rising. In the context of such overlapping global emergencies, it only seems likely that price shocks will become a more frequent phenomenon. Where prices have risen, the increase has been highly sectoral in the initial phase before emerging throughout the broader economy. This raises the question of how sector-specific shocks are related to overall price stability and whether shocks in some sectors matter more for general price stability than others. A recent contribution by Isabella Weber et al. sets out to develop a method to identify industries and prices which present systemic vulnerabilities for monetary stability in the US – which are, in other words, systemically significant.

The authors use a Leontief-based input-output model in which they simulate price shocks to identify systemically significant prices. In doing so, they depart from the view that inflation is exclusively macroeconomic in origin, and the key variables to control inflation are the quantity of money and government spending. The authors find that the pre-pandemic average price volatilities and the price shocks in the COVID-19 and Ukraine war inflation yield an almost identical set of systemically significant prices. The sectors with systemically significant prices fall into three groups: energy, basic production inputs other than energy, basic necessities, and commercial and financial infrastructure. While today’s institutions of economic stabilization are grounded on the aggregative macroeconomic approach, the authors argue that that in times of overlapping emergencies, economic stabilization needs to go beyond monetary policy and requires institutions and policies that can target these systemically significant sectors via micro policies.

Employing the unemployed of Marienthal: Evaluation of a guaranteed job program

Maximilian Kasy, Lukas Lehner

A policy tool aimed at addressing structural labor market weaknesses, the Job Guarantee has increasingly gained attention among policy makers. While there exists little evidence on the impact of such programs, in particular for rich countries, a few exceptions exist. France and Austria have introduced rather unorthodox state-supported policies to target prevailing levels of long-term unemployment. In October 2020, the Public Em- ployment Service for Lower Austria started piloting a guaranteed job program in the Austrian municipality of Gramatneusiedl with the aim to eradicate long-term unemployment in the region while simultaneously improving wellbeing, health and social outcomes among the participants. First evaluations from the pilot have been published recently in a contribution by Oxford economists Maximilian Kasy and Lukas Lehner. They find strong positive impacts of program participation on participants’ economic (employment, income, security) and non-economic wellbeing (social recognition, time structure, social interactions, collective purpose). At the municipality level, they find a large reduction of long-term unemployment, and a slightly attenuated reduction of total unemployment. There is also evidence of positive anticipation for future program participants in the form of subjective wellbeing, status and social inclusion, compared to ineligible control-town individuals.

Technological and Organizational Change and the Careers of Workers

Michele Battisti , Christian Dustmann, and Uta Schönberg

What happens when new technologies become established in the workplace? A new paper by Michele Battisti, Christian Dustmann, and Uta Schönberg investigates the effects of technological and organizational change (T&O) on jobs and workers. To do so, Battisti et al. combined various data sources from Germany spanning 18 years, including survey data from thousands of companies and registry data from the social security system, which can be used to trace the career paths of employees. Contrary to public assumption, the researchers find that – while T&O indeed reduces firm demand for routine relative to abstract task-based jobs – the affected employees generally remain employed in the company and do not face higher probability of lower earnings growth than unaffected workers. Rather, firms that adopt T&O offer routine workers re-training opportunities to upgrade to more abstract jobs. Companies that are particularly good at placing their own employees in more demanding positions rather than letting them go are those that regularly train young people.

However, the authors identify one important exception to their findings: Although those holding routine jobs at T&O implementation do not lose out on average, workers over the age of 55 are under an increased risk that technological and organizational change will result in a permanent move into non-employment, regardless of the tasks they performed in the firm prior. Moreover, not only does T&O increase such transitions for older routine jobholders, but for all older workers including those in abstract jobs and those with a university degree. As a possible reason, the authors suggest that there may be lower incentives to invest in new skills both from the employer and employee side due to a shorter amortization period.

The findings not only highlight the possibilities to cushion T&O’s adverse effects on the workforce through in-firm training, they also have implications beyond the labor market. „If economic factors do indeed play an important role in explaining the recent rise of populism, then institutions that can shield vulnerable workers from the possibly negative consequences of technological progress (and globalization) may also have far-reaching political consequences.“

Managing the distributional effects of climate policies: A narrow path to a just transition

Francesco Vona

Against the backdrop of the accelerating climate crisis and rising inequality, reconciling the social and environmental goals of public policies has received an enormous attention in the current debate on the green transition. However, to date, resilient data on how to design a policy package to achieve a “just” low-carbon transition is still lacking. In a recent publication, Francesco Vona revisits the debate on the distributional effects of climate policies and the just transition and outlines policy packages that mitigate the distributional effects of climate policies and, at the same time, have a high political acceptability. Departing from standard welfare analysis, the author uses the broader mechanisms of multidimensionality, adjustment dynamics and multiple market failures in his assessment framework. Using this framework, the paper then compares the performance of five green policy packages (rebates, environmental tax reforms, green deal plans, place-based policies, progressive green subsidies) with regards to their level of political acceptability. While there is no policy package emerging as preferred, the author finds the green deal plan to appear as the most sensible option, especially when combined with social goals such as retraining for fossil-fuel workers.

Alongside other broader strands of literature the author also finds evidence that the existing level of inequality, and not only the expected distributional effect of climate policies, is a major constraint for the successful implementation of climate policies. This implies that the approval of ambitious green policy packages may need to be combined with general reforms of the tax system; for instance, an enhanced level of tax progressivity.