The mysterious rise of absenteeism in Norway

Labor markets have local particularities that are sometimes rather difficult to explain. For example, US workers get little vacation, yet often do not even use it fully, while their European counterparts use all of their much longer off-time. Or, Italians have the right to strike, which they interpret as an obligation in the transport industry, where if in a particular year there are strike days left, they quickly find a reason to be unhappy before New Year. Where these quirks originate is difficult to tell, so it is of particular interest to study one that recently appeared.

Erik Biørn, Simen Gaure, Simen Markussen and Knut Røed absenteeism in Norway has notably increased in the past two decades. Nowadays, 6.5% of hours are lost, and this despite better health and no change in the legal or policy environment. Studying this requires excellent data, which is not available. The authors use data on long-term (more than 16 days) absentees, which should help uncover part of the story. They find that absenteeism rises with age, except for a hump for women in their twenties (pregnancies?), which should not be a surprise. Once adjusted for age, they also find that absenteeism has increased within individuals, and this even more than in aggregate. This means that the aggregate outcome is not due to new and lazy cohorts. Also, workers that had higher tendencies towards being absent have been sorted out of the labor force. Unless the short-term absentees dramatically reverse these results, the puzzle about this rise in absenteeism remains.

Are New Economic Geography models any good?

The New Economic Geography Model pioneered by Paul Krugman has revolutionized our thinking about the location of factors of production, yet there has so far been little empirical support for this theory. Empirical tests suffer from massive endogeneity problems, and simulations seem to replicate very poorly the data, in part because they use very sparsely the data. But combining both approaches coax out their advantages while not revealing too many of their disadvantages. One attempt was by Kristian Behrens, Giordano Mion, Yasusada Murata and Jens S├╝dekum, who estimate a structural model and then simulate border effects.

Eckhardt Bode and Jan Mutl take a somewhat different approach. They take a fully specified structural model, take a Taylor expansion around the empirical steady-state, and then estimate the resulting reduced form. And the model is soundly rejected on US county data, mostly because migration does not vary in the way the model would want. Not imposing theoretical restrictions improves the estimates considerably, which is not reassuring.

Does this mean the NEG models can be dumped now? Not yet. They still gives us good insight, and if they fail on migration, they appear to be holding rather well with regard to the links between wages and good prices. And the empirical methods can certainly be improved, especially regarding spatial autoregression.

My jaw drops at all the jaw dropping

Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis with a previous life as a prominent economic theorist, made a statement a few days ago that raised a surprising amount of controversy on the blogosphere. He said:

Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent.

To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.

This lead a few bloggers to questions his sanity: Employment, Interest and Money (I), Angry Bear (I), Economist's View (I, II, III), Nick Rowe (I, II), and even Paul Krugman (I). Surprisingly, Kocherlakota has few defenders: Steve Williamson (I) and only a few comments in the posts mentioned above.

Kocherlakota is clearly taking about a long run. And if the Fed wants to maintain low nominal interest rates, it can only do so, again this is a steady state, by have a negative inflation rate. This is not only the Fisher equation, but also the result of countless monetary models whose optimal monetary policies are the Friedman rule. In fact it is damn difficult to avoid the Friedman rule even in models with price rigidities. And remember, Kocherlakota was taking about the long run, and in the long run, money in neutral. Not superneutral, though, as the Friedman rule shows.