What the ongoing movement of workers out of agriculture means for economic policy

By Taylor Jaworski, Queen’s University

Structural transformation is the long-run process that moves workers (and the output they produce) from agriculture to the manufacturing or service sectors. Empirically, this process is characterized by a declining share of employment (and output) in agriculture as income per capita rises. The flip side of the transition out of agriculture is the increasing then decreasing importance of manufacturing and the increasing importance of services. The figure below, which is taken from a recent survey by Berthold Herrendorf, Richard Rogerson, and Akos Valentinyi, illustrates this pattern for several currently developed countries since 1800.


Structural Transformation in Developed Countries Since 1800

Structural transformation poses several challenges for policymakers. To see why, a useful starting point is the large literature in economics that describes the mechanismsRead More »

Understanding How Technological Change Affects the Wage Premium of Skilled Workers

By Wenbo Zhu, JDI Student Fellow, Queen’s University

Some technological advancements are skill-complementing, meaning that they tend to increase the productivity and demand for skilled workers. Other technological advancements are skill-replacing, meaning that they tend to reduce the demand for skilled workers and raise the productivity and demand for unskilled workers. Electronic computers are typically considered a prime example of skill-complementing technologies, whereas assembly lines and the use of interchangeable parts in the manufacturing industry are classic examples of skill-replacing technologies.

Disentangling the impacts of each type of technology is important for understanding of the impact of technological changes on labor markets. Read More »

International Trade with Heterogeneous Firms: Policy Implications

By Beverly Lapham, Queen’s University

Researchers and policymakers have long recognized that firms within an industry differ along many dimensions (size, productivity, participation in international markets, etc.). However, firm-level empirical analysis and rigorous theoretical models with firm heterogeneity have only been developed in the last fifteen years or so. Such analyses improve our understanding of how these differences affect firms’ performance in global and domestic markets and their responses to trade liberalization.Read More »

Globalization and the law of one price: Lessons from the history of price convergence

gregorsmithphotoBy Mario Crucini, Vanderbilt University, and Gregor Smith, Queen’s University

Read the full article on VoxEU.org

Why do we invest in transportation infrastructure and when does it work?

Appalachian Development Highway System

By Taylor Jaworski, Queen’s University

Calls for renewed infrastructure investment have been prominent issues in recent election cycles in the United States and Canada. Bernie Sanders called for $1 trillion in spending compared with $48 billion in President Obama’s first term and a proposed $73 billion to end his second term. Here in Canada, Prime Minister Justin Trudeau promised an additional $60 billion in new infrastructure spending. These proposals have received the endorsement of many economists, including Larry Summers in a recent Washington Post op-ed and Paul Krugman in the New York Times earlier this year.

Crucially, policymakers need to clarify the objectives of infrastructure spending. On the one hand, is the goal to provide short- or medium-run stimulus to ailing economies? If so, then knowing the magnitude of the fiscal multiplier is essential. A survey and more recent work on the fiscal multiplier by Valerie Ramey of UC-San Diego is available here, here, and here. On the other hand, is the goal to take advantage of historically low interest rates and use improvements in transportation infrastructure to promote long-run economic growth? In this case, economic history together with recent advances in empirical economics can provide a window into the long-run benefits of investment in new highways, bridges, and rail infrastructure.Read More »

How effective is unconventional monetary policy in Canada?

michal2By Michal Ksawery Popiel, JDI Student Fellow, Queen’s University

In normal times, the Bank of Canada stimulates the economy by lowering the target for the overnight interest rate, encouraging borrowing and spending. However, interest rate movements are restricted below by an effective lower bound (ELB) — a point at which investors would withdraw their money from banks because they prefer to hold cash for a return of 0 percent. Once it is reached, central banks must turn to other, unconventional measures to influence economic conditions.Read More »

Doctoral Fellow develops methods to better understand regional recessions

sergei2Zooming-in without losing focus – understanding regional recessions and the importance of spatial interactions

By Sergei Shibaev, JDI Student Fellow, Queen’s University

Here is the scenario – you are an interested party (e.g. regional policy maker or researcher) in a small regional division in Canada (e.g. Central Okanagan Regional District of British Columbia).  You need to know if your region is likely to become economically at-risk or potentially distressed separately from the national economy, and to do so you require an informative assessment of any synchronicities (i.e. co-movements) with other regions in the country regarding how your small region’s economy has evolved in the last decade. Furthermore, you have existing knowledge regarding several types of connections to other regions that you know are important for your local economy (e.g. your largest regional trading partners), and you wish to explore and compare them through time. I develop and investigate a tool that is capable of learning by itself about these types of phenomena in a unified framework that collectively models a large number of small regions in a country.Read More »

Stop Tinkering with Mortgage Insurance Rules – Just Price It Right

indexBy Thorsten Koeppl, Queen’s University

The better way to use mortgage insurance is to use the existing system, but price the risks appropriately. There is currently no deductible on mortgage default losses, but the pricing of insurance does not fully consider the idiosyncratic default risk of the mortgage either. Risk-based premiums would increase the cost of the mortgages that add more risk to the housing system, since insurance costs for high risk mortgages are passed on by lenders to borrowers. Moreover, the government backstops mortgage insurers. A step in the right direction is to start charging a premium for this backstop to mortgage insurers up front, in order to pass on the potential cost of an extreme housing crisis to the mortgage industry. Notwithstanding, the premiums that are currently charged seem to grossly underestimate these costs.

Read the full post at the C.D. Howe Institute