Background information

Some articles include "background information" boxes that provide further details on concepts, economic, scholarly, or technical terms, or on the historical background to an argument. All background information terms and concepts are brought together here in an alphabetized list—with direct links back to the corresponding article.


  • Data challenges in measuring the education performance of limited English proficient students

    High-performing students exit limited English proficient status sooner. Students are placed in mainstream classes when their academic performance is sufficiently high. Thus, the achievement gap with other students can be expected to widen over time as better performing students exit and lower performing students remain in the sample. With access to student longitudinal data, researchers can determine whether a student has ever been in limited English proficient status and not have to rely on the current limited English proficient status.

    Limited English proficient students are more likely to drop out of school than other students, and lower performing students are even more likely to drop out, so the measured achievement of limited English proficient students in upper grades may overestimate the true performance of that cohort. Ideally, researchers should examine dropout behavior along with test performance.

    Under federal law, limited English proficient students can be exempted from state assessments in their first year of enrollment and in later years can be offered test accommodations (such as taking content tests in their native language). Thus, researchers measuring student performance using scores on standardized exams should consider potential selection into the exam pool and the comparability of exams administered in different languages.

    Population surveys include data on limited English proficient individuals who never attended US schools. Data from nationally representative surveys of the US population can be used to examine adult outcomes (such as educational attainment and wages). Many limited English proficient adults in these data sets are migrants who arrived in their teens and later and never attended US schools, which limits the ability to link education or wage gaps observed in these data to US school policies.

  • Deadweight effects of employment subsidies

    In the literature on policy evaluation, a deadweight effect of a subsidy means that the subsidy does not affect beneficiaries’ behavior. Thus, beneficiaries’ decisions are unchanged in comparison to a hypothetical situation in which the subsidy is unavailable.

  • Defining and measuring mismatch

    Mismatch is defined as a situation where industries (occupations or locations) differ in the ratio of unemployed to vacancies. A balanced economy is one in which in each industry this ratio is equal to the ratio of total unemployed to total vacancies for the economy as a whole. An index of mismatch can be constructed by subtracting the fraction of unemployed from the fraction of vacancies in each industry and taking its absolute value. This measure gives the number of unemployed persons that would need to be reallocated across industries to make all industries have the same ratio of vacancies to unemployed.

    Lazear, E. P., and J. R. Spletzer. “The US labor market: Status quo or a new normal?” In: Annual Proceedings of the Jackson Hole Federal Reserve Conference, 2012.

  • Defining and measuring skills

    Much of the economics literature (including the literature on inequality) used proxies to measure skills—such as occupation, years of education, and qualification levels—because more direct measures of people’s skills were lacking. There is growing evidence, however, that such proxies are poor measures of true skills, particularly in cross-country comparisons. Because the quality of education systems varies so much across countries, a year of education in one country may produce a very different amount of skill than a year of education in another country (Hanushek et al., 2015).

    The good news is that substantial progress has recently been made in measuring skills more directly, both within and across countries. Generally, these measures have focused on cognitive skills which, at a fundamental level, can be captured by assessing people’s literacy and numeracy skills. Examples of large-scale and cross-country attempts to measure the cognitive skills of the adult population include the International Adult Literacy Survey (IALS), the Adult Literacy and Lifeskills (ALL) survey, and the Survey of Adult Skills, which is part of the OECD’s Programme for the International Assessment of Adult Competencies (PIAAC). IALS was conducted in three phases in 22 countries between 1994 and 1998. ALL involved seven countries in the initial round in 2002–2003 and five more in 2006. Round 1 of PIAAC covered 24 countries and regions between 2008 and 2013, and a further nine are being covered in round 2 between 2012 and 2016.

    These assessments are designed to provide reliable measures of skills proficiency that can be compared across countries, languages, and cultures. In addition, efforts have been made to make the assessments as comparable as possible over time (across different survey rounds) as well. That said, there have been some important changes across surveys in the skill domains assessed. IALS assessed three types of literacy skills (prose, document and quantitative literacy), while ALL replaced the assessment of quantitative literacy with assessment of numeracy and also introduced an assessment of problem solving. Finally, PIAAC merged the assessment of prose and document literacy and switched to a computer-based assessment of problem solving (“problem solving in technology rich environments”).

    In addition to these three surveys, the World Bank’s Skills toward Employment and Productivity (STEP) program is the first initiative to measure adult skills in developing countries and provides a direct assessment of reading proficiency and related competencies, similar to PIAAC. Between 2012 and 2014, STEP was run in 12 countries or regions.

    Sources: Hanushek, E. A., G. Schwerdt, S. Wiederhold, and L. Woessman. “Returns to skill around the world: Evidence from PIAAC.” European Economic Review 73:C (2015): 103–130; Thorn, W. International Adult Literacy and Basic Skills Surveys in the OECD Region. OECD Education Working Papers No. 26, 2009; Pierre, G., M.L. Sanchez Puerta, A. Valerio, and T. Rajadel. STEP Skills Measurement Surveys: Innovative Tools for Assessing Skills. World Bank Social Protection and Labor Discussion Papers No. 1421, 2014.

  • Defining intermarriage

    There are different approaches to defining immigrant status, marriage, and intermarriage.

    • Nationality, country of origin, ethnicity, or race are often used to define immigrant status, but other concepts have been introduced in recent years. In 2005, the German Microcensus introduced “people with/without migration background,” and among those with a migration background “people with/without own migration experience.” This classification differentiates first and subsequent immigration generations.

    • Marriage is often used interchangeably with cohabitation even though there are noticeable differences between these types of unions, as in legal rights and duties, and thus in spouse bargaining power and position.

    • Intermarriage can be defined along the lines of different ethnicity, nationality, country of origin, or race. Marriages between members of different ethnic or racial groups, from different countries of origin, or with different nationalities are therefore also called “interethnic,” “intercultural,” or “interracial.” Another common term in the literature is “exogamy,” in contrast to “endogamy.” This could include marriages between people with Asian and Mexican origin, for instance. But most often the term “intermarriage” is used for marriages of immigrants with members of the native society.

  • Defining international migration and travel

    Defining international migration is not straightforward. The UN defines an international migrant as a person who resides in a country other than their country of birth. However, some definitions include children born in a destination country with at least one parent born abroad among the migrant population (the “allochthonous” population).

    The notion of “residing” is open to interpretation. A person may have the right to reside indefinitely in a foreign country (a right to permanent residency) but may not actually spend much time there. More commonly, residency is defined by actual behavior. For example, a foreign person who spends 183 days or more of any fiscal year in a country may be considered a resident for tax purposes.

    Migration statistics are often based on statistics on intended behavior, which are collected through surveys at arrival and departure. In that case, an immigrant is defined as a person whose country of last permanent residence is not the country of arrival and who states an intention of staying for 12 months or more, irrespective of whether that turns out to be the actual duration of stay. With an intended stay of less than 12 months, a person arriving is considered an inbound visitor. Similarly, a resident who leaves and states an intention to stay away for 12 months or longer is an emigrant; one who intends to stay less than 12 months abroad is an outbound visitor.

    A temporary migrant resides in a country for an intentionally limited time, which may vary from a few months (a seasonal migrant) to several years (a foreign housekeeper or a professional, for example). Temporary migration is often circular, with some migrants returning to the destination country several times. The World Trade Organization refers to temporary migration to provide services abroad as the movement of natural persons (also called “Mode 4 of services trade”), which can again vary from a stay of a few months to a few years.

    Visitors are often characterized by the primary purpose of the trip: visits to friends and relatives, holiday/vacation, business, education, conferences and conventions, and other reasons. Measuring the importance of any of these types of trips is not straightforward, because many travelers have more than one purpose for a trip—for example, combining visiting friends and relatives with a sightseeing tour, establishing business contacts, or seeking medical treatment abroad.

  • Defining self-employment

    The self-employment rate is an important concept in comparing self-employment across ethnic groups. The rate can be thought of as the percentage share of total employment accounted for by the self-employed. The self-employment rate is calculated as the number of self-employed workers divided by the total number of workers (in both self- and paid employment). In looking at ethnic minority labor market outcomes, it is important to realize that there can be differences in employment rates across ethnic groups.

    The employment rate is the total number of employed individuals (paid and self-employed) divided by some appropriate measure of the eligible population. Many ethnic minority groups have lower employment rates because of lower participation in the labor market or higher unemployment, a condition that can provide useful context when discussing minority self-employment.

  • Defining the labor force participation rate

    The labor force participation rate is a measure of the proportion of a country’s working-age population that engages actively in the labor market, either by working or by looking for work. As the sum of the employed and (searching) unemployed, this indicator signals the relative size of the supply of labor available to engage in the production of goods and services (ILO Key Indicators of the Labour Market, 8th Edition).

    People are counted as a part of the labor force if they are engaged in activities that are included in the System of National Accounts or are available and searching for work in such activities.

    Persons are classified as not being in the labor force if they are attending an educational institution, engaged in household duties, retired, or infirm or disabled (and other reasons).

  • Definitions of different types of working time

    Standard hours refers to the stipulated weekly working time, determined by law, by collective bargaining agreement, or by individual contracts. Other commonly used terms are normal working time, standard working time, normal hours, and the standard work week. Standard hours are typically higher in firms that are not covered by collective bargaining agreements than they are in covered firms.

    Overtime hours refers to hours worked in excess of standard hours; overtime hours can be paid (usually at an overtime premium) or unpaid.

    Actual hours worked include both standard hours and overtime work, and so actual hours worked (on average) can exceed standard hours.

    Working time accounts allow workers to work longer or shorter than the standard hours during some periods as long as their long-term average matches the agreed standard hours. Working time accounts, part of a general trend toward more flexibility in working time, are intended to enable employers to react quickly to market conditions and to give employees more control over their work−life balance. The system is more common in northern Europe and Germany than in other European countries.

  • Definitions of non-observed economies (NOE)

    For analytical purposes, the OECD (2014) proposes a simplification of the seven sources of non-exhaustiveness for GDP estimates that were proposed by Eurostat’s (2005) “Tabular approach to exhaustiveness,” in five types of NOE adjustments:

    Underground production: activities that are productive and legal but deliberately concealed from public authorities to avoid payment of taxes or compliance with regulations;

    Illegal production: productive activities that generate goods and services forbidden by law or that are unlawful when carried out by unauthorized procedures;

    Informal sector production: productive activities conducted by unincorporated enterprises, in the household sector or other units that are unregistered and/or less than a specified size in terms of employment, and that have some market production;

    Household production for own/final use: productive activities that result in goods or services consumed or capitalised on by the households that produced them;

    Statistical deficiency: all productive activities that should be accounted for in basic data collection programmes but are missed due to deficiencies in the statistical system.

    Source: Eurostat. Eurostat’s Tabular Approach to Exhaustiveness: Guidelines. Ref. Eurostat/C1/GNIC/050 EN. Paper from the 5th Meeting of the GNI Committee, July 5–6, 2005; OECD. Statistics Brief, No. 18. Paris: OECD Statistics Directorate, 2014. Online at:

  • Definitions of religion and religiosity

    Religion: “Religion is any shared set of beliefs, activities, and institutions premised upon faith in supernatural forces (p. 1466).”

    Source: Iannaccone, L. R. “Introduction to the economics of religion.” Journal of Economic Literature XXXVI (1998): 1465–1496.

    Religiosity: The individual religiosity implies a self-identification with a particular religious denomination, having religious beliefs, praying, and attending religious services.

    Source: Need, A., and G. Evans. “Analyzing patterns of religious participation in post-communist Eastern Europe.” British Journal of Sociology 52:2 (2001): 229–248.

  • Definitions of worker displacement

    The displacement rate is the ratio of displaced workers to the stock of employed workers.

    The United States Bureau of Labor Statistics defines displaced workers as people aged 20 years or older who lost or left jobs because: their plant or company closed or moved; there was insufficient work for them; or their position or shift was abolished.

    Studies on transition and emerging economies define job separation as displacement due to an enterprise or organization closing down, moving, reorganizing, going bankrupt, or privatizing, or an employer initiating a reduction in personnel for other reasons.

  • Demographic dividend

    Demographic dividend refers to the extra growth and revenue made possible when the working-age population expands. The government can collect more revenue without raising taxes and finance more programs (including pension systems). The costs of running deficits falls because tax revenues are rising due to the population growth. This is temporary, however, and after several decades the dividend turns negative as the working population shrinks as a percentage of the total population, and older cohorts expand.

  • Demographic indicators of population aging

    The old-age support ratio measures how many people there are of working age (20–64) relative to the number of retirement age (65+).

    The old-age dependency ratio is a ratio between older people (65+) and the number of people of working age (generally 15–64).

  • Demographic transition

    The demographic transition refers to the change from high fertility and mortality rates to low fertility and mortality rates (including increasing longevity). In between, countries experienced high fertility rates accompanied by low mortality rates, which led to strong population growth. Most developed countries have already passed through this process of change; other countries are at various stages in the demographic transition.

    This is a simplified definition and more detail can be found in van de Kaa, 2008.

    van de Kaa, D. J. “Demographic transitions.” In: Zeng Yi (ed.). Demography: Encyclopedia of Life Support Systems (EOLSS). Oxford: EOLSS Publishers, 2008; pp. 65–103.

  • Difference-in-differences estimation

    When an experimental research design is not possible, difference-in-differences estimation can be used to study observational data to estimate the effect of a treatment (e.g. the introduction of joint custody) on an outcome by comparing the relative average change over time in the outcome variable for the treatment group to the average change over time for the control group. The change in the control group is considered to reflect the change that would have occurred in the treatment group had there been no intervention.

  • Difference-in-differences-in-differences estimation

    This estimator extends the well-known difference-in-differences estimator to the case in which it seems implausible that the change in the control group is the counterfactual change in the treatment group in the hypothetical case without the intervention. It consists in using two control groups and performing differences-in-differences estimation in each case. Then, the difference between the two estimators is taken. This procedure eliminates any trends specific to each of the two control groups.

  • Different approaches to firing regulations

    Some countries define unfair dismissal very narrowly, but workers are usually compensated whether termination is fair or wrongful. In another group of countries, ordinary compensation tends to be low or zero, but unfair dismissal is broadly defined, and compensation for unfair dismissal is high. Moreover, with the main exception of some emerging market economies, there seems to be a greater consensus among policymakers that collective dismissals bring about greater negative externalities and are in need of stricter protection. Thus, the cross-country variation in the stringency of regulation on collective dismissals is smaller than that of individual dismissals.

  • Different types of alternative dispute resolution

    Arbitration is a binding procedure that guarantees settlement. The two common forms of arbitration are:

    Conventional arbitration, in which the arbitrator crafts an award based on the facts presented.

    Final-offer arbitration, in which the arbitrator decides an award based on the demands and offers of the disputants.

    Mediation, by contrast, is nonbinding and attempts to facilitate good faith negotiations.

  • Different types of entrepreneurs

    Research distinguishes between two types of entrepreneurs: “innovative entrepreneurs,” who bring new products and processes to the market and introduce new services, marketing techniques, or business structures, and “replicative entrepreneurs,” who enter existing markets with unique selling propositions. Another differentiation is between opportunity and necessity entrepreneurs, the first engaging in entrepreneurial activity to become more independent or increase their income, and the second doing so to maintain their income when there are no other options for work. All entrepreneurs contribute to the advantages and disadvantages discussed here to differing degrees.

    Baumol, W., and Schilling, M. “Entrepreneurship.” In: The New Palgrave Dictionary of Economics. Basingstoke: Palgrave Macmillan, 2008.

  • Different types of female entrepreneurs

    Research distinguishes many types of female entrepreneurs. One important type is high-potential entrepreneurs who, by definition, are starting ventures that grow rapidly (and are therefore market-expanding), export to foreign markets, and utilize innovative products, processes, and services. There are many other types of female entrepreneurship, such as self-employment, necessity entrepreneurship, and lifestyle ventures; however, these types of entrepreneurs tend to have less impact on economic growth and development. For example, lifestyle entrepreneurs choose to keep their firms small in order to focus on other parts of their lives.

  • Different types of tracking

    School tracking refers to the practice of assigning students to different types of school at some point during compulsory education in public school systems. Typically, students are assigned to different tracks based on their abilities, educational achievement, and aspirations. School tracks often differ in the kinds of curriculum they teach, and they often apply very different pedagogical methods. The most common type of tracking is into vocational or academic curricula. School tracking is implemented nationally across a country’s public education system.

    Ability grouping, or within-school tracking, is the practice of separating pupils into different ability groups within a school. Unlike school tracking, the division is decided at school level, and the different groups usually follow the same curriculum and have the same educational goals.

  • Dowry

    A dowry, simply put, is the property or money that is brought from a bride’s side to the groom’s side, on their marriage. The dowry system dates back to at least 200 BCE and has occurred largely in Europe and Asia. The “dowry” is a payment from the bride’s parents to the bride herself and it remains the formal property of the wife throughout the marriage. However, the money from her parents can be directly transferred to the groom (called “groom price”) to the exclusion of the bride.

    Although dowries were common practice in western Europe during medieval times and were widespread in Mexico and Brazil during the seventeenth and eighteenth centuries, in modern times dowries are mostly to be found in south Asia—in particular India, where dowries have long been a custom and are currently virtually universal, although also increasingly in Bangladesh, Pakistan, and Sri Lanka.

    Source: Anderson, S. “The economics of dowry and brideprice.” Journal of Economic Perspectives 21:4 (2007): 151–174.

  • Dutch disease

    Dutch disease (named after the crisis in the Netherlands following the discovery of large natural gas reserves) refers to the negative impacts of large increases in a country's income, whether from natural resources, foreign direct investment, foreign aid, or remittances. The increases lead to a decline in the competitiveness of a country's manufactured exports and an increase in imports.


  • EU eastern enlargements and transitional arrangements

    In May 2004, eight Central and Eastern European countries (EU8) joined the EU (EU15)—the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia—together with Cyprus and Malta. Bulgaria and Romania (EU2) followed in January 2007, and Croatia in July 2013. To quell fears of huge waves of emigration from the poorer and geographically close Central and Eastern European countries, the EU15 members introduced the Transitional Arrangements to restrict the free movement of workers from the EU8 and EU2 countries. These arrangements were based on a “2+3+2” formula: For the first two years, access to the labor markets of the EU15 countries depended on their national laws; the duration could be extended for a further three years, and then for another two years, if countries could demonstrate serious disruptions in their labor markets.

    In 2004, only Ireland, Sweden, and the UK opened their labor markets to EU8 workers. Austria and Germany removed the remaining restrictions for EU8 workers in 2011. Several countries applied restrictions for the EU2 workers, while Spain unprecedentedly reintroduced restrictions in July 2011 “due to serious disturbances in its labor market”. The restrictions on EU2 workers ended in January 2014.

    The differential implementation of the Transitional Arrangements set up a unique natural experiment. Some researchers conclude that they have diverted some of the migrants from traditional destination countries such as Germany and Austria toward the Republic of Ireland and the UK. Others argue that other factors, such as the English language and favorable labor market conditions, have also played an important role in directing migration.

    Furthermore, while immigration from the EU8 to the “closed” German labor market has been taking place despite the formal restrictions, using self-employment as an entry channel, Sweden has attracted a relatively small number of migrants, despite its open borders.

  • Earned income tax credit

    The earned income tax credit is the largest source of government-provided cash transfers to low-income families in the US. For each dollar of wage earned by a worker in an income-eligible family, earned income tax credit benefits increase by $0.08 for workers with no children (to a maximum of $496), $0.34 for workers with one child (maximum of $3,305), $0.40 for workers with two children (maximum of $5,460), and $0.45 for workers with three or more children (maximum of $6,143). Thus, during the benefit phase-in period, the earned income tax credit effectively raises the hourly wage earnings of all low-income workers. After a short “disregard” period, during which additional income does not affect earned income tax credit benefits, the phase-out period begins and earned income tax credit benefits are reduced by $0.08 (no children), $0.16 (one child), $0.21 (two children), and $0.21 (three or more children) per dollar of income. All benefits are lost at $20,020, $43,941, $49,186 and $52,427. Phase-in and phase-out benefit periods are indexed for inflation.

    Twenty-five states and the District of Columbia supplement the federal earned income tax credit, further increasing the effective hourly wage rate for their low-income workers. A review of the behavioral and distributional consequences of the earned income tax credit concludes that unlike other safety-net programs, the earned income tax credit has unambiguously positive labor market participation incentives because it subsidizes only the income of people who work. And because it phases out benefits at higher incomes, its benefits are targeted to low- and moderate-income families.

    Source: Tax Policy Center. Tax Policy Briefing Book. Urban Institute and Brookings Institution, 2014. Online at:; Hotz, V. J., and J. K. Scholz. “The earned income  tax credit.” In: Moffitt, R. A. (ed.). Means-Tested Transfer Programs in the United States. Chicago, IL: National Bureau of Economic Research, University of Chicago, 2003; pp. 141–198.

  • Eastern Partnership

    The Eastern Partnership is an enhanced cooperation agreement between EU member states and six countries of Eastern Europe and Southern Caucasus: Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine. It is founded on common values, such as democracy and the rule of law, respect for human rights and freedoms, and commitment to market economy. The rationales and long-term goals of this initiative, launched in 2009, are to strengthen integration and cooperation, in particular to “promote democracy and good governance, strengthen energy security, promote sector reform and environment protection, encourage people-to-people contacts, support economic and social development, and offer additional funding for projects to reduce socio-economic imbalances and increase stability.”

    Eastern Partnership. Online at: [Accessed April 2, 2014].

  • Econometric instrumental variables

    The instrumental variable technique isolates the part of immigration driven by supply choices of migrants and tracks its effect on wages. As migrants prefer locating near other migrants of the same nationality the presence of older communities is used to predict immigrant supply changes. By using this technique the response of wages can be tracked, for given labor demand, when only supply shifts.

  • Econometric models

    Pooled ordinary least squares models, using all survey waves as a large cross-section data set, estimate the overall association between wages and the mismatch variables but cannot be taken to imply causation.

    Panel estimation provides the closest estimates of the causal effect of mismatch on wages. Under appropriate assumptions, the random effects model, including a Mundlak correction, can account for the potential correlation between the time-constant unobserved individual differences and the explanatory variables.

    Where the dependent variable is binary (where there are only two states, say matched or mismatched), a nonlinear probit model must be used. Calculation of the marginal effects can provide an estimate of the association between the probability of a change in the variable to be explained and a one-unit change in the explanatory variable.

  • Effective altruism

    The effective altruism movement, which is fairly widespread on a global scale, focuses on impact and cost-effective donations. Effective altruists tend to reject “warm glow” motivations (non-altruistic determinants of giving, like prestige) and social closeness (giving to those who are similar to the donor) in favor of purely rational calculations of the impact of a donation, attempting to quantify the number of lives improved and the amount by which they are improved. This approach extends to the donor’s own behavior, including the notion of “earning to give” by taking a high-paying job in order to donate the proceeds. The movement is far from monolithic but is generally characterized by an emphasis on lives saved in the short term, focusing on donations that reduce immediate suffering.

  • Effective retirement age

    The average effective retirement age is the mean age at which older workers withdraw from the labor force to retire. In most countries, it is lower than the official retirement age. For example, in 2011, the official retirement age for men in Germany was 65 and the effective retirement age was 62, according to the OECD. In most wealthy countries, the trend toward a lower effective retirement age dating back to the 1970s has been halted if not reversed. However, retirement ages are still generally below the levels of the 1970s. Life expectancy is rising faster than increases in the effective retirement age, which implies a longer time in retirement, raising concerns about old-age poverty and the sustainability of public pensions.

  • Efficient bargaining

    Efficient bargaining can be carried out only at the level of the individual firm (plant) as it involves setting both wages and employment levels.

  • Employment protection legislation

    Employment protection legislation is commonly defined to encompass regulations governing hiring and firing.

    Hiring rules cover such areas as duration of employment contracts, set-asides for disadvantaged groups, and probation periods.

    Firing rules include such topics as dismissal for cause, mass layoffs, and severance payments.

    Some definitions restrict employment protection to hiring and firing costs, while others also include working hours, health and safety, and worker representation rights.

  • Endogeneity or exogeneity?

    Endogenous variables are determined by something within the system being analyzed; exogenous ones are determined wholly outside it. In the pure neoclassical model, the level of employment is entirely exogenous to international trade considerations, but if the model recognizes labor market frictions, it can become endogenous, at least in the short term. The distinction is also very important in determining causality. If we find a strong association between two variables, but both are endogenous, we don’t know which causes which. If, by contrast, we are sure that one is exogenous and that our model includes all relevant considerations, we can infer that causation runs from it to the endogenous one.

  • Environmental regulations: how clean is clean enough?

    Laws relating to environmental regulation tend to focus on benefits and ignore costs. The Clean Air Act of 1970 seeks “to protect and enhance the quality of the Nation’s air resources so as to promote the public health and welfare and the productive capacity of its population.” The Clean Water Act of 1972 seeks “to restore and maintain the chemical, physical, and biological integrity of the Nation’s waters” and calls for the complete elimination of water pollution discharges by 1985. Most environmental regulations in the US are defined by the Environmental Protection Agency at the federal level, while enforcement is carried out primarily by state environmental agencies.

    With respect to air pollution, the Environmental Protection Agency is required to define national ambient air quality standards to protect human health. Over time, these standards have been revised as new scientific evidence emerges. The discovery that particulate-related mortality came mostly from small particles prompted a shift in the particulate standard from total suspended particles in 1971 to particulate matter of less than 2.5 microns (PM2.5) in 1997, with further tightening in 2006 and 2012. Stricter standards can also be driven by lawsuits brought by environmental groups seeking to force agencies to tighten their standards.

    A common characteristic of environmental protection laws is a focus on eliminating pollution or reducing it to a level at which there are no observable health effects, in contrast to the economist’s view of balancing the incremental benefits and costs of pollution reduction. Over the years, a series of executive orders have required federal agencies to prepare a benefit–cost analysis before issuing a major regulation. While this may make it more difficult to issue costly regulations, the underlying legal justification for the regulation is not tied to benefits exceeding costs.

  • Equivalence scale

    A measure of the income needed by a household of a given composition relative to the income of a reference household (usually a single-adult household) so that both households have the same level of well-being. Equivalence scales are generally represented as a number by which the income of a given family is multiplied so that the family has the same level of well-being as the reference family. The scales are difficult to construct because family well-being cannot be measured directly.

  • Evaluating charities

    Overhead costs generally fall into two broad categories: administrative and fundraising expenses. Administrative expenses include the salaries of support staff and other typical expenditures, like information technology, legal services, and insurance. Fundraising expenses are those spent on soliciting contributions to the non-governmental organization, including grants from foundations and the government.


    Charity Navigator is a service to “guide intelligent giving.” This service is one of America’s largest and most influential charity evaluators and examines charities’ financial health and transparency using data from the Internal Revenue Service of the United States.


    Among many others, ratings organizations include CharityWatch (US-based charities), CharityChoice (UK-based charities), and Change Path (Australian-based charities).

  • Evaluative and emotional components of well-being

    Feelings of well-being can encompass both evaluative and emotional components. Evaluative components are concerned with evaluating one’s satisfaction with areas of one’s life, both current and anticipated. Emotional or affective components concern daily feelings and moods or the affective dimension of happiness (such as the balance between positive and negative feelings). The German Socio-Economic Panel survey captures the notion of evaluative well-being in the question: “How satisfied are you at present with your life as a whole?” and the notion of emotional well-being in the question: “How often have you felt happy during the previous weeks?”

  • Examples of longitudinal cohort and panel studies

    Among various sources of longitudinal data, two of the most common are large-scale cohort and panel surveys. Cohort studies follow a group of individuals setting off at the same age, often at or close to birth, while panel studies start with a sample of people of various ages at the same point in time, often taking members of households for example. To illustrate the range of longitudinal studies, the following lists include major national cohort and panel longitudinal studies in industrial countries.

    Cohort studies follow individuals from a common starting age through time.

    Mature cohort studies follow a large national sample from birth or adolescence into adulthood, with data on mid-life:

    Youth cohorts start at adolescence and follow individuals into adulthood:

    Child cohorts start at pregnancy, birth, or a given point in childhood and follow individuals; most have not yet reached adulthood:

    Aging and retirement cohorts follow people around and beyond retirement age:

    Household panel studies follow individuals of different ages in an initial sample of households.

  • Extraterritorial nations and extraterritorial citizens

    Nations were once based largely in one territory, as were their citizens. But as the transnational activities of all citizens increase, nation states need to reach out to citizens who live outside their territories. In this way, both nations and their citizens have become extraterritorial.


  • Factors affecting the impact of union wage effects on firm performance


    • wages lead to increased labor productivity

      • worker sorting

      • worker effort (efficiency wages, fairer wages)

    • increase capital intensity


    • taken from surplus rents (no closure)

    • high unionization among competitors, or extension of union pay rates

    • wages are simply labor’s share of bigger pie created by union


    • taken from normal rents

    • shareholder response (Lee and Mas, 2012)

    • wage compression reduces work incentives

    • limit managerial discretion to pay for performance

    • wage compression less attractive to high-ability workers

    • reduce capital investment (insufficient funds; anticipate lower returns)

    Lee, D. S., and A. Mas. “Long-run impacts of unions on firms: New evidence from financial markets, 1961–1999.” The Quarterly Journal of Economics 127 (2012): 333–378.

  • Failure versus closure

    Only a little more than half of new firms survive the first five years of operation. However, closure is not necessarily an indicator of an unsuccessful business outcome. A substantial number of businesses that close in the first five years are successful. These businesses close not because they have failed but because of successful execution of a planned exit strategy, a desire to close without incurring excess debt, the sale of a viable business, or retirement of the owners, among other reasons.

    The costs of failure extend beyond the entrepreneur. When a business fails or closes, employees lose their jobs and might have to turn to social security, generating additional burdens for society. There is often no safety net to absorb these losses except for the social welfare system. If a business fails and cannot pay its debts, lenders lose out as well. Finally, a high failure rate for new businesses can have a discouraging effect on potential future entrepreneurs.

  • Features of MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme)

    MGNREGS is India’s flagship public works program, designed as a poverty alleviation tool. Its features include:

    National legislation guarantees each rural household up to 100 days of public works employment a year at the minimum wage.

    Participation is supposed to be demand driven, with households self-selecting into employment at any time of the year.

    It is a national program that is mostly paid for by the central government, but implemented by local governments.

    The projects are aimed at local development, with a focus on drought-proofing and infrastructure creation.

    In 2011–2012 the scheme benefitted about 50 million households annually.

    Implemented in three phases between 2006 and 2008, the program now operates in all rural areas in India and is expected to remain in operation for many years.

    The program wage is equal to the minimum wage, which tends to be higher than the market wage in many parts of India, especially for women.

    The program seems attractive to some richer households as well as to poor households, but it still reaches the most disadvantaged groups.

  • Feed-in tariffs

    Under a feed-in tariff, a supplier of renewable energy is guaranteed access to the grid at a selling price based on its costs. The intention is to induce investment by offering a long-term purchase agreement at known selling prices. The tariff, or surcharge, typically varies depending on the technology, the scale, and the region.

    For example, the German version of a feed-in tariff, the EEG-Umlage, has proved to be a successful policy tool to attract investments in renewable energy sources. Interestingly, while consumer prices for electricity have increased owing to the EEG-Umlage (currently a surcharge of 6.24 cents per kilowatt hour added to consumers’ bills), it has led to decreasing market prices for electricity at, for example, the European Power Exchange (EPEX). This is due to the so-called “merit–order effect” at the spot markets, where electricity produced at the lowest marginal cost is traded first.

    Since renewable technologies typically generate electricity at lower marginal costs, electricity generated from conventional power plants is crowded out, which lowers spot market prices. Mechanically, this widens the gap between guaranteed compensation of renewable electricity generation and the market prices, which in turn raises the total amount of EEG compensation. This channel has contributed even more toward increasing consumer prices for electricity in Germany.

  • Field experiment

    A field experiment is carried out in the real-life environment of the participants and so, although the independent variable is still manipulated, the extraneous variables are not controlled and the cause and effect relationship cannot be clearly established.

    Behavior in a field experiment is more likely to reflect real life than a laboratory experiment because of its natural setting, and is not likely to be affected by demand characteristics (particularly if the study is covert). However, the extraneous variables cannot be controlled and they may well bias the results. It is also very difficult for another researcher to replicate the experiment accurately as a standardized procedure is not used (McLeod, 2012).

    Source: McLeod, S. A. “Experimental method.” Simply Psychology (2012). Online at:

  • Foreign direct investment (FDI)

    Foreign direct investment is a type of cross-border investment made by an entity based in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise that is based in another economy (the direct investment enterprise).

    The aim of the investor is a strategic long-term relationship with the direct investment enterprise, in order to secure a significant degree of influence in its management. The “lasting interest” is evidenced when the direct investor controls at least 10% of the voting power.

    FDI may also allow the investor to gain access to the economy of the direct investment enterprise, which it might otherwise be unable to do.

    Inward FDI, which includes all liabilities and assets transferred between the resident enterprise and its direct investor, can lead to foreign-owned firms if the controlling parent is non-resident.

    FDI is a key element in international economic integration. It creates direct, stable, and long-lasting links between economies, encourages the transfer of technology and expertise between countries, and allows the host economy to promote its products more widely internationally. FDI is also an additional source of funding for investment and, in the right policy environment, can be an important vehicle for development.

    Source: OECD. OECD Benchmark Definition of Foreign Direct Investment. Paris: OECD, 2008.

    OECD. OECD Factbook 2013: Economic, Environmental and Social Statistics. Paris: OECD, 2013.

  • Foreign direct investment inflows

    According to the World Bank, foreign direct investment (FDI) is cross-border investment by a resident enterprise in one economy having control or a significant degree of influence on an enterprise that is resident in another economy. FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy.

    Source: World Bank. “What is the difference between Foreign Direct Investment (FDI) net inflows and net outflows?” Online at:

  • Formal and informal institutions

    According to the institutional theory, all societies have both formal and informal institutions that affect individuals’ behavior.

    Formal institutions: Laws, rules, and procedures outline the legal guidelines that they have to obey.

    Informal institutions: Rules shared at a social level, usually based on a verbal agreement, which are generated, communicated, and applied aside from formal channels.

    Source: North, D. C. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press, 1990; Helmke, G., and S. Levitsky. “Informal institutions and comparative politics: A research agenda.” Perspectives on Politics 2 (2004): 725–740; Williams, C. C., and I. Horodnic, “Evaluating the prevalence of the undeclared economy in Central and Eastern Europe: An institutional asymmetry perspective.” European Journal of Industrial Relations 21:4 (2015): 389–406.

  • Formal and informal, public and private childcare services

    Formal childcare is provided in childcare centers (often regulated at the local level in several dimensions, such as student–teacher ratio, staff and teachers’ education, and space).

    Formal childcare can be publicly or privately provided. Public provision is the rule in Europe; private provision is more common in the UK and the US. Public services are more strictly regulated than private services both in service standards and in management and personnel requirements.

    Informal childcare includes the less regulated care offered by small group daycare providers and nannies or by members of a child’s extended family.