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.

G

  • General equilibrium versus partial equilibrium analysis

    General equilibrium refers to the interactions of supply and demand across multiple markets in an economy, resulting in a final set of prices that are influenced by all those interactions. Partial equilibrium analysis looks only at supply, demand, and prices in a single market and ignores the ways in which changes in one market may affect supply, demand, and prices in related markets. For some types of policies, these interdependencies are unimportant, and partial equilibrium analysis is appropriate. For other types of policies, especially policies that affect many markets at the same time, understanding the general equilibrium effects is essential to understanding the true effects of the policies.

  • Germany’s citizenship law reforms

    Traditionally, Germany had a very restrictive citizenship law which was closely tied to ancestry and ethnic origin. Since the 1990s, Germany—a country which had a weak record of immigrant integration—has substantially liberalized its access to citizenship. In 1991, the government introduced, for the first time, explicit criteria for how immigrants could obtain German citizenship. Since 2000, immigrants can naturalize after eight years of residency in Germany, and children of foreign-born parents in Germany now obtain citizenship at birth. The residency requirements for eligibility vary across age and year of arrival as well as over time. The 1991 reform, for example, imposed age-dependent residency requirements for naturalization. Adult immigrants (aged 23 and above) faced a residency requirement of 15 years before they could apply for citizenship. Adolescent immigrants (ages 16–22) in turn could apply for German citizenship after only eight years of residence. The two immigration reforms provide a unique opportunity to assess the labor market returns of citizenship net of selection effects.

  • Germany’s energy turnaround

    In Germany, the operators of renewable electricity sources are granted feed-in connections to public electricity grids and guaranteed fixed compensation per unit of electricity supplied over a period of 20 years under the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, or EEG), the most important legislative instrument steering the country’s energy turnaround (Energiewende). The subsidy is financed by electricity consumers through a surcharge on their electricity bills—a so-called “feed-in tariff”—known as the EEG-Umlage. Revenues from this surcharge are transferred to the operators of renewable energy facilities, thus subsidizing their investments in the renewable energy infrastructure.

    The feed-in tariff triggered massive investments in solar panels, wind power stations, and power stations based on biomass. The share of renewable electricity generated rose from 6.6% in 2000 to 23.4% in 2013. The total remuneration for renewable electricity, less than €1 billion in 2000, increased to more than €15 billion in 2012, as the EEG surcharge rose from 0.41 cents per kilowatt hour in 2003 to 6.24 cents in 2014, making electricity substantially more expensive for firms and private households. Only very energy-intensive production, which is exposed to fierce international competition, is exempt from the surcharge. The exemption clauses have been extended several times since 2013, a fact that has recently been scrutinized by the European Commission, since these exemptions could be interpreted as subsidies, which may not be in line with the EU’s common market rules. The price increases, which lower the purchasing power of disposable income, especially for low-income households, have gained wide attention in the public debate on Germany’s energy policy and pose a challenge to the public’s acceptance of the Energiewende.

    The German government and environmental associations emphasize the positive effects of green job creation in renewable energy and energy-efficient technologies. But industrial business associations stress that high energy prices constitute a threat to Germany’s export-oriented manufacturing and may thus cost jobs in the long term. So, the potential employment effects, either positive or negative, have become important arguments both for and against the Energiewende.

  • Gini coefficient

    Measures the degree of inequality of the distribution of national income. It ranges between zero (when all citizens receive the same income) and one (when one citizen receives all national income). In practice, the coefficient varies between 0.2 and 0.7.

  • Grade point average

    Grade point average (GPA) is a common measure of academic performance in the US. It is calculated by assigning a point value to the letter grade a student receives in each class (from A = 4 to F = 0) and then taking the mean. GPA is often used by employers and universities to rate and compare applicants.

  • Gravity models of migration: Available data sets

    Bilateral migration flows and stocks

    UN Global Migration database

    Includes information on the evolution of international migrants by country of birth and citizenship based on different sources such as population censuses, population registers, nationally representative surveys and other official statistical sources. Flow estimates are presented for 1990, 2000 and 2010 for more than 200 countries.

    Online at: http://www.un.org/en/development/desa/population/migration/data/

    World Bank Global Bilateral Migration database

    Census and population register records are combined to construct matrices of bilateral migrant stocks for 1960, 1970, 1980, 1990, and 2000. Foreign-born definition of migrants is used. Bilateral migration matrixes for a reduced set of countries are also provided for 2010 and 2013.

    Online at: http://go.worldbank.org/092X1CHHD0

    OECD DIOC-E

    Contains data on 89 countries of residence and covers all individuals aged 15 and over living in these countries. For most countries the place of birth is used to identify migrants, although in some cases it was necessary to rely on criteria based on nationality. The database identifies 232 countries of origin. It only contains information of migrant stocks, but provides detailed information on the educational level of immigrants, although it is not possible to control for the geographic location where the education or training was received.

    Online at: http://www.oecd.org/migration/databaseonimmigrantsinoecdandnon-oecdcountriesdioc-e.htm

    Geographical variables and additional controls and policy variables

    CEPII GeoDist

    Provides data on several geographical and other variables that can be used to estimate gravity models. Different measures of bilateral distances are available for 225 countries. It incorporates country-specific geographical variables, including capital cities coordinates, languages spoken in the country, a variable indicating whether the country is landlocked, and colonial links. Different measures of bilateral distances are also available for most country pairs across the world. CEPII’s Gravity data set adds some additional time-varying variables for the period 1948–2006 to the GeoDist data set. In particular, data for GDP, population, and other institutional variables such as regional trade agreements and currency unions are also provided.

    Online at: http://www.cepii.fr/cepii/en/bdd_modele/presentation.asp?id=6

    UN World Population Policies database

    Provides information about the evolution of government views and policies regarding different demographic dimensions, including internal and international migration.

    Online at: http://esa.un.org/PopPolicy/about_database.aspx

H

  • Hidden cost of control

    An agent (worker) chooses a productive activity x, which is costly to the agent, with c(x)=x. The productive activity x is beneficial to the principal (employer) with b(x)=2x.

    Endowments are 120 for the agent and 0 for the principal, and payoffs are determined as follows: The principal receives 2x and the agent receives 120-x. Before the agent chooses x, the principal determines the agent’s choice set.

    In particular, the principal can either enforce a minimum level of x equal to x ≥ 10 or leave the decision about x completely to the agent’s discretion. Trusting the agent implies the risk of earning less than 2*10 points, simply because the agent is free to act according to material self-interest.

    The experiment illustrates the idea that the use of controlling devices in the workplace, as well as particular forms of explicit performance incentives, may entail “hidden costs.” Firms should take these into account when designing employment contracts and workplace environments (see Falk and Kosfeld, 2006).

    Falk, A., and M. Kosfeld. “The hidden cost of control.” American Economic Review 96:5 (2006): 1611–1630.

  • High cost of pronatalist policies

    Some pronatalist policies were very costly. In the early 1970s, Czechoslovakia allocated 10% of its budget to payments for child benefits, subsidies for childcare centers, and other policies intended to benefit families with children. In Bulgaria in the mid-1970s, the combined payments for child benefits and paid maternal leave more than doubled the income of a family with three children.

    David, H. P. “Eastern Europe: Pronatalist policies and private behavior.” Population Bulletin 36:6 (1982): 1–48.

  • High-impact entrepreneurship

    Actions of individuals responding to market opportunities by bringing innovations to market that create sizable growth as opposed to mere imitators, sometimes called replicative entrepreneurship.

  • Higher tax rates on a smaller base

    “When personal tax rates on ordinary income rise, evasion may increase, businesses may shift to corporate form, there may be a rise in the consumption of deductible activities such as charitable giving, and individuals may rearrange their portfolios and compensation packages to receive more income as tax-preferred capital gains. These responses to higher taxes, and all others, will show up in declines in taxable income, and there is a growing body of evidence, that, at least for high-income individuals, the elasticity of taxable income to the marginal tax rate is substantial.”

    Slemrod, J., and W. Kopczuk. “The optimal elasticity of taxable income.” Journal of Public Economics 84:1 (2002): 91–112 (page 92).

  • Hold-up problem

    Hold-up refers to a problem that can arise when two agents know that they would need to make relationship-specific investments to reap gains from future transactions. However, they cannot commit to the terms of the future transaction in advance or make a binding contract on relationship-specific investment. Consequently, either agent may refrain from making relationship-specific investments out of concern that doing so would weaken his or her bargaining position.

  • How difference-in-differences estimation isolates treatment effects

    One way to deal with an inability to conduct an experimental design with random assignment to treatment and control groups is to use difference-in-differences estimation. Observational data can be used to compare the average change over time for the outcome variable in the treatment group with the average change over time for the outcome variable in the control group. The average change in the control group is then considered to reflect what the outcome would have been in the treatment group without the intervention.

  • How do unemployment insurance savings accounts work?

    Selected countries: Brazil, Chile, Colombia, Ecuador, Panama, Peru, Uruguay, and Venezuela.

    Employers deposit a specified fraction of each worker’s earnings in a special individual savings account on a regular basis. In Chile workers are also required to make regular contributions to their accounts. Upon separation—and in most countries, regardless of the reason for separation—workers can make withdrawals from their savings accounts as they deem fit (some programs allow access before separation for health, education, and housing). In Brazil workers can access their accounts only in the case of involuntary separation, and employers are required to make an additional payment of 40% of the account balance to the individual. In all of the selected countries, positive account balances are added to old-age pensions at retirement.

    Several types of unemployment insurance savings accounts (UISA) programs can be distinguished:

    Pure UISA program, in which withdrawals are strictly limited by the balance of the UISA, that is, the balance on an individual’s UISA must always be positive. This program is identical to a prefunded severance pay program.

    UISA-cum-borrowing, in which within predetermined limits, individuals can borrow money beyond their UISA balances.

    UISA-cum-solidarity fund, in which upon depletion of their own accounts, individuals may receive payments from the solidarity fund.

    The last two programs combine self-insurance with public insurance. The self-insurance mechanism via mandatory savings is complemented by other mechanisms to improve the adequacy of protection. The second program (UISA-cum-borrowing) does so by allowing workers, at least temporarily, to run into the red in their UISAs. Under certain circumstances (for example, upon retirement), the repayment of such borrowing can be subsidized, that is, this mechanism also allows for redistribution across plan members. In the case of the third program (USIA-cum-solidarity fund), self-insurance is augmented with an explicit redistributive component.

    Source: Text from Robalino, D., M. Vodopivec, and A. Bodor. Savings for Unemployment in Good or Bad Times: Options for Developing Countries. IZA Discussion Paper No. 4516, October 2009; pp. 4–5.

  • How post-Soviet countries are classified

    According to the World Bank’s 2015 country classifications, the vast majority of post-Soviet countries are classified as “lower-middle-income” countries. These 11 countries include: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Russia, Latvia, and Lithuania are considered high-income, non-OECD countries. Latvia, Lithuania, and Estonia are also EU member countries, having joined the union in 2004. All three have switched to using the euro as their currency: Estonia was the first to introduce the euro in 2011, followed by Latvia in 2014 and Lithuania in 2015. Estonia is the only post-Soviet country to be classified as both high-income and an OECD member country.

  • How the UK improved access to psychological therapies

    How might a government respond to the evidence on the effectiveness and economic benefits of psychological therapy? In the UK, the government decided in 2008 to launch a major national program to deliver evidence-based psychological therapies through the National Health Service called Improving Access to Psychological Therapies. The program includes a major training program for therapists. Trainees spend one or two days a week in college and the rest in supervised practice, with national curricula and national accreditation of trainees.

    The aim of the program was to reach 15% of the population suffering from diagnosable depression or anxiety disorders (as measured in a population survey) by 2015. A range of evidence-based therapies would be offered, including cognitive behavioral therapy, interpersonal therapy, brief psychodynamic therapy, and counseling for depression. Patients could self-refer, and each patient’s progress would be monitored at every session. Thus, the outcome is known for nearly all the patients treated: nearly half (46%) recovered, and two-thirds showed significant improvement. In the next phase, recovery rates are expected to rise substantially following a series of improvements to the program.

    This experience shows how a bad situation can be rapidly transformed. By 2020, the program is expected to expand from 15% of need (900,000 people) to 25% (1,500,000 people). Many other countries have expressed an interest in setting up a similar program.

    Source: Clark, D. M. “Implementing NICE guidelines for the psychological treatment of depression and anxiety disorders: The IAPT experience.” International Review of Psychiatry 23:4 (2011): 318–327.

I

  • Immigrant elasticity of trade

    The percentage change in trade associated with a 1% increase in the stock of immigrants.

  • Imposing the 40-hour workweek in the US in the 1940s

    The 40-hour workweek, beyond which overtime wage rates apply, was legislated in the US with the Fair Labor Standards Act of 1938. It was quickly applied to wholesale trade, but only in the late 1940s was it applied to the retail trade. Before 1938 average weekly hours worked per employee were about the same in both sectors—42.5 hours in 1936 and 1938, a little more in 1937. From 1939 on, hours in the retail trade averaged about one more per week than in wholesale, where employers were now required to pay overtime on long hours.

  • In-work tax credits in OECD countries

    US: earned income tax credit. The earned income tax credit is available to US workers on “low to moderate” incomes. To qualify, they must be aged 25–65, live in the US for at least half the year, and not be a dependent of another person; or have a child who meets certain requirements.

    UK: working tax credit. Workers in the UK are eligible for the tax credit if they are over 25, or aged 16–24 and have a child or a qualifying disability. To qualify, they must work a certain number of hours of paid work each week (for example, 16 hours for a single person with children, or 30 hours for a single person without children), and have an income below a certain level (which varies depending on factors such as children and disability).

    The basic amount of working tax credit is currently £1,960 a year, but applicants may receive more or less depending on circumstances and income.

    New Zealand: in-work tax credit. New Zealand’s in-work tax credit is one of several tax credits for families with children. Parents are eligible if they are normally in paid employment for at least 30 hours a week as a couple, or 20 hours a week as a single parent.

    Parents with up to three children are eligible for a tax credit worth NZ$60 a week. Parents with more than three children are eligible for an additional NZ$15 a week.

    Canada: working income tax benefit. Canada’s working income tax benefit (WITB) is a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families. Workers can claim WITB if their working income is over C$3,000; if they are over 19; and if they are resident in Canada all year round. WITB is calculated based on marital status, province or territory of residence, income, eligible dependants, and disability benefit eligibility.

    WITB is currently paid to individuals without children earning up to a maximum of C$17,986, and to families earning up to C$27,736.

    Ireland: single person child carer tax credit; home carer tax credit. Ireland offers a range of tax credits applicable in different circumstances. For example, the single person child carer tax credit awards €1,650 a year to single parents.

    The home carer tax credit applies to couples in a marriage or civil partnership where one partner is a home carer and cares for one or more dependent persons. To qualify, the home carer’s income must be under €5,080 a year.

    Finland: child tax credit. Finland awards tax credits to parents according to number of children and custody arrangements. It is currently €100 per child annually for single parents or €50 for parents with joint custody. The tax credit is reduced for parents whose income exceeds €36,000 a year.

    The Netherlands: income-related combination tax credit. Working parents with children under 12 can apply for an income-related combination tax credit from the Netherlands Tax and Customs Administration. The tax credit means parents pay less in income tax and national insurance contributions. The amount of the credit is linked to parents’ income.

    Sources: US Internal Revenue Service. Online at: http://www.irs.gov/Credits-&-Deductions/Individuals/Earned-Income-Tax-Credit; UK Government. Online at: https://www.gov.uk/working-tax-credit/overview; New Zealand Inland Revenue. Online at: http://www.ird.govt.nz/wff-tax-credits/entitlement/what-is-wfftc/iwtc/wfftc-iwtc.html; Canada Revenue Agency. Online at: http://www.cra-arc.gc.ca/bnfts/wtb/menu-eng.html; Ireland Revenue. Online at: http://www.revenue.ie/en/tax/it/leaflets/it1.html; Finnish Tax Administration. Online at: http://www.tax.fi/en-US/Individuals/Child_Tax_Credit_FAQ(35454); Government of the Netherlands. Online at: https://www.government.nl/topics/income-related-combination-tax-credit

  • Indicators of democracy

    Freedom House’s political rights and civil liberties indicators: these are based on measures proposed by analysts who score countries using information collected through various sources such as news reports, non-governmental organization and think tank evaluations, and surveys administered to a large number of professionals. For the political rights index, the questions used in the scoring process are grouped into three sub-categories: electoral processes, political pluralism and participation, and functioning of the government. For the civil liberties index, questions are grouped into four subcategories: freedom of expression and belief; association and organization rights; rule of law and personal autonomy; and individual rights. The sum of each country’s subcategory scores translates to a rating from 1 to 7, with a higher score indicating more freedom.

    Economic Freedom of the World: this is a measure that indicates the degree of economic freedom in a country. It is based on components belonging to five main areas: (i) size of government; (ii) legal system and security of property right; (iii) access to sound money; (iv) freedom to trade internationally; (v) regulation of business, labor, and capital markets. The ratings are determined by combining real indicators with answers to survey questions taken from other primary sources (such as the Global Competitiveness Report, and the World Bank’s Doing Business project). The overall index ranges from 0 to 10, with a higher score indicating more freedom.

    Polity 2 indicator of the Polity IV Project of democracy: this is a combined score that reflects several aspects such as: the presence of institutions and procedures through which citizens can express effective preferences about alternative policies and leaders; the existence of institutionalized constraints on the exercise of power by the executive power; and the guarantee of civil liberties to all citizens in their daily lives and in acts of political participation. It ranges from –10 to +10.

    Source: Docquier, F., E. Lodigiani, H. Rapoport, and M. Schiff. “Emigration and democracy.” Journal of Development Economics 120 (2016): 209–223.

  • Inequality in gross wages versus inequality in net household income

    Gross wages are the most direct measure of the value of a certain characteristic in the labor market, such as skills. However, while this focus facilitates assessment of the value of skill (and its determinants), it is not necessarily the concept of inequality that most policymakers are ultimately concerned about, which is more likely to be net household income. That said, wages make up the most important component of household income and therefore deserve to be studied in their own right. It is important to note, however, that many steps are required to get from gross wages to net household income, including labor supply decisions (such as the number of hours worked and the decision to work at all), as well as tax and benefit policies. This means that policymakers concerned about household income inequality should also consider policy interventions that go beyond skills and labor market institutions.

  • Informal economy estimation methods

    Estimates of the informal economy can be calculated using two main approaches: macroeconometric and national accounting methods.

    Macroeconometric methods are usually placed into three groups:

    Direct methods are based on contact with or observations of persons and/or firms, to gather direct information about undeclared income/production. This includes, for instance, analyses of data collected by auditing tax returns and crime statistics (judicial method); “ad hoc” sample surveys designed to estimate the informal economy, or by using existing household survey programs, e.g. the Living Standards Measurement Study of the World Bank’s Development Data Group (Survey method); and by experiments.

    Indirect methods try to determine the size of informality, by measuring the “traces” that it leaves in official statistics. They are often called “indicator” approaches and use mainly macroeconomic data. This includes measuring discrepancies (e.g. discrepancy between national expenditure and income statistics; discrepancy between the official and actual statistics of the labor force); monetary methods (e.g. transaction approach; the currency demand (or cash-deposit ratio) approach); the physical input method or electricity method.

    The Model or MIMIC approach is based on the statistical theory of latent variables (variables that are not directly observed but are rather inferred (through a mathematical model) from other variables that are observed (directly measured)), which considers several causes and several indicators of the informal economy. It is considered as an “unobservable/latent variable.”

    The national accounting method to achieve exhaustiveness or the “Tabular approach to exhaustiveness” is applied by national statistical institutes to appropriately measure and include in the GDP estimates of the non-observed activities. It combines different data sources and adjustment methods in accordance with the source of non-exhaustiveness (i.e. lack of the coverage and consistency of national accounts). In general, it includes the non-observed economy in GDP estimates compiled by the production approach using different complex procedures, e.g. based on supply (e.g. labor input), demand, income, or commodity.

  • Informal employment definitions

    Enterprise-based definition: “Informal employment ... refers to those jobs that generally lack basic social or legal protections or employment benefits and may be found in the formal sector, informal sector or households.”

    Activity-based definition: “All legal production activities that are deliberately concealed from public authorities for the following kinds of reasons: to avoid payment of income, value added or other taxes; to avoid payment of social security contributions; to avoid having to meet certain legal standards such as minimum wages, maximum hours, safety or health standards.”

    Job-based definition: “Employees are considered to have informal jobs if their employment relationship is, in law or in practice, not subject to national labor legislation, income taxation, social protection or entitlement to certain employment benefits (e.g., advance notice of dismissal, severance pay, paid annual or sick leave, etc.).”

    Source: ILO, Statistical Update on Employment in the Informal Economy. Geneva: ILO Department of Statistics, 2011; p. 12; OECD, Measuring the Non-Observed Economy. Paris: OECD Publications Service, 2002; p. 139.

  • Informality and formalization

    Informality in the labor market covers workers, the self-employed, and firms that are not registered with the government. Formalization is the process of transforming informal jobs and firms to formal ones. Registering these informal jobs and firms would formalize them.

  • Informality in the labor market

    Informality in the labor market encompasses income-generating activities of waged workers or the self-employed that are not reported to the tax authorities.

    As this definition is difficult to operationalize, informality is often associated with job characteristics (unskilled workers, those in marginal jobs, the self-employed, domestic and family workers, and workers in small firms with up to five employees) as well as with the non-compliance to the state in terms of labor laws and social security systems (wage workers and the self-employed non-compliant with, or without access to, the social security system or pension system).

  • Informality in transition economies

    Informality in transition economies is somewhat unique. A successful transition to a market economy implies that the biases characteristic of planned economies have disappeared: Labor has to be reallocated from state enterprises to the private sector, from large firms to small and medium-size firms, and from industry into services. Informality tends to be more prevalent in firms with exactly the desired characteristics: They are de-linked from the state economy, small, and predominantly in the service sector. So developing a large informal economy is an intrinsic risk of transition.

    Because tax revenues decline with a rising share of informal activity, transition economies can end up either in a good equilibrium with a small informal sector and high tax revenues or in a bad equilibrium with a large informal economy and low tax revenues.

    Source: Johnson, S., D. Kaufmann, A. Shleifer, M. I. Goldman, and M. L. Weitzman. “The unofficial economy in transition.” Brookings Papers on Economic Activity 28:2 (1997): 159–239.

  • Instrumental variable

    In a regression context, the satisfactory estimation of the model parameters rests on the assumption that the explanatory variables are not correlated with the unobserved components of the model. When legitimate explanatory variables are omitted or when one explanatory variable and the explained variable of the regression model are determined simultaneously, direct estimation methods like ordinary least squares will yield biased measurements of the regression parameters. If the analyst can credibly identify additional variables that correlate well with both the explained and the explanatory variables in the regression model, these variables can be used as instrumental variables (instruments) in order to estimate the model parameters without bias.

  • Instrumental variable approach

    Ordinary least squares estimates of the effect of an intervention on the dependent variable may not have a causal interpretation due to such concerns as omitted variables bias and reverse causality. If there is a variable that is both correlated with the intervention variable and affects the dependent variable only through the intervention variable, this variable can serve as an instrumental variable. It can be used in place of the intervention variable to estimate the local average treatment effect (local to individuals whose intervention status is affected by the instrument).

  • Instrumental variables estimation

    Instrumental variables is a method of estimation that is used when it is not possible to estimate correctly the causal impact of a variable due to invalidity of the statistical assumptions required. The method simply semi-replaces the defective variable with another variable that is called an instrument (or instrumental variable). The instrument needs to be partially correlated with the defective variable and uncorrelated with the error term in the equation, and should not belong to the equation itself.