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.


  • Say’s Law

    Say’s Law is attributed to the French economist Jean-Baptiste Say, who wrote, in A Treatise on Political Economy, 1834, “[a] product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.” The idea is simply that if a product worth $x is produced, a flow of $x revenue is generated. (That is, the value is defined by the flow it generates.) That part of the flow which is spent on inputs that are purchased for the purpose of production, represents a direct demand, and that which is not is paid to the various factors of production used in production (land, labor, capital, taxes) as income. Since income is for spending, these people will demand goods and services from others of that value and so ultimately all $x is reflected in demand.

    The term “Say’s Law” was coined by John Maynard Keynes who summarized it as saying “supply creates its own demand” and then challenged it on the grounds that income 
may be saved and thus not enter demand. Those who adhere to the Law, however, would argue that savings get re-directed into investment and that eventually even hoarded money gets spent.

    Say, J.-B. A Treatise on Political Economy: Or the Production, Distribution, and Consumption of Wealth (Grigg & Elliot, 1834).

  • Schumpeter’s concept of creative destruction

    Joseph Schumpeter described creative destruction in the following way, “...a capitalist economy is not and cannot be stationary. Nor is it merely expanding in a steady manner. It is incessantly being revolutionized from within by new enterprise, i.e., by the intrusion of new commodities or new methods of production or new commercial opportunities into the industrial structure as it exists at any moment.”

    Source: Schumpeter, J. A. Capitalism, Socialism, and Democracy. 3rd edition. New York: Harper and Brothers, [1942] 1950; Part I, Chapter III, p. 31.

  • Search-and-matching model

    According to the classical view of the market, buyers and sellers find each other immediately. Buyers and sellers have perfect information about the prices of all goods, and the search process is costless. Prices are set so that supply equals demand and all resources are fully utilized.

    The labor market, on the other hand, is characterized by frictions. These frictions take many forms. Workers differ from each other as do firms, it takes time for workers and firms to find each other, both workers and firms have imperfect information about each other, and the search process is costly for both workers and firms. The fact that frictions exist implies that resources are not fully utilized: workers are unemployed at the same time that firms are looking for employees to hire.

    One way to characterize these frictions is through the search-and-matching model. This model was developed by Peter Diamond, Dale Mortensen, and Christopher Pissarides (who all shared the 2010 Nobel Prize in Economics). The DMP model focuses on the search behavior of unemployed workers, the recruiting behavior of firms, and the wage-setting process.

    Today, the DMP model is the most common tool for analyzing unemployment and wage formation and for evaluating labor market policies. The model is also used in many theoretical and empirical studies on the effects of unemployment insurance. The search behavior of unemployed workers depends on the expected value of employment compared to the value of unemployment. If unemployment benefits increase, the difference between having a job and not having a job decreases, which makes unemployed workers reduce their search effort. There is a strong relationship, both in theoretical studies and in empirical studies, between unemployment duration and the generosity of the unemployment insurance. Higher benefits increase the duration of unemployment spells.

  • Selection bias

    Term used in statistics to describe a situation whereby the sample of objects being studied (e.g. individuals or firms) is not random and so cannot be said to be representative of the overall population of those individuals or firms. In this case, the results may be skewed by differences that exist between the sample selected and the overall population.

  • Selection bias of university dropouts

    To estimate the impact of a policy or an event on an outcome, the group of individuals who experienced the event can be compared with those who did not (the control group). A good control group demonstrates the counterfactual: how individuals would have performed without the specific policy or event (in this case dropout). Selection bias occurs when the selection of individuals into these two groups is not random, but associated with the variable of interest. If selection bias is not taken into account in the analysis, the identification of the impact associated with the policy or event will be biased.

  • Selection effects

    Selection effects are differences in observed and unobserved characteristics between those who experience a change in the monitoring regime and those who do not, which are themselves correlated with outcomes.

  • Self-assessment approach to measuring vertical education–job mismatch

    A self-assessment approach is based on respondents’ self-reports about the required education level at their current job or about how well their education or skills are used.

    Information about required education for late-reforming transition economies comes in response to the question in the World Bank’s Skills Toward Employment and Productivity household surveys: “What minimum level of formal education do you think would be required before someone would be able to carry out this work?” The related question in the Programme for the International Assessment of Adult Competencies survey asked of respondents in OECD countries is: “If applying today, what would be the usual qualifications, if any, that someone would need to get this type of job?” If a worker’s highest educational attainment is the same as that required by a given job, the respondent is classified as well-matched. If the educational attainment is higher or lower than that required by a job, the respondent is classified as overeducated or undereducated.

    Source: Kupets, O. Education in Transition and Job Mismatch: Evidence from the Skills Survey in Non-EU Transition Economies. Kyoto Institute of Economic Research Discussion Paper No. 915, 2015.

  • Sex education

    In the US there are two main approaches to sex education: comprehensive sex education, which covers both contraception and avoidance of premarital sex as ways of preventing pregnancy and sexually transmitted disease; and abstinence-only sex education, which advocates refraining from sex until marriage as the only safe way—and, some proponents argue, as the morally preferable way.

  • Slavery in the US

    Slavery was introduced in the territories that today represent the US in the 16th century. Its diffusion escalated throughout the next centuries, with an estimated 645,000 slaves brought in mostly from Africa. Initially the slaves were forcibly settled in the coastal southern colonies, while between the American Revolution and the American Civil War most were relocated in the inland regions. By the 1860 census the slave population of the US amounted to four million, i.e., about 13% of the population, and was distributed within 15 slave states, mostly belonging to the south. The American Civil War led to the abolition of slavery in 1865.

    On the history of slavery in the US see: Berlin, I. Generations of Captivity: A History of African American Slaves. Cambridge, MA: Harvard University Press, 2003.

    For an economic history of American slavery see: Fogel, R. W., and S. L. Engerman. Time on the Cross: The Economics of American Negro Slavery. New York: W.W. Norton and Co., 1974.

    For further sources of information see: Bertocchi, G., and A. Dimico. “Slavery, education, and inequality.” European Economic Review 70 (2014): 197–209; and Bertocchi, G., and A. Dimico. “The racial gap in education and the legacy of slavery.” Journal of Comparative Economics 40:4 (2012): 581–595.

  • Small-scale entrepreneurs and entrepreneurship programs

    Some definitions of “entrepreneurs” limit them to people who organize or operate a business or businesses that involve risk-taking and innovation. The literature using this definition emphasizes the role of innovation among entrepreneurs as an engine of growth, and some studies consider only innovative business people as entrepreneurs. This view distinguishes entrepreneurs from replicative workers who set up small businesses that are similar to other small businesses and remain small.

    A broader definition of “entrepreneurs” includes multiple types of businesspeople but recognizes differences within the group. For instance, “transformational entrepreneurs” (high-growth, innovative, and expansive entrepreneurs who likely have entrepreneurial traits) are differentiated from “subsistence entrepreneurs” (self-employed out of necessity and often lacking skills and entrepreneurial traits) (Schoar, 2010).

    When standard employment status categories are used to objectively classify workers in the labor market, entrepreneurs likely overlap with non-wage workers (the self-employed), which include farmers, non-paid family workers, own-account workers, and employers.

    The broader definition treats entrepreneurs interchangeably with self-employed workers. Small-scale entrepreneurs include agricultural and own-account workers without paid employees in their self-employed activities.

    Small-scale entrepreneurship programs, which focus on individual workers, are slightly different from microenterprise development, which focuses more on organizations. Programs to improve the regulatory environment and infrastructure for businesses, for instance, can be part of microenterprise development, but are not covered by the definition of small-scale entrepreneurship programs.

    Source: Schoar, A. “The divide between subsistence and transformational entrepreneurship.” In: Lerner, J., and A. Schoar (eds). International Differences in Entrepreneurship. Chicago: University of Chicago Press, 2010; pp. 57–81.

  • Social experiments

    A social experiment assigns study subjects, randomly or by lottery, to a “treatment group” whose members receive an intervention, such as preschool, or to a control group, whose members do not receive the treatment. Random assignment ensures that the treatment and control group are on average identical in all other respects aside from exposure to the treatment itself. As a result, any difference on average in later outcomes between the two groups can be safely attributed to the treatment, not to other factors.

  • Social protection schemes

    Social protection schemes include all interventions to support communities, households, and individuals in their efforts to prevent, manage, and overcome economic risks and vulnerabilities. As defined here, social protection is thus a broader concept than traditional social security. It encompasses social insurance (for example, where individual workers make contributions) and social assistance (which is more likely to be noncontributory) but also includes other measures to protect people from economic and social distress (International Labour Organization, 2003). Social protection can be provided by governments, markets (for example, financial institutions), employers, and nongovernment organizations or informally through community-based groups. For women social protection thus implies strategies to minimize risk in their roles as workers, mothers, and caregivers.

    An effective social protection system would typically include:

    • Unemployment insurance;

    • Maternity leave and employment protection during pregnancy and post-delivery;

    • Childcare and other social support services;

    • Health coverage and insurance;

    • Life and disability insurance;

    • Pension schemes; and

    • Interventions to enhance access to financial services.

    International Labour Organization. Social Protection: A Life Cycle Continuum Investment for Social Justice, Poverty Reduction, and Sustainable Development. Geneva: ILO, 2003

  • Social security: Some basic concepts

    Defined-benefit: A guarantee by the insurer or pension agency that a set benefit based on a prescribed formula will be paid.

    Defined-contribution: A pension plan in which the periodic contribution is prescribed and the benefit depends on the contribution plus the investment return.

    Full funding: The accumulation of pension reserves that total 100% of the present value of all pension liabilities owed to current members.

    Individual (or savings) accounts: Accounts in which individual contributions are deposited in fully-funded defined-contribution pension programs. The amounts accumulated are capitalized and then used to finance pensions when individuals retire.

    Unfunded or pay-as-you-go: A method of financing whereby current outlays on pension benefits are paid out of current revenues from an earmarked tax, often a payroll tax.

    Sources: Definitions from Alvaro Forteza; and, World Bank. Averting the Old Age Crisis. New York: Oxford University Press, 1994.

  • Specification tests

    In order to estimate the relationship between two variables, e.g. to explain the effect of education on income, econometricians often assume a functional form for this relationship. For instance, one could assume a linear relationship in the sense that each additional year of schooling increases income by 2%. Alternatively, one could assume that after a while, let us say 30 years of education, one additional year of education has less of an effect, so that the relationship might not be increasing at a constant rate “forever” but at a decreasing rate. In such a case the (functional form) assumption is incorrect and needs to be adjusted. Specification tests examine whether the functional form of the model is correct. Other errors one could make when defining the functional form of the model to be estimated include: omitting relevant variables, including irrelevant variables, or making measurement errors.

  • Statistical discrimination

    Statistical discrimination describes the persistence of racial and gender-based discrimination in the labor market even in the absence of overt prejudice. Statistical discrimination occurs when an economic agent uses an individual’s observable characteristics, such as physical traits that describe gender or race based on group averages, to stand in for unobservable characteristics, such as an individual’s productivity and skills, that are relevant to desired outcomes. These group averages (real or imagined) or stereotypes are used to fill in information gaps and thus lead to a persistence of discrimination.

  • Status in employment

    Wage and salaried workers (employees) hold paid employment jobs, with explicit (written or oral) or implicit employment contracts that promise a basic remuneration that is not directly dependent on the revenue of the unit for which they work. They are typically remunerated with wages and salaries but may be paid in commission from sales, piece-rates, bonuses, or in-kind payments, such as food, housing, and training.

    Self-employed workers includes individuals who engage in work on their own or with one or a few partners. They hold jobs in which their remuneration depends on the profits derived from the goods and services they produce. Own-account workers work alone or with one or a few partners, without engaging employees on a continuous basis to work for them. Employers or entrepreneurs are workers who hire one or more people to work for them as employees on a continuous basis.

    Contributing family workers (unpaid family workers) are unpaid workers who work in a market-oriented establishment operated by a related person living in the same household. They cannot be regarded as partners, because their degree of commitment to the operation of the establishment is not at a level comparable to that of the head of the establishment.

    Vulnerable employment is the sum of own-account workers and contributing family workers. Vulnerable employment is used as an indicator for measuring progress toward achievement of the Millennium Development Goal of reducing poverty and hunger.

    Source: United Nations. The World’s Women 2005—Progress in Statistics. New York: UN Department of Economics and Social Affairs, Statistic Division, 2006; p. 161. Online at:; International Labour Organization. International Classification by Status in Employment (ICSE, 1993). Geneva: Department of Statistics, 2010. Online at:

  • Statutory minimum wage

    A statutory minimum wage is the lowest wage permitted by law.

  • Straight time

    In human resources, especially in the US, “straight time” refers to an employee’s regular established working hours over a standard period (such as a week), excluding time lost due to absence or gained by working overtime.

    Straight-time pay refers to the agreed hourly rate for work performed within these agreed hours. Additional work performed beyond these hours may be paid at a higher overtime rate.

    Source: “Straight time.” Online at: [Accessed September 12, 2014].

  • Structural change: definition

    There are a number of different ways to define structural change. The first option is to define structural causes of increased unemployment as those that cannot be influenced by monetary policy. This may be the most relevant definition, but it confuses two issues: (a) determining the causes of unemployment; and (b) assessing whether those factors can be remedied by monetary policy.

    A second option defines structural causes of increased unemployment as those that cannot be remedied by either monetary or fiscal policy. This definition is broader than the first, but still suffers from the same problem, as outlined above.

    A third approach is to distinguish between supply and demand causes. Supply causes may be labeled structural causes, which demand causes are not. This is based on the idea that demand conditions tend to be short-lived and are inherently cyclic, whereas supply conditions may reflect longer-term changes, such as demographics. This includes changes that may be brought about by fiscal policy.

    For example, changes in the generosity of unemployment insurance might induce workers to spend more time searching for jobs or taking more leisure. Making housing subsidies income contingent would also lower the value of work and might increase the proportion of individuals who are unemployed.

    Fourth, a structural change might be said to occur if the composition of unemployment changes. However, this definition is somewhat indirect. It suggests that a structural change has occurred when we observe changes in the pattern of unemployment, not when we see changes in the factors that caused the pattern of unemployment to change. It is a “define-by-residual” approach: that is, if nothing else can account for a pattern, then it must be structural. In addition, it also overlooks the notion that the existence of more long-term unemployed people does not in itself imply that monetary policy has less power to affect unemployment than it did in the past.

    A fifth approach is simply to define a structural shift as one that is permanent (or at least long-lasting). A non-structural (possibly “cyclical”) shift is a change that is more temporary. In summary, a structural change is permanent (or at least long-lasting). A non-structural (cyclical) shift is a change that is temporary. Structural changes can occur if there are changes to unemployment insurance or the industrial composition of the economy.

    For example, a permanent change in the amount or nature of mismatch would be considered as structural. The industrial composition of the economy may have changed permanently. Consequently, this change might mean that the skill requirements of the available jobs do not match the skill set of workers who are looking for jobs because they trained for an economic structure that has become out of date. Monetary policy is unlikely to be helpful in fixing these kinds of structural changes.

    Source: 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.

  • Studies of overeducation

    Since an early study in the 1970s brought wide attention to education mismatch, the literature on the topic has grown rapidly. But the literature deals mainly with educational mismatch because few data sets contain questions on skill mismatch and few are panels. Most studies have concluded that a large share of workers are overeducated for their jobs and earn less than their well-matched peers. Among studies using panel data, one that examines the effect of overeducation on earnings in the UK after graduation and six years later found that overeducated graduates earned lower wages and that overeducation declined over time for the same workers (Dolton and Vignoles, 2000). Another study using panel data investigated overeducation among young graduates in full-time employment in Canada two and three years after graduation; it also found a slight decline in overeducation over time, as well as a wage penalty for overeducated graduates that declined once unobserved heterogeneity was addressed (Frenette, 2004). A third study using panel data from the Australian Beyond Graduation Survey, which focused on overeducation among recent graduates, also found that overeducation declined over time (though remaining fairly high), a result attributed to the possibility that early jobs provided needed skills training (Carroll and Tani, 2013). Once unobserved heterogeneity was addressed, the study found that young overeducated graduates were not at an earnings disadvantage but older overeducated graduates were. The European Centre for the Development of Vocational Training is developing a skills monitoring index of EU member states to identify and prioritize occupations that are especially susceptible to skill mismatch (European Centre for the Development of Vocational Training, 2012).

    Sources: Carroll, D., and M. Tani. “Overeducation of recent higher education graduates: New Australian panel evidence.” Economics of Education Review 32 (2013): 207–218.

    Dolton, P., and A. Vignoles. “The incidence and effects of overeducation in the U.K. graduate labour market.” Economics of Education Review 19 (2000): 179–198.

    European Centre for the Development of Vocational Training (Cedefop). Skill Mismatch: The Role of the Enterprise. Research Paper No. 21. Luxembourg: European Union, 2012.

    Frenette, M. “The overqualified Canadian graduate: The role of the academic program in the incidence, persistence, and economic returns to overqualification.” Economics of Education Review 23 (2004): 29–45.

  • Studies on unconditional basic income

    A 2014 paper provides detailed information and links on statewide implementations of a basic income measure in Alaska, local experiments in the 1970s in Canada and the US, and more recent experiments and pilot projects in India and countries in Africa and South America (Pasma, 2014). It also covers implementation and experiments for other policies that, although not strictly unconditional basic income measures, come close, such as conditional cash transfers and capital grants. A critical review of US experiments in the 1970s is provided by Widerquist (2005). A striking example of the positive incentives that can be activated by unconditional cash transfers is described in a paper on Uganda (Blattman et al., 2012).

    Other studies describe natural experiments. A useful source of data for investigating the effects of exogenous changes in unearned income is lotteries and lottery winners (Imbens et al., 1999; Marx and Peeters, 2008).

    Sources: Blattman, C., N. Fiala, and S. Martinez. Employment Generation in Rural Africa: Mid-Term Results from an Experimental Evaluation of the Youth Opportunities Program in Northern Uganda. DIW Berlin Discussion Paper No. 1201, 2012.

    Imbens, G., D. Rubin, and B. Sacerdote. Estimating the Effect of Unearned Income on Labor Supply, Earnings, Savings and Consumption: Evidence from a Survey of Lottery Players. NBER Working Paper No. 7001, 1999.

    Marx, A., and H. Peeters. “An unconditional basic income and labor supply: Results from a pilot study of lottery winners.” The Journal of Socio-Economics 37:4 (2008): 1636–1659.

    Pasma, C. Basic Income Programs and Pilots. Calgary: Basic Income Canada Network, 2014.

    Widerquist, K. “A failure to communicate: What (if anything) can we learn from the negative income tax experiments?” Journal of Behavioral and Experimental Economics 34:1 (2005): 49–81.

  • Stylized facts

    Stylized facts are observations that have been shown to be true or are believed to hold in multiple contexts, or broad generalizations that summarize complicated statistical analyses.

  • Substitute or replacement labor

    Workers who can serve in place of other workers because they have similar skills and thus compete with each other for positions; employers consider these workers to be identical.

  • Substitution effects of incentives

    Substitution effects (also referred to as “displacement” or “crowding-out” effects) occur when incentives for a certain activity lead individuals to shift their attention away from other valuable activities and towards the incentivized activity.

  • Sunk-capital-intensive sectors and the hold-up problem

    Sunk-capital-intensive industries are defined as industries in which capital expenditures are firm-specific, and there is no active secondary market for physical capital. In these industries, used capital is likely to account for a lower share of total investment than in industries where capital investments are easily resold. In this context, physical capital resalability is defined as the share of used capital investment in total capital investment outlays at the sectoral level. Thus, the capital resalability index is an inverse measure of the degree of sunk capital investment across industries.

    The hold-up problem arises if one party (the firm) pays the cost of an irreversible (or sunk) investment, while the other (the union) shares the returns.

    Source: Cardullo, G., M. Conti, and G. Sulis. “Sunk capital, unions and the hold-up problem: Theory and evidence from cross-country sectoral data.” European Economic Review 76:C (2015): 253–274 [1].

  • Superdiversity

    Superdiversity typically refers to having a large number or percentage of immigrants and people of different ethnicities in a society or area. Superdiversity can also refer to religious or linguistic diversity, especially as these have implications for a shared civic culture or economic outcomes. Equivalent terms are hyperdiversity, diversification of diversity, and deep diversity.

  • Survey of Health, Ageing, and Retirement in Europe (SHARE)

    The Survey of Health, Ageing, and Retirement in Europe (SHARE) is a multidisciplinary and cross-national panel database of micro data on health, socio-economic status, and social and family networks of more than 85,000 individuals age 50 or older. The main purpose of the survey is to provide detailed information on the living conditions of middle-age and older people for 19 countries in Europe, plus Israel. Eleven countries contributed data to the 2004 SHARE baseline study. Further data were collected in 2005–2006 in Israel. Three more countries joined SHARE in 2006 and participated in the second wave of data collection in 2006–2007. The survey’s third wave, SHARELIFE, collected detailed retrospective life histories in 13 countries in 2008–2009. Finally, the fourth wave, collected in 2010–2011 includes four additional countries.


  • Taste-based discrimination and statistical discrimination in hiring

    Almost all economic analyses of discrimination in hiring have focused on taste-based and/or statistical models of discrimination. Taste- or preference-based discrimination refers to the situation in which employers have a preference for not employing minority workers, while statistical discrimination arises when employers have imperfect information about individuals’ productivity and therefore use estimates of group productivity when hiring. If the group productivity of minority workers is lower on average than that of majority workers, employers will statistically discriminate in favor of majority job applicants when hiring.

  • Tax avoidance and tax evasion

    Individuals take a variety of actions to reduce their tax liabilities. Some are legal “tax avoidance” measures, such as income splitting, tax postponement, and tax arbitrage across income that faces different tax treatment. “Tax evasion” refers to illegal and intentional actions taken by individuals or firms to illegally reduce their tax obligations. Individuals can evade income taxes by underreporting income; overstating deductions, exemptions, or credits; failing to file tax returns; or engaging in barter. Most often these actions concern individual income tax, but corporate and other taxes can also be the object of tax evasion.

    Alm, J. “Measuring, explaining, and controlling tax evasion: Lessons from theory, experiments, and field studies.” International Tax and Public Finance 19:1 (2012): 54–77.

  • Taxonomy of costs to displaced workers analyzed in the literature

    Conventional costs include the duration of unemployment, loss of skills, lower employment rate, reduced working hours, lower monthly or yearly income, and long-term wage penalties in new jobs.

    Non-conventional costs include shorter life expectancy, increased health problems of displaced workers or their spouses and children, reduced happiness, increased depression, more fixed-term and informal employment in new jobs, loss of fringe benefits in new jobs, and unwanted self-employment.

  • Terms used in migration studies

    Externality: An individual’s costs and benefits can result from the activities or transactions of others. For example, emigration of community members reduces the moving costs of other members of the same community and reduces other transaction costs between countries (such as trade costs). The latter effects are referred to as diaspora externalities.

    Optimal emigration rate: The level of skilled/educated emigration that maximizes human capital accumulation in a developing country.

    Private and social returns on human capital: The private return to education is the impact of the individual’s education level on her/his income or employment. The social return is the additional impact that an individual’s education has on the other members of the society.

  • The American Time Use Survey

    Respondents to the American Time Use Survey, a diary-based survey, are asked to sequentially report time spent on activities for the entire day before their interview. For each respondent, time spent working throughout the day is aggregated to estimate the hours worked on the “diary day.” The daily hours are multiplied by seven and averaged over all employed individuals to estimate average weekly hours (the sample weights account for the oversampling of weekends and ensure that the day-of-week representation is correct).

    Hours-worked estimates based on time-diary data are considered to be more accurate than other survey-based estimates because the one-day recall period reduces recall bias. Further, time-of-day anchors and the requirement that the time spent in all activities equals 24 hours reduces social-desirability bias, which results when respondents over-report time spent in socially desirable activities (such as work and childcare) and under-report time spent in less socially desirable activities (such as watching TV). These features make the survey data useful for evaluating the accuracy of hours-worked data from the household survey. An important drawback is the survey’s small sample, which limits the types of analyses that can be performed. Another difference from the household survey is that diary days are approximately evenly distributed over each month of the year.

  • The Clean Air Act Amendments (CAAAs)

    The Clean Air Act (1963) was introduced to control air pollution on a national level, requiring the Environmental Protection Agency to develop and enforce regulations to protect the public.

    In 1970, the CAAA covered the restriction of the emission of pollutants into the air and demanded that National Ambient Air Quality Standards (NAAQS) for certain air pollutants are met by all states. These air pollutants included carbon monoxide, sulfur dioxide, total suspended particles, and ozone. In order to comply, states had to provide a State Implementation Plan outlining their plans to improve any areas that exceeded these new federal air quality guidelines. Despite a deadline of 1975, many states did not succeed in meeting the standards, due to insufficient resources to implement their plans and general confusion.

    In 1977 the CAAA was passed due to the lack of progress. It brought in a system where every county in the US was annually declared “in-attainment” or “out-of-attainment” of the NAAQs, regarding each air pollutant. If any county is out-of-attainment, detailed plans have to be provided that lead to attainment imminently. Failure to reach the standards risks the loss of funding for public goods and services from federal monies.

    The strict environmental regulations mean that any polluting plants joining or growing in an out-of-attainment area are automatically bound by the standard of “Lowest Achievable Emission Rate,” regardless of cost. Often, plants need to install and operate specified pollution abatement equipment under these stringent regulations and any plant changes or expansion leads to that plant being put under stricter regulations. In addition, any new investment’s emissions need to be offset by emissions reductions in existing plants in that area.

    Source: Greenstone, M., J. A. List, and C. Syverson. The Effects of Environmental Regulation on the Competitiveness of U.S. Manufacturing. NBER Working Paper Series No. 18392, September 2012; pp. 6–9. Online at:

  • The European Blue Card

    An approved EU-wide work permit that allows high-skilled non-EU citizens to work and live in any country within the EU, excluding Denmark, Ireland, and the UK.

  • The Foster-Greer-Thorbecke poverty measurement technique

    The Foster-Greer-Thorbecke (FGT) formula is defined as the sum of the difference between the poverty line, z, and individual incomes, y, in relation to the poverty line to the power of alpha, which is a sensitivity parameter. This sum covers all people defined as poor (i.e., those with incomes at or below the poverty line) and is weighted by 1 over the total population, N.

    The headcount index is the proportion of the population that is poor, and is obtained by setting the sensitivity parameter alpha equal to 1. The poverty gap measures the average distance that a poor person is from the poverty line and indicates the depth of poverty among the poor; it is obtained by setting alpha equal to 1.

    The FGT formula is adapted to derive a measure of minimum wage violation, where the poverty line, z, is replaced with the relevant minimum wage; the individual income, y represents individual wage levels for workers below the minimum wage; and alpha is a violation aversion parameter.

    The proportion of individuals below the minimum wage is derived by setting alpha equal to 0. The violation gap measure is derived by setting alpha equal to 1 and denotes the average normalized gap between the wage levels and the minimum. The “squared violation gap” is derived by setting alpha equal to 2.

    The focus of policy responses depends on which measure of non-compliance is used.

    Source: Foster, J., J. Greer, and E. Thorbecke. “A class of decomposable poverty measures.” Econometrica 52:3 (1984): 761–765.

  • The New Independent States (NIS)

    The NIS are the 12 countries in Europe and Central Asia that gained independence after the dissolution of the Soviet Union in 1992. They are grouped into three regions:

    • Trans-Caucasus—Azerbaijan, Armenia, Georgia.

    • Central Asia—Kazakhstan, Kyrgyzstan, Turkmenistan, Uzbekistan, Tajikistan.

    • European region—Belarus, Russian Federation, Moldova, Ukraine.

    Three other former Soviet republics—the Baltic states of Estonia, Latvia, and Lithuania—chose to align themselves with the EU as early as 1989. The Baltics, together with other former socialist countries in Central and Eastern Europe are among the EU New Accession States.

  • The Porter hypothesis

    The Porter hypothesis postulates that environmental regulations have positive effects on the innovative behavior and competitiveness of regulated firms. The regulation-induced newly developed environmental technologies and products may even lead to first-mover advantages for the firms. The Porter hypothesis assumes imperfect information, organizational problems, and market failures. It questions a firm’s ability to maximize profit and indicates that managers may fail to recognize cost savings potential, possibly resulting from the fact that the success of managers is often measured by short-term profits rather than long-term returns.

  • The Prevention of Significant Deterioration (PSD) permit program

    Plants in National Ambient Air Quality Standards attainment areas have a more laidback regulatory standard: PSD. This allows new plants that might emit over 100 tons of a pollutant per year to use the “Best Available Control Technology (BACT).” It seems likely that installing the BACT in attainment areas is far cheaper than achieving the “Lowest Achievable Emission Rate” standard in out-of-attainment areas, meaning that new plants and expansions have pointedly lower pollution control capital construction costs in attainment than out-of-attainment.

    Since existing plants in out-of-attainment areas need to provide regular State Implementation Plans, they undergo more regulatory scrutiny than those in attainment areas. The level of this regulation depends on the size of the plant. They also have emission limits set and have inspections and regulatory supervision more often than those in attainment areas.

    To make sure that the Clean Air Act Amendments are met, the Environmental Protection Agency (EPA) and the states are provided with enforcement powers. States run their own inspection programs and non-compliers can be fined by the state. However, to ensure that the state regulation programs do not vary greatly in intensity, the EPA must approve all programs. The 1977 amendments made the plant-specific regulations both federal and state law. This means that the EPA can impose penalties on states that are not enforcing the regulations as well as on plants not following the regulations.

    Source: Greenstone, M., J. A. List, and C. Syverson. The Effects of Environmental Regulation on the Competitiveness of U.S. Manufacturing. NBER Working Paper Series No. 18392, September 2012; pp. 6–9. Online at:

  • The big five personality traits

    There is growing interest in including measures of personality such as the big five personality traits, typically used in psychology, to explain economic behavior, e.g. financial decisions, entrepreneurial success, or academic motivation—to name just a few. The big five are:

    • openness to experience,

    • extraversion,

    • neuroticism/emotional stability,

    • agreeableness, and

    • conscientiousness.

    One survey that publishes self-reported measures of the big five characteristics is the German Socio Economic Panel (GSOP). In order to capture the five traits the GSOEP asks respondents about:

    Openness to experiences, measured by: (a) I have lively fantasies; (b) I am original, and contribute new ideas; (c) I value artistic, aesthetic experiences.

    Extraversion, measured by (a) I am communicative, talkative; (b) I can let myself go, am social; (c) I am reserved.

    Neuroticism, measured by: (a) I easily become nervous; (b) I worry a lot; (c) I am relaxed, can deal well with stress.

    Agreeableness, measured by: (a) I am considerate and friendly with others; (b) I can forgive; (c) I can sometimes be a bit rude with others.

    Conscientiousness, measured by: (a) I work hard; (b) I accomplish tasks effectively and efficiently; (c) I am rather lazy.

    All of these answers are rated on a scale from 1 (=strongly disagree) to 7 (=strongly agree). For further information see

    Source: O. Nottmeyer. Inter-Ethnic Partnerships: Key Characteristics and What They Reveal about Successful Integration. DIW Berlin Weekly Report No. 15, 2010. Online at:

  • The coverage of collective bargaining

    The coverage of collective bargaining refers to the percentage of the eligible workforce—employees with bargaining rights—whose contract is regulated by the relevant collective agreement. It often exceeds the union density rate, that is, the fraction of workers who are members of trade unions. In this case, reference is made to the excess coverage of collective bargaining.

  • The definition and measurement of disability

    Evidence relating to the labor market experience of disabled workers is frequently based on survey data where individuals self-report disability in response to a series of questions. Disability is usually defined as a long-term limiting health condition. Although precise definitions vary, the main measures typically define “long-term” as a period of six or 12 months and relating to limitations in terms of (1) daily/life activities and/or (2) work. Regardless of the precise definition, self-reported information suffers from two main sources of bias: measurement error and justification bias.

    Measurement error arises because the responses are not directly comparable between individuals who are likely to have different thresholds for reporting disability. Justification bias arises because the incentive to report disability may depend on labor market outcomes themselves. In particular, individuals may use disability to justify non-participation in the labor market.

    Source: Bound, J. “Self-reported versus objective measures of health in retirement models.” Journal of Human Resources 26:1 (1991): 106−138.

  • The difference between intended growth and actual growth

    Growth entrepreneurship is an increasingly important question for policymakers, as some entrepreneurial firms can generate disproportionate gains, for example, in terms of job creation. In the context of growth entrepreneurship, it is worth noting the contrast between desiring growth and actual growth. Some entrepreneurial firms that want to grow may not be successful in doing so, while other firms that did not intend to grow may have done so anyway. This makes it difficult for policymakers to systematically identify and target high-growth firms.

    Source: Krasniqi, B., and S. Desai. “Institutional drivers of high-growth firms: Country-level evidence from 26 transition economies.” Small Business Economics (Forthcoming).

  • The economic functions of insurance

    Insurance pools risk over multiple individuals, performing two important functions for an economy. The first is to replace lost income or a lost asset if a chance loss occurs. The second is to encourage people to engage in socially beneficial but risky activities (such as buying a house even though it might burn down) that they might not undertake without insurance. For unemployment insurance, one aspect of this effect is referred to as the entitlement effect.

  • The efficiency and equality debate

    Efficiency of the education system and of educational outcomes is enhanced by tracking, proponents argue, as a result of grouping students of similar abilities. This in turn allows teaching and curricula that are better tailored to students’ needs and a more efficient allocation of resources across tracks.

    Equality generally refers to equality of educational opportunity. If this is reduced by early school tracking, the outcome may be lower educational achievement, lower earnings, and limited intergenerational mobility.

    The efficiency–equality trade-off rests on the belief that efficiencies in education that result from tracking come at the cost of diminished intergenerational mobility when tracking is begun too early.

    Intergenerational (social) mobility refers to the changes in social status that occur between the parents’ generation and their children’s. Higher mobility is considered desirable. Low social mobility between generations is referred to as intergenerational persistence.

  • The estate tax

    Trends in estate taxes during the 19th and 20th centuries for 19 Organisation for Economic Co-operation and Development countries show that top rates were low in the early 1800s, began to rise around World War I, peaked in the mid-20th century, and have mostly fallen since. Nevertheless, today’s average estate tax rate remains relatively high compared with that before World War I.

  • The flexicurity concept

    The “flex” part of the flexicurity concept refers to lax employment protection, which makes it relatively easy for firms to adjust their workforce. The “[se]curity” part captures the generous income support for the unemployed. Critically, the Danish model also relies on active labor market policies to counteract the possible disincentive effects of generous income support to the unemployed and to enhance workers’ qualifications in order to improve their employment chances (see, for example, Andersen and Svarer, 2007). Especially important, the activation policy includes both employment contingencies built into the eligibility rules for social transfers, and specific program activities such as on-the-job training.

    Institutions, rules, and regulations are richly detailed, so it is difficult to compare and classify countries, not least in quantitative terms, in a few summary indicators. Within the OECD, Denmark has one of the most generous unemployment insurance systems, measured by the net replacement rate in the first year of unemployment, and spends the most on active labor market policies (OECD, 2014). Employment protection legislation for regular workers is about average for OECD members. While a more recent OECD revision implies that Denmark’s employment protection rules are now assessed as less flexible than previously, other assessments put Denmark among the countries with the most flexible rules, including an assessment based on a survey of business leaders, which may reflect how key actors experience the system (World Economic Forum, 2013).

    Finland, the Netherlands, and Sweden belong in the same group, but with some differences. Finland and Sweden have less generous unemployment benefits than Denmark, while the Netherlands has somewhat stricter employment protection legislation for regular workers. There are some similarities in performance between Denmark, Finland, and Sweden following the great recession, while the Netherlands was not as severely affected.

    Source: Andersen, T. M., and M. Svarer. “Flexicurity: Labour market performance in Denmark.” CESifo Economic Studies 53:3 (2007): 389–429.

    OECD. OECD Employment Outlook 2014. Paris: OECD Publishing, 2014.

    World Economic Forum. The Global Competitiveness Report 2013−14. Geneva: WEF, 2013.

  • The gift exchange game

    In its most simple form, the gift exchange game implements a two-stage, two-player game with one subject in the role of a principal (employer) and one in the role of an agent (worker).

    In the first stage, the principal can make a binding wage offer w to an agent, who can, but does not have to, accept it. If an agent accepts the offer, he/she has to determine the effort level e.

    In the experiment, the choice of effort level is represented by the choice of a number. The higher the chosen number, the higher the effort level, and the higher the monetary effort costs to be borne by the agent. The higher e, the larger the material payoff for the principal, but the higher also the agent’s effort costs c(e), which are increasing and convex.

    Material payoffs from an exchange are given by aew for the principal and wc(e) for the agent, where a is a constant. If the principle and his/her agent do not manage to trade, they both earn zero.

    The gift-exchange game is one way of testing the notion of reciprocity for motivating individuals (see Fehr et al., 1993).

    Fehr, E., G. Kirchsteiger, and A. Riedl. “Does fairness prevent market clearing? An experimental investigation.” The Quarterly Journal of Economics 108:2 (1993): 437–459.

  • The spatial mismatch hypothesis

    The spatial mismatch hypothesis was inspired by the rapid residential suburbanization around metropolitan areas of the US in the second half of the 20th century. As people moved from the cities to the suburbs, firms also dispersed from central areas within cities to take advantage of agglomeration externalities (the benefits that firms obtain by locating near each other) in suburban areas and to escape increasing congestion and rent prices in cities. As minorities were slower to relocate, allegedly because of housing market discrimination and zoning regulations, there was an increase in the concentration of minorities in inner-city areas, where low-skilled job creation was slow.

    Source: Gobillon, L., H. Selod, and Y. Zenou. “The mechanisms of spatial mismatch.” Urban Studies 44:12 (2007): 2401–2427; Moreno-Monroy, A. I., and F. Ramos. The Impact of Public Transport Expansions on Informality: The Case of the São Paulo Metropolitan Region. ERSA Conference Papers, 2015.

  • The strength and resource content of social and family ties

    Strength of social network ties. The strength of network ties, as defined by Granovetter (1973, p. 1361), is a “combination of the amount of time, the emotional intensity, the intimacy (mutual confiding), and the reciprocal services which characterize the tie.” The notion of the “strength of weak ties,” as developed by Granovetter, conveys the sense that links with infrequent interactions or with low intimacy tend to bridge individuals across social groups and are consequently the most informative and most useful in the labor market.

    Resource content of social networks. Another dimension of social networks that should be considered, as laid out in Lin’s (1990) theory of social resources, emphasizes the importance of the resources available in a network, defined by the socio-economic characteristics of the individuals connected through the network.

    Source: Granovetter, M. S. “The strength of weak ties.” American Journal of Sociology 78:6 (1973): 1360–1380; Lin, N. “Social resources and social mobility: A structural theory of status attainment.” In: Breiger, R. L. (ed.). Social Mobility and Social Structure. New York: Cambridge University Press, 1990; pp. 308–356.

  • The three principal international agreements on child labor

    The legal boundaries of child labor and the legal basis for national and international actions against it are established by three principal international conventions on child labor: International Labour Organization (ILO) Convention No. 138 on minimum age; the UN Convention on the Rights of the Child; and ILO Convention No. 182 on the worst forms of child labor.

  • The trans-Atlantic slave trade

    Out of several slave-trade waves from Africa, the quantitatively most important one involved the shipping of slaves over the Atlantic and to the Americas. The trans-Atlantic slave trade occurred between the 16th and 19th century and caused the forced migration of over 12 million Africans.

    For data see: Eltis, D., S. D. Behrendt, D. Richardson, and H. S. Klein. The Trans-Atlantic Slave Trade: A Database on CD-Rom. Cambridge, UK: Cambridge University Press, 1999.

    For an analysis of its consequences from the perspective, respectively, of sending and receiving countries, see: Nunn, N. “The long-term effects of Africa’s slave trades.” Quarterly Journal of Economics 123:1 (2008): 139–176; and Soares, R. R., J. J. Assunção, and T. F. Goulart. “A note on slavery and the roots of inequality.” Journal of Comparative Economics 40:4 (2012): 565–580.

  • The “Carnegie conjecture”

    “...the parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would...” From an 1891 essay by Andrew Carnegie.

    Holtz-Eakin, D., D. Joulfaian, and H. S. Rosen. “The Carnegie conjecture: Some empirical evidence.” The Quarterly Journal of Economics 108:2 (1993): 413–435.

  • Theory of labor demand under environmental regulation

    The key variable to evaluate the effect of regulations on labor demand is the cross-price elasticity associated with an increase in the rental price of capital.

    The cross elasticity of demand measures the responsiveness of labor demand when the price of capital increases. A negative cross elasticity means that environmental regulations will reduce employment, while a positive cross elasticity indicates that environmental regulations will increase it.

    There are three key sources of variation in the cross elasticity of labor demand to capital prices across industries. First, labor shares differ across industries. Second, market power varies across industries, and this power determines how much of the extra costs associated with the regulations firms in a sector can pass on to buyers. For example, industries more exposed to international trade are more likely to be affected by regulations. Third, differences in the production technology across sectors also contribute to differences in the responsiveness of labor demand to environmental regulations.

  • Three types of employment

    Regular employment: Workers are directly hired in open-ended contracts by the company seeking their services. They are covered by a country’s employment protection laws, which may specify notice periods or severance payments if the employee is dismissed. In the US, regular employees have few legal protections against dismissal.

    Temporary agency employment: Workers are the legal employees of the temporary help agency but perform work for a client organization at the client’s worksite and under its supervision. In some cases, but not most, temporary agency employees have open-ended contracts with the agency and have the same protections against dismissal as regular employees. Individuals placed into temporary positions with client organizations account for the large majority of employment in the temporary help industry, an estimated 95% in the US.

    Fixed-term contract or direct-hire temporary employment: Workers are hired directly by the firm that uses their services and are the legal employees of that firm. They are hired for a fixed period of time specified in the contract and so are easily dismissed when the contract period is over.

  • Time-inconsistent preferences

    Time inconsistency arises when people do not discount between all future periods in the same way. The form of time inconsistency that is most likely to reduce savings is present bias, the tendency to be more patient about trade-offs in the future than trade-offs in the present. People with present biased preferences may find it difficult to follow through on plans to save money, and may regret the choices that they have made about past spending and saving.

  • Total fertility rate and completed fertility

    The total fertility rate is the average number of children a woman would have through the end of her reproductive life span, given the current levels of age-specific birthrates. The total fertility rate is obtained by adding the age-specific fertility rates for women ages 15–49. The completed fertility rate is the average number of children a woman has in her lifetime.

  • Tournaments

    Rank-order tournament: Contestants compete for prizes that are awarded based on relative rank.

    Rent-seeking tournament: Contestants compete for a rent (or a political favor) and the likelihood of receiving such rent depends on the contestants’ relative efforts and skills.

    All-pay auction: A contestant exerting the highest effort receives the best prize with certainty (as is the case in auctions—the highest bidder wins).

    Lottery contests: A contestant exerting the highest effort has the highest likelihood of receiving the best prize.

    Real-effort tournaments: Contestants compete by exerting physical or mental efforts (but no direct monetary costs).

  • Transition economies

    Transition economies are the countries in Central and Eastern Europe and the former Soviet Union which experienced (or are currently experiencing) democratization and marketization reforms. They include: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, Former Yugoslav Republic of Macedonia, Moldova, Mongolia, Montenegro, Poland, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

    The post-transition countries (i.e., the EU-11) are the countries which joined the EU, thus technically completing their transition processes. These countries include the EU-8 countries, which joined the EU in 2004: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia; and the EU-2 countries which joined in 2007: Bulgaria and Romania; and Croatia which joined the EU in 2013.

  • Types of job/education mismatch

    Overeducated: An individual has completed more years of education than the current job requires. Though often used interchangeably with overqualification, overeducated is used more commonly because it does not require estimating years of education.

    Overqualified: An individual holds a higher qualification than the current job requires.

    Overskilled: An individual is unable to fully use acquired skills and abilities in the current job.

    Vertical mismatch: The level of education or skills is less or more than the required level.

    Horizontal mismatch: The level of education or skills is appropriate, but the type of education is not. The Household, Income, and Labour Dynamics in Australia data set does not provide the data needed to estimate this type of mismatch.

  • Types of mismatch

    Qualification (vertical education–job) mismatch arises when workers’ educational attainment is higher than required by their job (workers are overeducated) or lower than required (workers are undereducated).

    Field of study (horizontal education–job) mismatch arises when workers are employed in a different field from the one in which they specialized. Workers who are not employed in an occupation that is considered a good match for their field are classified as mismatched.

    Skill mismatch arises when workers’ skill level is higher than that required by their job (over-skilled) or lower than required (under-skilled).

    Source: OECD. OECD Employment Outlook 2014. Paris: OECD Publishing, 2014.

  • Typical claim and resolution process of employment tribunals

    Claims to employment tribunals can be of various types, such as unfair dismissal, breach of contract, and discrimination on the basis of sex, race, disability, or other personal characteristics. The typical claim and resolution process involves three stages: instigation, conciliation, and determination. Instigation refers to the bringing of a claim, conciliation includes subsequent pre-hearing processes aimed at effecting settlement, and determination refers to the tribunal adjudication.

    In Great Britain, employees wanting to bring a claim against an employer submit an ET1 application form to the tribunal. Since April 2014 claimants need first to notify their intention to bring a claim to the Advisory, Conciliation and Arbitration Service (Acas), an independent, non-departmental public body charged with improving employment relations and promoting settlement of tribunal claims referred to it. Acas will offer voluntary “early conciliation” in an attempt to resolve the dispute prior to a formal application. Conciliation, both at this stage and following a claim, involves working with the parties toward resolution, for example, by helping them understand the tribunal process, exploring their interests, encouraging them to reflect on the strengths and weaknesses of their case, and communicating any offers.

    If the claim proceeds, the tribunal sends a copy to the employer (respondent) inviting a response on form ET3; a copy of the response is also sent to the claimant. Case management by the tribunal may include a pre-hearing review, with a warning that costs may be awarded against a party whose case is considered weak. Acas will also discharge its statutory duty to conciliate once a claim has been brought.

    Applications can result in several outcomes. The most common is settlement, usually involving compensation for the claimant. In Great Britain, settlements may be Acas-conciliated (so-called COT3 settlements) or private. Claims may also be withdrawn. A small proportion of applications are dismissed or disposed of by the tribunal prior to a full hearing, usually for technical reasons such as exceeding the time limits for making a claim.

    Only one-fifth of cases are decided at a full tribunal hearing. Historically, these have normally comprised a three-person panel—an employment judge accompanied by two lay members who represent the perspectives of the employer and the employee—although a growing number of claims may now be heard by employment judges sitting alone. After considering the evidence, the tribunal may uphold, partially uphold, or not uphold the claim. When it upholds or partially upholds a claim, it also decides any award to be made to successful claimants.

    Either side may appeal against the tribunal’s decision, but only on a point of law.


  • US data sources for job-to-job flow rates

    Several data sources can be used to measure job-to-job flows in the US economy. Rates are usually calculated by dividing the measure of transitions by the employed population.

    • The March Current Population Survey asks workers for the total number of employers that they have worked for in the last year. A refinement was added to the survey in 1994. Each month, for three months, respondents are prompted with the name of the employer they identified previously and are asked whether they still work there.

    • Administrative records permit measurement based on employee records showing that they were receiving taxable earnings from one employer and then from another without any intervening period with no taxable earnings.

    • The US Census Bureau recently produced a public-use data product derived from the Longitudinal Employer–Household Dynamics data, which combines data from state and federal sources to create a longitudinal linked employer–employee data set. This data set tabulates different types of employment transitions:

      • Within-quarter job-to-job flows, when the previous and subsequent jobs have reported earnings.

      • Adjacent-quarter job-to-job flows, when the previous job ends in the quarter before the subsequent job begins.

      • Flows into and from nonemployment, for quarters in which a worker has no reported earnings.

    • Other longitudinal or retrospective surveys, such as the Survey of Income and Program Participation, ask employees about employer switching. Job-to-job flow rates calculated from such data sources generally do not have a very long time series.

    • The US Bureau of Labor Statistics produces monthly statistics from its Job Openings and Labor Turnover Survey, which asks employers about their employee separations and to distinguish between separations that occurred because the employee quit and those that occurred because the employee was laid off.

  • US welfare programs: Selected list

    Medicaid: Medicaid is a health insurance program for low-income people and those in need, jointly funded by the federal and state governments. It covers children, the elderly, blind people, disabled people, and other people who are eligible to receive federally assisted maintenance payments. (Source: US Social Security Administration)

    Aid to Families with Dependent Children (AFDC): AFDC enables states to provide cash welfare payments for needy children who have been deprived of parental support or care because their father or mother is absent, incapacitated, deceased, or unemployed. (Source: US Department of Health and Human Services)

    Supplemental Security Income (SSI) Benefits: SSI makes monthly payments to people who have low income and few resources, and are aged 65 or older, blind, or disabled. (Source: US Social Security Administration)

    Pharmaceutical Assistance to the Aged and Disabled (PAAD): The PAAD program helps eligible New Jersey residents pay for prescription drugs. (Source: State of New Jersey Department of Human Services)

  • Uganda’s Youth Opportunities Program

    Uganda’s Youth Opportunities Program of 2006–2010 was directed to men and women aged 16–35 living in rural villages. It had several important characteristics that may have contributed to its successes:

    • The program solicited applications for cash grants to start a skilled business, such as carpentry or tailoring. The maximum amount that could be requested was $10,000.

    • People had to apply as a group (on average 22 people). Half the groups were already in place (microfinance clubs, farm cooperatives), and half were new.

    • Groups had to submit a written proposal on how they planned to use the grant for non-agricultural skills training and enterprise start-up costs.

    • Groups could select their own trainers, who were local artisans or small institutes providing group-based training.

    • Because illiteracy was widespread among the targeted groups, applicants were required to use facilitators, chosen from among local government employees, teachers, and community leaders, to advise on proposals. Facilitators received a stipend of 2% of the value of the funded proposals.

    • The government screened the proposals. Only one application per village was allowed, and proposals had to meet minimum technical requirements. There was no government monitoring once the winning proposals were selected.

    • The management committees of the successful proposals received a lump-sum cash transfer directly into a bank account. The average grant amounted to $382 per person, and 80% of the grants ranged from $200 to $600 per person.

    Source: Blattman, C., N. Fiala, and S. Martinez. “Generating skilled self-employment in developing countries: Experimental evidence from Uganda.” The Quarterly Journal of Economics 129:2 (2014): 697–752.

  • Unauthorized immigrants

    People who entered a country without permission—either by crossing the border surreptitiously or by using false documents—or people who entered legally but then “fell out of status” by overstaying their visa, or going beyond the scope of their visa. This latter group may include students, temporary workers, tourists, and those ultimately denied asylum status.

  • Understanding refugee and immigrant status

    Refugee: A person who, owing to well-founded fear of persecution for reasons of race, religion, nationality, political opinion, or membership of a particular social group, is outside the country of nationality (or, in the case of stateless persons, the country of former habitual residence) and is unable or, owing to such fear, unwilling to avail themselves of the protection of that country.

    Resettlement: The selection and transfer of refugees from a state in which they have sought protection to a third state which has agreed to admit them—as refugees—with permanent residence status. The status provided should ensure protection against refoulement (i.e. return to a state where they may be persecuted) and provide a resettled refugee and his/her family or dependents with access to civil, political, economic, social, and cultural rights similar to those enjoyed by nationals. It should also carry with it the opportunity to eventually become a naturalized citizen of the resettlement country.

    Family reunion migration: The entry into and residence in another state by an individual for the purpose of (re)uniting with that person’s family in the new country.

    Labor migration: Movement of persons from one state to another, or within their own country of residence, for the purpose of employment.

    Source: European Migration Network. Asylum and Migration Glossary 3.0. Brussels: European Commission, 2014.

  • Unemployment insurance and individual savings accounts worldwide

    Unemployment insurance schemes vary in eligibility conditions and in the level and duration of benefits. The generosity of benefits (the replacement rate for the average-income worker) depends on the country’s income level. High-income countries have the highest average replacement rate (over 60%).

    Individual unemployment savings accounts, a more recent type of defined-contribution system, can be funded or be pay-as-you-go (Robalino et al., 2009). Most countries with funded individual savings accounts are in Latin America. Austria and Jordan are among the few countries outside Latin America that have individual savings accounts.

    The key policy parameter when designing individual savings accounts is the contribution rate. In general, contribution rates are higher than for unemployment insurance schemes because of the need to generate meaningful benefits with individual savings. With a 3% real interest rate, for instance, workers would need to save 8% of their salaries for one year (the value of the contribution rates in most Latin American countries) to finance one month of benefits. Countries with lower contribution rates, such as Jordan (1%) and Chile (1.5%), also finance benefits from additional sources—pension funds in Jordan and a solidarity fund in Chile.

    Robalino, D. A., M. Vodopivec, and A. Bodor. Savings for Unemployment in Good or Bad Times: Options for Developing Countries. IZA Discussion Paper No. 4516, October 2009.

  • Unemployment insurance schemes

    Unemployment insurance schemes have different dimensions and conditions in different countries. They may be voluntary or mandatory and have different eligibility conditions, different financing (through general taxation or direct contributions), and varying benefit levels (dependent on such factors as previous wages, employment history, duration of benefits, and eligibility conditions).

    Especially relevant here is whether benefit generosity—defined to include benefit levels, duration, and eligibility—should be based on the business cycle. In most cases, the principle arguments are the same, regardless of which dimension is highlighted. In policy discussions, the focus is mostly on benefit duration and eligibility conditions.

    Theoretical work on unemployment schemes usually focuses on one dimension or just a few. The literature is inconclusive as to which dimension is best suited to being made dependent on the business cycle.

    Sources: P. Jung, and K. Kuester. Optimal Labour-Market Policy in Recession. Research Department, Federal Reserve Bank of Philadelphia Working Paper No. 11-48, 2011; K. Stovicek, and A. Turrini. Benchmarking Unemployment Benefits in the EU. IZA Policy Paper No. 43, June 2012.

  • Unit labor costs (ULC)

    Measure the average cost of labor per unit of output and are calculated as the ratio of total labor costs to real output. Looking at ULC across time or across firms and countries gives perspective on the relative differences in productivity.

    Source: OECD Glossary of Statistical Terms. Online at:

  • United Nations Development Programme (UNDP) 2004 and UNDP, World Bank, and European Commission 2011 data sets

    The UNDP’s 2004 data set was an important effort to produce a socio-economic profile of large Roma populations throughout Europe (UNDP/FRA, 2012). The data are based on samples of Roma living in Roma settlements or areas of compact Roma populations (areas where the share of Roma population is at least as large as the share of Roma in the national census). The samples represent about 85% of the Roma in each country but are not representative of Roma living in areas with a low overall concentration of Roma. Control samples were constructed for non-Roma households in close spatial proximity to Roma households. Households were selected through random route sampling, and Roma surveyors were engaged when relevant. The UNDP, World Bank, and European Commission’s 2011 data set followed a similar sampling strategy (UNDP/WB/EC).

    UNDP/FRA (United Nations Development Programme, European Union Agency for Fundamental Rights). 2012. The Situation of Roma in 11 EU Member States: Survey Results at a Glance. New York: UNDP, and Vienna: FRA.

    UNDP/WB/EC (United Nations Development Programme, World Bank, European Commission). Explore data. View Online [Accessed September 20, 2013].

  • Using propensity score matching to evaluate the effect of privatization

    Estimates of the effects of policy interventions, such as the privatization of state-owned enterprises, are often biased because policy targets are most likely selected intentionally, not randomly. If firms with high growth potential are specifically selected for a policy intervention, then the firms’ performances after the intervention do not necessarily indicate the effect of the intervention. In the case of China, many small- and medium-sized SOEs have been privatized, while most large SOEs remain state- owned. Therefore, when comparing the outcomes of privatized SOEs and the remaining SOEs, the difference reflects not only the effect of privatization, but also intrinsic differences between small and large SOEs.

    One way to isolate and identify the effect of privatization is propensity score matching (PSM) estimations. In PSM estimations, each privatized SOE is matched with a remaining (non-privatized) SOE that has similar characteristics. In particular, the probability of privatization is estimated for each SOE using all possible determinants of the government’s selection, including firm size; this probability is then used as a composite measure of firm characteristics. The difference in the share of exporters between privatized SOEs and the remaining SOEs (considering only those that have been matched with privatized SOEs) represents the effect of privatization on export decisions because no intrinsic difference exists between the two groups’ prior characteristics.

  • Using propensity score matching to measure the effect of university dropout

    The control group is created using matching. For every individual in the treatment group (in this case, for every dropout) another individual is identified in the data who shares the same characteristics except for the one of interest, in this case dropping out of university. Propensity score matching creates a score that summarizes in a single number all the characteristics used for matching. Individuals are then matched based on this score. A problem of propensity score matching is that individuals can only be matched on variables for which information is available in the data.

  • Utility

    A numerical representation of individual well-being, generally expressed as a function of consumption and leisure time. May also depend on other variables, such as the number of children. By extension, may also be used to represent the well-being of groups of individuals.