American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Symposia The Rising Instability of U.S. Earnings PeterGottschalkBoston College RobertMoffittJohns Hopkins U 3 24 The inequality of earnings and of family incomes in the United States has increased since the late 1970s. The large rise in earnings inequality between the 1970s and the 1990s could reflect either a rise in disparity of permanent incomes, a rise in earnings instability, or some portion of both. In this paper, we provide longitudinal measures that separate changes in income inequality into changes that permanently change income to new levels and those that only reflect transitory change. We refer to the latter as changes in "income instability" and discuss how the instability of individual earnings and family income in the United States has evolved -- as whole as well as for different types of individuals and families -- over the last quarter century. We consider alternative definitions of instability that have been proposed, and establish that all studies find that instability is considerably higher today than in the mid-1970s. This increase in instability is not a recent phenomenon. Earnings instability rose sharply in the late 1970s and early 1980s, then stabilized at these high levels through the recent period, although it may be increasing once again. We also discuss the factors that may be driving this increase in instability. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.3 10.1257/jep.23.4.3 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Symposia The Evolution of Medical Spending Risk JonathanGruberMIT HelenLevyU MI 25 48 How has the economic risk of health spending changed over time for U.S. households? We describe trends in aggregate health spending in the United States and how private insurance markets and public insurance programs have changed over time. We then present evidence from Consumer Expenditure Survey microdata on how the distribution of household spending on health -- that is, out-of-pocket payments for medical care plus the household's share of health insurance premiums -- has changed over time. This distribution has shifted up over time -- households spend more on medical care and insurance than they used to -- but for the purposes of measuring change in risk, it is not the mean but the dispersion of this distribution that is of interest. We consider two measures of dispersion that serve as proxies for household risk: the standard deviation of the distribution of household health spending and the ratio of the 90th percentile of spending to the median (the so-called "90/50 gap"). We find, surprisingly, that neither has increased despite the rapid rise in aggregate health spending. This conclusion holds true for broad subgroups of the population (for example, the nonelderly as a group) but not for some narrowly-defined subgroups (for example, low-income families with children). We next consider how much risk households should face, from the perspective of economic efficiency. Household risk may not have changed much over the past several decades, but do we have any evidence that this level represents either too much or too little risk? Finally, we discuss implications for public policy -- in particular, for current debates over expanding health insurance coverage to the uninsured. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.25 10.1257/jep.23.4.25 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Symposia Changing Household Financial Opportunities and Economic Security Karen E.DynanBrookings Institution 49 68 Households have experienced an expansion of financial opportunities over the past several decades. Expanded financial opportunities, such as the democratization of credit and new lending approaches, can yield benefits in terms of household economic security. However, the financial crisis that began in 2007 has powerfully illustrated that expanded financial opportunities can also pose dangers for households. By increasing the scope for investment in risky assets, people may end up with larger swings in wealth than they had anticipated. Households may borrow too much and then face obligations that are unsustainable given their resources. To explore these issues, I examine household data on wealth, assets, and liabilities going back 25 years and, in some cases, 45 years. I argue that changes in household finances in the decades leading up to the mid-1990s -- including the gradual rise in indebtedness -- likely increased household well-being, on balance, and contributed to a decline in aggregate economic volatility. However, changes in finances since the mid-1990s -- in particular, a much sharper rate of increase in household debt -- appear to have been destabilizing for many individual households and ultimately for the economy as a whole. I consider how the lessons learned in the current crisis might change household financial opportunities and choices going forward. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.49 10.1257/jep.23.4.49 http://www.aeaweb.org/jep/app/2304_dynan_data_appendix.pdf American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Symposia Job Loss and the Fraying of the Implicit Employment Contract Kevin F.HallockCornell U 69 93 Most workers have one employment contract that is explicit and another one that is implicit. The explicit employment contract specifies working hours, compensation, and job tasks. The implicit contract involves expectations about the extent to which the employment relationship is likely to continue over time. Will the firms will seek to avoid mass layoffs unless or until absolutely necessary? Will firms cushion the wages and compensation of employees to some extent from broad swings in the economy? Will employees show some degree of loyalty to the firm? This paper will argue that, along a number of dimensions, the nature of the worker-firm employment relationship may have changed substantially in recent years -- a group of changes that as a whole have negatively affected the lives of workers and produced modest, if any, benefits for firms. If employers have become less involved with cushioning the blow of unemployment and avoiding layoffs where possible, then public policy might have a role to play in spreading the burden of a down labor market so that the burden is not borne so heavily by those who lose their jobs entirely. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.69 10.1257/jep.23.4.69 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Symposia The Changing Selectivity of American Colleges Caroline M.HoxbyStanford U 95 118 Over the past few decades, the average college has not become more selective: the reverse is true, though not dramatically. People who believe that college selectivity is increasing may be extrapolating from the experience of a small number of colleges such as members of the Ivy League, Stanford, Duke, and so on. These colleges have experienced rising selectivity, but their experience turns out to be the exception rather than the rule. Only the top 10 percent of colleges are substantially more selective now than they were in 1962. Moreover, at least 50 percent of colleges are substantially less selective now than they were in 1962. To understand changing selectivity, we must focus on how the market for college education has re-sorted students among schools as the costs of distance and information have fallen. In the past, students' choices were very sensitive to the distance of a college from their home, but today, students, especially high-aptitude students, are far more sensitive to a college's resources and student body. It is the consequent re-sorting of students among colleges that has, at once, caused selectivity to rise in a small number of colleges while simultaneously causing it to fall in other colleges. This has had profound implications for colleges' resources, tuition, and subsidies for students. I demonstrate that the stakes associated with choosing a college are greater today than they were four decades ago because very selective colleges are offering very large per-student resources and per-student subsidies, enabling admitted students to make massive human capital investments. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.95 10.1257/jep.23.4.95 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Symposia Playing the Admissions Game: Student Reactions to Increasing College Competition JohnBoundPopulation Studies Center, U MI BradHershbeinU MI Bridget TerryLongHarvard U 119 46 Gaining entrance to a four-year college or university, particularly a selective institution, has become increasingly competitive over the last several decades. We document this phenomenon and show how it has varied across different parts of the student ability distribution and across regions, with the most pronounced increases in competition being found among higher-ability students and in the Northeast. Additionally, we explore how the college preparatory behavior of high school seniors has changed in response to the growth in competition. We also discuss the theoretical implications of increased competition on longer-term measures of learning and achievement and attempt to test them empirically; the evidence and related literature, while limited, suggests little long-term benefit. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.119 10.1257/jep.23.4.119 http://www.aeaweb.org/jep/app/2304_Bound_Hershbein_Long_data_appendix.pdf American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Articles Optimal Taxation in Theory and Practice N. GregoryMankiwHarvard U MatthewWeinzierlHarvard U DannyYaganHarvard U 147 74 The optimal design of a tax system is a topic that has long fascinated economic theorists and flummoxed economic policymakers. This paper explores the interplay between tax theory and tax policy. It identifies key lessons policymakers might take from the academic literature on how taxes ought to be designed, and it discusses the extent to which these lessons are reflected in actual tax policy. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.147 10.1257/jep.23.4.147 http://www.aeaweb.org/jep/app/2304_Mankiw_Weinzeirl_Yagain_sim_files.zip http://www.aeaweb.org/jep/app/2304_Mankiw_Weinzierl_Yagan_appendix.pdf American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Articles Mortality Inequality SamPeltzmanU Chicago 175 90 The paper describes how changes in the inequality of lifetimes have contributed to changes in the social distribution of welfare. I address the following questions: How can we measure inequality of lifetimes? How has this kind of inequality changed over time? How is this inequality related to increased longevity? How do these trends differ across and within countries? Unequal longevity was once a major source of social inequality, perhaps even more important in some sense than income inequality, for a long time. But over the last century, this inequality has declined drastically in high-income countries and is now comparatively trivial. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.175 10.1257/jep.23.4.175 http://www.aeaweb.org/jep/app/2304_Peltzman_appendix.pdf American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Articles The Liabilities and Risks of State-Sponsored Pension Plans RobertNovy-MarxU Chicago Joshua D.RauhNorthwestern U 191 210 As of December 2008, state governments had approximately $1.94 trillion set aside in pension funds for their employees. How does the value of these assets compare to the present value of states' pension liabilities? Just as future Social Security and Medicare liabilities do not appear in the headline numbers of the U.S. federal debt, the financial liability from underfunded public pensions does not appear in the headline numbers of state debt. If pensions are underfunded, then the gap between pension assets and liabilities is off-balance-sheet government debt. We show that government accounting standards require states to use procedures that severely understate their liabilities. We then discuss the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the $1.94 trillion in assets, these pensions are underfunded by $3.23 trillion. This "pension debt" dwarfs the states' publicly traded debt of $0.94 trillion. And we show that even before the market collapse of 2008, the system was economically severely underfunded, though public actuarial reports presented the plans' funding status in a more favorable light. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.191 10.1257/jep.23.4.191 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Articles Field Experiments in Class Size from the Early Twentieth Century JonahRockoffColumbia U 211 30 A vast majority of adults believe that class size reductions are a good way to improve the quality of public schools. Reviews of the research literature, on the other hand, have provided mixed messages on the degree to which class size matters for student achievement. Here I will discuss a substantial, but overlooked, body of experimental work on class size that developed prior to World War II. These field experiments did not have the benefit of modern econometrics, and only a few were done on a reasonably large scale. However, they often used careful empirical designs, and the collective magnitude of this body of work is considerable. Moreover, this research produced little evidence to suggest that students learn more in smaller classes, which stands in contrast to some, though not all, of the most recent work by economists. In this essay, I provide an overview of the scope and breadth of the field experiments in class size conducted prior to World War II, the motivations behind them, and how their experimental designs were crafted to deal with perceived sources of bias. I discuss how one might interpret the findings of these early experimental results alongside more recent research. http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.211 10.1257/jep.23.4.211 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Features Recommendations for Further Reading TimothyTaylorMacalester College 231 38 http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.231 10.1257/jep.23.4.231 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Features The Shrinking Medicare Part D Benefit: Comment CarlJohnstonInterdisciplinary Center for Economic Science, George Mason U 239 40 http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.239 10.1257/jep.23.4.239 American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Journal Article Front Matter i vi http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.i 10.1257/jep.23.4.i American Economic Association Nashville, TN 0895-3309 Journal of Economic Perspectives http://www.aeaweb.org/jep/ 23 4 Fall 2009 http://www.aeaweb.org/issue.php?journal=JEP&volume=23&issue=4 Features Notes 241 246 http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.4.241 10.1257/jep.23.4.241