Carlos Urrutia

Intergenerational Persistence of Earnings: The Role of Early and College Education

Recent empirical studies show that the intergenerational persistence of economic status in the U.S. is much higher than previously thought. We develop a quantitative theory of inequality and intergenerational transmission of human capital where parents invest in early and college education of their children subject to borrowing constraints. Children differ exogenously in innate abilities, which can be correlated with their parents innate ability. An important feature of the environment is that the quality of early education determines the probability of college completion. We calibrate a stationary equilibrium of this economy to relevant statistics in aggregate U.S. data, and use it to investigate the sources of inequality and persistence in earnings. In our benchmark model, about half of the intergenerational persistence and one fourth of the inequality in earnings are accounted for by endogenous investments in education. We find that early investments in education account for most of the endogenous persistence in earnings, while college education generates most of the endogenous inequality in earnings. Our theory is suited to study the effect of educational policies on the persistence of inequality. We show that public resources devoted to early education have the largest impact on earnings mobility. Moreover, non-progressive college subsidies generate more intergenerational persistence of earnings.

Relative prices and investment rates

Abstract We construct a panel for the price of aggregate investment over consumption and report the following observations. (1) Relative price differences across countries are large over the entire sample period, and this conclusion is not affected by excluding non-tradable consumption goods. (2) Relative price dispersion has decreased during the sample period. (3) Relative price changes are not persistent across periods, while average price levels are. Moreover, the persistence in relative price levels is higher for countries at low relative prices. We show that the relative price of investment is negatively correlated with investment rates in a cross section of countries. The standard one-sector growth model is a natural framework to study quantitatively the effects of barriers to capital accumulation since there is a very simple mapping between barriers to investment and relative prices in this environment. We simulate a calibrated version of the model, in which barriers follow a stochastic process common to all countries and estimated using relative price data, and obtain statistics for investment rates that closely resemble what we observe in the data. In particular, the model accounts for 90% of the 1985 Gini index of relative investment rates and the decline in investment rate dispersion over time. The model has two limitations as a theory of development. First, it cannot account for the income disparity in the data unless we assume unmeasured capital with barriers affecting the broad measure of capital. Second, even under these extreme assumptions, the model cannot account for the evolution of income disparity over time.

Employment Protection and Business Cycles in Emerging Economies

We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment.

Economic Growth and Wage Stagnation in Peru: 1998–2012

From 1998 to 2012, the Peruvian economy exhibited rapid growth. Moreover, the composition of the labor force improved in terms of education and experience, two variables that are typically associated to higher human capital. The average worker in 2012 had a higher level of education and was one and a half years older than in 1998, reflecting the impact of the demographic transition. However, the average real wage was roughly constant. We show that a decline in the wage premium for education, and to a minor extent for experience, is responsible for the lack of growth in the average real wage. Had these two premia remained constant throughout the period of analysis, average labor earnings would have increased by about 2.6% per year, of which 0.7 percentage points are accounted for by the changes in the composition of the labor force in terms of age and education. We explore the role of the relative supply of workers with different levels of human capital as an explanation for the decline in the wage premium for education. Finally, we analyze the implications of these findings for some macroeconomic variables, as earnings and wage inequality, the labor share and total factor productivity.