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Microeconometrics deals

Microeconometrics deals with the theory and applications of methods of data analysis developed for microdata pertaining to individuals, households, and firms. A broader definition might also include regional- and state-level data. Microdata are usually either cross sectional, in which case they refer to conditions at the same point in time, or longitudinal (panel) in which case they refer to the same observational units over several periods. Such observations are generated from both nonexperimental setups, such as censuses and surveys, and quasi experimental or experimental setups, such as social experiments implemented by governments with the participation of volunteers. A microeconometric model may be a full specification of the probability distribution of a set of microeconomic observations; it may also be a partial specification of some distributional properties, such as moments, of a subset of variables. The mean of a single dependent variable conditional on regressors is of particular interest. There are several objectives of microeconometrics. They include both data description and causal inference. The first can be defined broadly to include moment properties of response variables, or regression equations that highlight associations rather
than causal relations. The second category includes causal relationships that aim at measurement and/or empirical confirmation or refutation of conjectures and propositions regarding microeconomic behavior. The type and style of empirical investigations therefore span a wide spectrum. At one end of the spectrum can be found very highly structured models, derived from detailed specification of the underlying economic behavior, that analyze causal (behavioral) or structural relationships for interdependent microeconomic variables. At the other end are reduced form studies that aim to uncover correlations and associations among variables, without necessarily relying on a detailed specification of all relevant interdependencies. Both approaches share the common goal of uncovering important and striking relationships that could be helpful in understanding microeconomic behavior, but they differ in the extent to which they rely on economic theory to guide their empirical investigations.

As a subdiscipline microeconometrics is newer than macroeconometrics, which is concerned with modeling of market and aggregate data. A great deal of the early work in applied econometrics was based on aggregate time-series data collected by government agencies. Much of the early work on statistical demand analysis up until about 1940 used market rather than individual or household data (Hendry and Morgan, 1996). Morgan’s (1990) book on the history of econometric ideas makes no reference to microeconometric work before the 1940s, with one important exception. That exception is the work on household budget data that was instigated by concern with the living standards of the less well-off in many countries. This led to the collection of household budget data that provided the raw material for some of the earlier microeconometric studies such as those pioneered by Allen and Bowley (1935). Nevertheless, it is only since the 1950s that microeconometrics has emerged as a distinctive and recognized subdiscipline. Even into the 1960s the core of microeconometrics consisted of demand analyses based on household surveys. With the award of the year 2000 Nobel Prize in Economics to James Heckman and Daniel McFadden for their contributions to microeconometrics, the subject area has achieved clear recognition as a distinct subdiscipline. The award cited Heckman “for his development of theory and methods for analyzing selective samples” and McFadden “for his development of theory and methods for analyzing discrete choice.” Examples of the type of topics that microeconometrics deals with were also mentioned in the citation: “ . . . what factors determine whether an individual decides to work and, if so, how many hours? How do economic incentives affect individual choices regarding education, occupation or place of residence? What are the effects
of different labor-market and educational programs on an individual’s income and employment?” Applications of microeconometric methods can be found not only in every area of microeconomics but also in other cognate social sciences such as political science, sociology, and geography.

Beginning with the 1970s and especially within the past two decades revolutionary advances in our capacity for handling large data sets and associated computations have taken place. These, together with the accompanying explosion in the availability of large microeconomic data sets, have greatly expanded the scope of microeconometrics. As a result, although empirical demand analysis continues to be one of the most important areas of application for microeconometric methods, its style and content have been heavily influenced by newer methods and models. Further, applications in economic development, finance, health, industrial organization, labor and public economics, and applied microeconomics generally are now commonplace, and these applications will be encountered at various places in this book. The primary focus of this book is on the newer material that has emerged in the past three decades. Our goal is to survey concepts, models, and methods that we regard as standard components of a modern microeconometrician’s tool kit. Of course, the notion of standard methods and models is inevitably both subjective and elastic, being a function of the presumed clientele of this book as well as the authors’ own backgrounds. There may also be topics we regard as too advanced for an introductory book such as this that others would place in a different category.

Microeconometrics focuses on the complications of nonlinear models and on obtaining estimates that can be given a structural interpretation. By contrast, the distinguishing feature of econometrics is the emphasis placed on causal modeling.
This chapter introduces the key concepts related to causal (and noncausal) modeling, concepts that are germane to both linear and nonlinear models. [ A. Colin Cameron, Pravin K. Trivedi: Microeconometrics: Methods and Applications, 2005]

microeconomics

Microeconomics (from Greek prefix micro- meaning "small" + "economics") is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services.

This is a contrast to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment. Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the before mentioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations' — i.e. based upon basic assumptions about micro-level behaviour.

One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system.

Staffing & Employment News – June 2010

Staffing & Employment News

Most experts tell us that the recession starting in December 2007 ended in mid-2009 when real GDP and industrial production bottomed and then started growing again. According to the National Bureau of Economic Research (NBER) business cycle committee, domestic production and employment are the primary conceptual measures of economic activity.

The committee views the payroll employment measure as the most reliable estimate of employment. Our employment recovery has been the slower in the 3 quarters following the ‘end of the recession’ than after other recent downturns. However the economy has added jobs in the last three consecutive months, a reversal of the prior 24 months of employment decreases. (First graph below from ADP)

According to Macroeconomic Advisors LLC, the GDP Index was positive each of the months in Q1 2010 and is showing an upward swing, showing a negative annualized growth only twice since mid-2009. (Second graph below from Macroeconomic Advisors)

ADP Employment Graph

MA GDP Index

Unsurprisingly, as we come out of the bottom of this business cycle, hiring will increase and that has already begun. The Q2 2010 U.S. Hiring Forecast shows that 23% of employers increased their full-time, permanent staff in the first quarter, up from 13% in the same period last year and up from 20 % in the fourth quarter. This is the third quarter that employers projected hiring increases.
Responses to the survey indicate that many companies are reviewing current employees in light of the upturn ahead, and more than one quarter anticipate replacing low performers with top performers in the second quarter.
The top staffing challenges are going to be 1) Competing on salary/compensation, 2) Maintaining productivity, and 3) Retaining Top Talent. Strategies for retaining your top performers include: Flexibility on work time/location; Training and Development opportunities; and Future Benefits and Performance-Based Incentives as the company’s bottom lines improve.
Recommended Further Reading:
Undoing IT Staffing and ROI Myths by Patty Azzarello
U.S. Recovery Approaches One-Year Anniversary in Good Shape May 2010 by the National Association for Business Economics
Short Takes, SI Review May 2010 by the Staffing Industry Review Magazine
Slowdown Ahead, But Not a Recession by the Economic Cycle Research Institute
Q2 2010 U.S. Hiring Forecast by Career.Builder.com and USA Today

MACROECONOMIC EQUILIBRIUM: Putting it all Together

So, we have the aggregate supply curve and we have the aggregate demand curve.
AD measures levels of production which won't change over time as a function of price
AS measures levels of production which suppliers will actually produce at as a function of price.
SO... what happens when you put both of them together?

Answer: You get a real level of output which doesn't change over time (at the intersection point). Here, GDP is at an equilibrium, which means that output is equal to expenditures. Also GDP is an actual achievable level of output, which firms are willing to produce at, given the price level, to maximize profits: The actual output is in equilibrium!

The general price level is the y-axis, and we can use it to determine inflation (increases in the general price level)
GDP is the x-axis, and we can use actual GDP in relation to potential GDP to determine unemployment

This is also a stable equilibrium! If the price level is too low, then aggregate demand will overwhelm what producers are actually willing to produce. As production increases to meet the needs of the consumers, however, the accompanying rise in the price level reduces consumer demand until the two meet in the middle. Whenever the economy is not at macroeconomic equilibrium, there are pressures which ultimately bring it back to a state of equilibrium

Aggregate Demand Shocks and Macroeconomic Equilibrium:

These are a bit more tricky. If a change in autonomous expenditure shifts the family of aggregate expenditure functions, then in turn the Aggregate Demand function will shift (to the left in expenditure is lower, and to the right if it is higher). However, in macroeconomic equilibrium, an increase in aggregate demand predicts an accompanying increase in prices, while lower aggregate demand predicts an accompanying drop in prices (remember, firms will only produce more if prices increase to stabilize profit margins). This change in the price level changes aggregate expenditure, causing it to shift up or down due to a new price!

As a general rule, both price and output move in the same direction as a demand shock (increased demand = more output at higher prices. Decreased = less output at lower prices)

You may have noticed, but the simple multiplier, due to the change in price, can no longer predict the change in output caused by changes in expenditure. Instead, we use the multiplier (not simple, just multiplier) to determine output changes which result from expenditure changes. The multiplier is smaller than the simple multiplier. It represents the change in GDP divided by the change in aggregate expenditure.

The severity of a demand shock depends on the state of the economy: in other words, where an economy lies on the Aggregate Supply Curve.

When the economy has excess capacity (constant costs of production), it is called Keynesian short run aggregate supply (this is the flat part of the AS curve). Increases in AE cause Y to rise and Price to remain the same.

When the economy has increasing costs (the middle of this graph where the AS curve is about diagonally sloped), this is intermediate short run aggregate supply. Here, increases in aggregate expenditure cause increases in both price and output.

When the economy has rapidly increasing costs, this is classical short run supply (the vertical part of the AS curve). Here, increases in aggregate expenditure lead to increases in price, and no change in output.

Basically, the steeper AS is, the more a demand shock will affect price, and the less it will affect output.

We can have supply shocks too! The new intersection point is the new stable macroeconomic equilibrium.


Be careful- in some cases, both AS and AD will shift in response to a single event! (for an example, let's say the price level in China rises. This increases domestic AD (because of increased net exports). However, if domestic producers buy a lot of intermediate products from China, then their costs of production just rose, so aggregate supply shifts to the left. The net effect could be either positive or negative: it depends how invest producers are in chinese intermediate goods, and how much of the domestic economy is trade-determined.

Structure of Financial System

I. SUPERVISING ENTITIES

1. Central Reserve Bank of El Salvador

Its objective is to promote macroeconomic stability, particularly monetary stability. Low inflation promotes savings, increases productivity and promotes low interest rates. All of this encourages investment creating a healthy cycle, i.e. macroeconomic stability –better opportunities–macroeconomic stability.

It also safeguards financial system stability, establishing prudent measures and regulations to assure its financial solvency and enabling it to offer efficient financial services. This reduces operating costs, fostering savings and making credit easier to obtain, thus promoting financial development and economic growth.

2. Financial System Superintendence (SSF)

Its main function is to enforce all provisions applicable to the Central Bank, other banks, financial institutions, insurance companies, non-banking financial intermediaries, mutual guarantee companies, exchange bureaus, and Official Credit Institutions. It is also in charge of their control.

3. Securities Superintendence

Its main function is to enforce compliance with the provisions applicable to the stock exchange, exchange broker companies, bonded warehouses, specialized companies for the safe custody of securities and valuables, risk classification companies, etc. It is in charge of controlling the above institutions. It also inspects and supervises the issuers who are inscribed in the Public Stock Exchange Registry.

4. Pension Superintendence

It is mainly in charge of enforcing compliance with the provisions applicable to the Retirement Savings System and the Public Pension Fund System, and mainly those applicable to Pension Fund Administration institutions, the INPEP (National Institute for Public Employees Pension), and the Disability, Old-Age and Death Program of the Social Security Institution, being also in charge of their control.

5. Deposit Guarantee Institute

In the event that a member bank is forced to be dissolved and liquidated, it guarantees the public deposits for up to US$6,700 dollars. Likewise, it contributes to the restructuring of member banks, which may have solvency problems, in order to defend the rights of the depositors and those of the institution.

* Pursuant to Article 181 of the Banking Law, the Financial System Superintendence is in charge of controlling this institution.

II. PARTICIPANT ENTITIES

1. Banks

They are organized as incorporated companies, having a minimum capital of US$11.43 million. They require prior authorization from the Financial System Superintendence in order to begin operations.

2. Stock Exchange Companies

a) Stock Exchange

Corporations aiming to provide its members with the necessary means to efficiently carry out securities transactions and enable them to carry out securities intermediary activities. The country has a Stock Exchange.

b) Exchange broker companies

Corporations whose objective is to act as securities brokers. They can also carry out portfolio administration operations, prior authorization from the Securities Superintendence.

c) Specialized companies for the safe custody of securities and valuables.

These Corporations receive securities in custody from financial brokers and from the public; they also provide amortization-collecting services. Currently there is only one firm providing such services.

3. Welfare Institutions

a) National Institute for Public Employees Pension (INPEP).

An autonomous institution whose aim is to manage and invest its economical resources destined to the payment of benefits to cover Disability, Old Age and Death of public employees.

b) Salvadoran Institute of Social Security (ISSS): Disability, Old Age and Death Program.

c) Armed Forces Institute for Social Prevision, Disability, Old Age and Death (IPSFA).

An autonomous credit institution whose objective is to achieve welfare and social security goals on behalf of the members of the Armed Forces

d) Pension Fund Administration Institutions (AFP’s)).

These are welfare institutions organized as corporations whose sole aim is to administer a pension fund while they administer and award the benefits and entitlements provided by the Pension Fund System Law.

4. Auxiliary Organizations and Bonded Warehouses

Their main function the oversight and preservation of merchandise submitted to their custody, issuing certificates of deposit and warrants over said merchandise.

5. Non Banking Financial Intermediaries

a) Cooperatives:

These entities are organized to render credit-financial services to their partners and to the public. They may be organized as partnerships, or as cooperative associations. Some of them are supervised by the SSF (the ones authorized to collect funds from the general public) and others shall be supervised by the Federation they belong (receiving funds only from their members).

b) Federations.

These are organizations that group into financial cooperatives. Their aim is to render financial, consultancy and technical assistance services to the member cooperatives.

c) Sociedades de Ahorro y Crédito (Credit and Savings Societies, SAC).

These corporations are authorized to collect deposits from the public and to grant credits, these are incorporated with a minimum capital of US $2.9 million. They cannot collect deposits in current accounts; they must comply with the corresponding requirements set forth for such purpose in the Banking Law and in the Non Banking Financial Intermediaries Law.

6. Official Institutions

a) Banco Multisectorial de Inversiones (Multisector Investment Bank, BMI).

A public credit institution created to promote the development of investment projects from the private sector by granting loans under the current market conditions, through the financial institutions of the system.

b) Banco de Fomento Agropecuario (Agriculture Promotion Bank, BFA).

Official credit institution whose aim is to create, foster and maintain financial conveniences and other associated services necessary to contribute to foster agriculture.

c) Fondo de Financiamiento y Garantía para la Pequeña Empresa (Finance and Guarantee Fund for Small Businesses, FIGAPE).

Autonomous institution whose objective is to grant small loans to small business and Industry holders.

d) Fondo Nacional de Vivienda Popular (National Low-Cost Housing Fund FONAVIPO)

Its objective is to allow low-income Salvadoran families to have access to credit to enable them to procure housing under the most favorable conditions. It also fosters activities of social interest.

e) Fondo Social para la Vivienda (Social Housing Fund, FSV).

Its purpose is to render financial services to solve housing problems of the working population.

7. Mutual Guaranty Companies

Corporations whose exclusive purpose is to grant its associated members endorsements, bonds and other guarantees. They are controlled by the Financial System Superintendence.

8. Insurance Companies

These are Corporations who operate insurance, reassurance, bonds and reinsurance services. In the insurance contract (pursuant to the Code of Commerce) the insurance company is bound, by the payment of a premium, to compensate for damages or to pay an amount of money upon verification of the occurrence of an event provided in the contract. In the bond contract, on the other hand, one or more persons are responsible for someone else’s obligation, being committed on behalf of the creditor to comply in full or in part if the main debtor does not comply.

9. Foreign Currency Exchange Bureau

Companies whose usual activity is the purchase and sale of foreign currency in bills, bank drafts, traveler’s checks and other payment instruments issued in foreign currencies, at prices set by offer and supply.

Economics - Macroeconomics - DEMAND AND SUPPLY ANALYSIS

	TOTAL DEMAND AND SUPPLY ANALYSIS
	The Keynesian IS-LM model developed earlier is a model of only demand behavior. It tells us how the equilibrium between planned aggregate demand and output is achieved. It describes demand behavior but says absolutely nothing about supply behavior. Total supply and demand analysis breaks that implicit assumption and introduces the possibility of supply constraints or economic issues that can affect supply behavior. The total demand curve shows how the Keynesian equilibrium changes for different values of the price level. The total demand curve shows how changes in the price level affect the IS-LM or demand side equilibrium. Total Demand Curve The price level determines the real value, or purchasing power, of the nominal money supply, thus positioning the LM curve and determining the aggregate demand equilibrium. The total demand curve is a locus of Keynesian aggregate demand equilibrium for different price levels. If the price level changes while everything else (including the nominal money supply, M) remains the same, then the resulting change in the real money supply ( ) causes the IS-LM equilibrium to change Total Supply Curve It describes the amount of output that producers are willing and able to supply to the goods market. Keynesian Supply Curve: The total supply curve implicit in the Keynesian IS-LM model is based on the notion that there are no supply constraints and that prices are pre-determined in the short-run (one year or less). Thus, whatever output level is demanded will be produced and the total supply curve is a horizontal line.There is sufficient excess capacity so that an increase in demand leads to more production without increasing production costs and prices. Long-run or Classical Supply Curve: At the opposite extreme to the Keynesian short-run horizontal supply curve lies the supply curve implicit in the long-run equilibrium or classical view of the Macroeconomic world. The classical view implies a vertical supply curve, The classical vertical total supply curve and the Keynesian horizontal total supply curve represent two theoretical extremes, neither of which is a satisfactory representation of behavior in the real world. The traditional Keynesian approach leaves us without a theory of price determination. The classical approach introduces a theory of price determination, but at the cost of eliminating an explanation of fluctuations in real output. By assuming that competitive markets at all times generate equilibrium levels of output, the model cavalierly does away with fluctuations in output. Some More Reasons Why Prices are Sticky: Labor Contracts: Implicit labor contracts are a term that refers to the type of agreements that are often made between employers and employees. Career Labor Markets: The idea here is that employers adopt policies that promote the long-run attachment of workers to the firm. This is important to employers because finding able workers and providing training can be expensive. In addition, employees find it in their interest to agree to such arrangements. A Demand Shock: In the short run. The monetary policy expansion leads to a fall in interest rates which gets the multiplier process under way and output increases. Over time, the multiplier process that leads to an increase in output also leads to increases in prices. Quantity adjustments become less common and price adjustments become more common. Nevertheless, additional output is forthcoming, and after a period of several years, there are both output and price increases. Expansionary monetary policy: A major theoretical point of our discussion is the tendency to return to a long-run equilibrium—the normal, natural, or long-run equilibrium level of output termed Y*. It is an output level associated with balance in the macroeconomics; in particular, there is an absence of inflationary or deflationary pressures at this output level. It is very important to add that this output need not be one where all resources are fully employed. The long-run equilibrium is “natural” because the economy tends to move toward it. The term does not convey a value judgment that this equilibrium is desirable or good. There may be more unemployment at Y* than a democratic society would like to endure. INFLATION Since the inflation rate is probably the most closely followed macroeconomic phenomenon, it will be helpful to have a theoretical framework that concentrates on the determination of the inflation rate directly. Our inflation equation will also help us understand one of the most unusual characteristics of inflation—its persistence. That is, we will discuss the momentum to inflation. Price Adjustment Function: where π = is the inflation rate. An important implication of this specification of equation is that when Y =Y* , there are not inflationary pressures. Phillips Curve: The term Phillips curve refers to the empirical relationship between wage or price inflation and the unemployment rate. Since Phillips’ early econometric studies in the 1950s, the relationship has been extended and developed into an important analytic tool for understanding the inflation process. An expansionary policy could reduce the unemployment rate at the cost of only a small increase in the inflation rate. Expectations of Inflation The influence of market supply and demand on the inflation rate that emerges will depend as well on the expected inflation rate. A given degree of slack will result in a higher or lower overall inflation rate depending on how much inflation the price-setting agents expect to occur. Augmented Price Adjustment The effect of an increase in expectations of inflation on the actual rate of inflation can be seen by envisioning a particular price or wage negotiation. The parties in a particular negotiating session will be influenced by supply and demand conditions in the market and also by their expectations of aggregate inflation. The price or wage agreement that emerges from the negotiations will be higher if both parties expect more inflation to take place in the overall economy. Expectations-augmented price adjustment equation Where the expected rate of inflation and the coefficient b is measures the impact of expectations on the inflation rate. Rational Expectations Formation of expectations have indicated that expectations adjust slowly when inflation changes. This has often turned out to be an accurate description of reality, but it is not necessarily true. Starting in the early 1970s an alternative hypothesis about the formation of expectations had a very profound effect on economic thinking. The rational expectations hypothesis states that expectations are knowledgeable and informed predictions of the actual outcome. That is, expectations are formed by individuals with an understanding of the workings of the economy and with available information on all relevant phenomena. Expectations of inflation are thus based on all available information that relates to price determination and with an understanding of how prices are in fact determined. With rational expectations, the expected inflation rate can be expressed as the actual inflation rate (π) plus a random error term: New Classical Macroeconomics The natural rate Phillips curve model implies that the unemployment rate differs from the natural rate hen inflation is unanticipated. With rational expectations, unanticipated inflation is always a random or unpredictable phenomenon. Therefore, all deviations, including short-run deviations, of the unemployment rate from the natural rate are random events. Sources of Inflation The distinction among the different sources of inflation is somewhat artificial because they can all be present and are often related to one another. However , different inflationary episodes can be often be ascribed to a particular dominant causal factor. Monetary Growth Excess Demand Relative Price Shocks Wage Price Spiral Inflation Expectations