UC Davis Econ in the News

Prof. Knittel talks about gas prices. Consumers aren’t responding to the increases in gas prices as much as they did in the 70’s.

What’s different about the now versus the 70’s that consumers are so much less responsive to price changes? The obvious answer, at least to me, wasn’t mentioned in the article, but is discussed in the associated research paper:

Another hypothesis is that as incomes have grown, the budget share represented by gasoline consumption has decreased making consumers less sensitive to price increases. The price income interaction model presented here provides insight into this hypothesis. If increasing income results in a decrease in the consumer response to gasoline price changes, one would expect the coefficient on the interaction term of the model to have a positive sign. However, in both periods we find that the coefficient on the interaction term is negative suggesting that on average, gasoline consumption is more sensitive to price changes as income rises. This somewhat counterintuitive result is supported by the household gasoline demand analysis conducted by Kayser (2000) who also finds a negative coefficient on the price income interaction term. The hypothesis proposed by Kayser is that as incomes rise, a greater proportion of automobile trips are discretionary. Alternatively, at lower income levels, the amount of travel has already been reduced to the minimum leaving little room for adjustment to higher prices. Another possible explanation is that the number of vehicles per household increases with income. When the number of household vehicles exceeds the number of drivers, there is the possibility for drivers to shift to more fuel efficient vehicles within the household stock as gasoline prices rise. Whatever the explanation, the overall decrease in price elasticity despite growth in incomes suggests that these effects are relatively minor compared to other factors affecting gasoline demand.

These results are extremely important if one thinks its a good idea to raise gas taxes. If consumers don’t respond to the higher after tax price by buying less gas, then you’re getting all the bad stuff that comes with taxes (consumers are poorer with the tax so they buy less stuff) and your not getting any of the “good” change in behavior.

UC Davis economics in the news

Prof. Peri talking up immigration (even the unskilled kind).

As of 2004, two thirds of workers without a high school degree in California were immigrants as well as almost half of the workers with a doctoral degree. Moreover U.S.-born Californians moved out of the state during the nineties and sometimes job competition from immigrants has been regarded as a key factor for this outflow. Certainly, if the inflow of immigrants crowded out the labor market options of U.S. natives, particularly the low skilled ones, such effect should have been particularly strong in California. But is it possible that immigrants lifted California’s wages, rather than harming them? After all immigrants have different skills and tend to work in different occupations then natives and hence they could make natives more productive and increase the demand for complementary production tasks performed by natives!

On the other hand the impact of immigration, in the 1960-2004 period has been negative on wages of previous immigrants and positive on wages of U.S. natives, revealing a good degree of complementarity between U.S. and foreign-born workers that contributes to benefit (rather then to harm) native workers’ productivity. One plausible interpretation of these complementarieties is the following. Manual tasks in most sectors of California economy are executed by immigrants; the larger availability of these skills has increased the demand for interactive-communication-coordination tasks, needed in production, and this second set of skills are more likely provided by natives even with low education.

UC Davis Econ in the news

Professor Woo, my growth prof this quarter, sat on a panel discussing the sustainability of growth in the Chinese economy. There’s a video on that page. The professor’s comments.

Professor Woo took the position that China’s growth with unravel before its economy over takes the U.S. economy. There are three reasons for this: economic problems facing the country (like banking sector issues and fiscal policy problems), social instability and environmental collapse.

“Social unrest has increased in the last decade.”

“China has the dirtiest air in the world.”

“There has a change in expectations of the people… Chinese have learned to aspire to the better things in life.”

“Changes in policy may be retarded by factions within the party.”

“If there’s not harmony in China, there’s not going to be harmony in the world.”