Sie sind auf Seite 1von 17


A Service of


Make Your Publications Visible.

Leibniz Information Centre
for Economics

Summers, Lawrence H.

Economic possibilities for our children

NBER Reporter

Provided in Cooperation with:

National Bureau of Economic Research (NBER), Cambridge, Mass.

Suggested Citation: Summers, Lawrence H. (2013) : Economic possibilities for our children,
NBER Reporter, National Bureau of Economic Research (NBER), Cambridge, Mass., Iss. 4, pp.

This Version is available at:

Standard-Nutzungsbedingungen: Terms of use:

Die Dokumente auf EconStor drfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your
Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes.

Sie drfen die Dokumente nicht fr ffentliche oder kommerzielle You are not to copy documents for public or commercial
Zwecke vervielfltigen, ffentlich ausstellen, ffentlich zugnglich purposes, to exhibit the documents publicly, to make them
machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise
use the documents in public.
Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen
(insbesondere CC-Lizenzen) zur Verfgung gestellt haben sollten, If the documents have been made available under an Open
gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you
genannten Lizenz gewhrten Nutzungsrechte. may exercise further usage rights as specified in the indicated

Reporter OnLine at: 2013 Number 4

The 2013 Martin Feldstein Lecture

Economic Possibilities for Our Children

Lawrence H. Summers*

This is the 40th anniversary of the summer when I first met Marty
Feldstein and went to work for him. I learned from working under Martys
auspices that empirical economics was a profoundly important thing, that
it had the opportunity to illuminate the world in important ways, that it
had the opportunity to change peoples perspectives as they thought about
economic problems, and that the successful solution or resolution of eco-
nomic problems didnt happen with the immediacy with which a doctor
treated a patient, but did touch and affect the lives of hundreds of thou-
sands, if not millions, of people.
Lawrence H. Summers I learned about how to approach economic research from watching
Marty. There is a central element that has been a part of his approach to
INTHISISSUE economics, and it has always been a part of mine, both as an economist
and a policymaker. It is the approach of many in our profession, but not all.
The Martin Feldstein Lecture 1 This is the belief that we cannot aspire to know the world with complete
precision; that no single parameter will measure with precision how our
Research Summaries economy is going to respond to a policy or a shock. Rather, what we can
The Economics of Obesity 7 aspire to establish is a combination of logic, modeling, suggestive anecdote
Public Sector Retirement Plans 10 and experience, and empirical measurements from multiple different per-
High-Skilled Immigration 13 spectives that lead to an overall view on economic phenomena. That kind
The Chinese Economic Experience 17 of overall view on economic phenomena moves the world forward much
more than a precise estimate of a single parameter.
NBER Profiles 20 It is very much in that spirit that I want to reflect with you this after-
Conferences 22 noon on economic possibilities for our children. Keynes wrote a famous
NBER News 30 essay entitled Economic Possibilities for Our Grandchildren. I am not
Program and Working Group Meetings 32 Keynes, so I cannot look nearly as far forward as he did. But I am seeking
Bureau Books 42
*Summers is the Charles W. Eliot University Professor, and President
Emeritus, at Harvard University. He is a Research Associate in the NBERs
Programs on Public Economics; Monetary Economics; Economic Fluctuations
and Growth; Productivity, Innovation and Entrepreneurship; and Aging. He
delivered these remarks as the fifth annual Martin Feldstein Lecture at the
NBER Summer Institute on July 24, 2013.

NBER Reporter 2013 Number 4

to speak in the same spirit. At a moment of sub-
NBER Reporter stantial cyclical distress, at a moment of finan-
cial preoccupation, I would like to look to the
broader technological forces that are operating
and that will shape the structure of our economy
and how people live over the long term.
The National Bureau of Economic Research is a private, nonprofit research orga- I think of my horizon as being more like a
nization founded in 1920 and devoted to objective quantitative analysis of the generation than the century that Keynes spoke
American economy. Its officers and board of directors are:
of. At one level, by the way, Keynes did pretty
President and Chief Executive Officer James M. Poterba well. He predicted that incomes in the industri-
Controller Kelly Horak
Corporate SecretaryAlterra Milone alized world would rise eightfold between 1930
and 2030 and theyve risen a little more than
sixfold so far, so hes looking pretty good on that
Chairman Kathleen B. Cooper
Vice Chairman Martin B. Zimmerman prediction. But Keynes also got some things
Treasurer Robert Mednick wrong. He predicted that as incomes rose eight-
fold, the workweek would fall to 15 or 20 hours.
Peter C. Aldrich Mohamed El-Erian Michael H. Moskow The reason he got that wrong is something that I
Elizabeth E. Bailey Linda Ewing Alicia H. Munnell hadnt previously reflected on.
John Herron Biggs Jacob A. Frenkel Robert T. Parry When I took introductory economics, a big
John S. Clarkeson Judith M. Gueron James M. Poterba
Don R. Conlan Robert S. Hamada John S. Reed feature of the textbook was the backward bend-
Kathleen B. Cooper Peter Blair Henry Marina v. N. Whitman ing labor supply curve, where it was explained
Charles H. Dallara Karen N. Horn Martin B. Zimmerman that past a certain point, the income effect took
George C. Eads John Lipsky
Jessica P. Einhorn Laurence H. Meyer over from the substitution effect and so the labor
DIRECTORS BY UNIVERSITY APPOINTMENT supply curve bent backwards. This does not get
much attention in textbooks today. The rea-
George Akerlof, California, Berkeley Bruce Hansen, Wisconsin son is that people with higher wages now work
Jagdish N. Bhagwati, Columbia Marjorie B. McElroy, Duke more hours than people with lower wages. The
Timothy Bresnahan, Stanford Joel Mokyr, Northwestern
Alan V. Deardorff, Michigan Andrew Postlewaite, Pennsylvania time series tracks the cross section. Over time,
Ray C. Fair, Yale Uwe E. Reinhardt, Princeton as we have all gotten richer, the number of hours
Edward Foster, Minnesota Richard L. Schmalensee, MIT worked for many people has risen.
John P. Gould, Chicago David B. Yoffie, Harvard
Mark Grinblatt, California, Los Angeles Keynes missed many other things. He
missed that there was a developing world and
DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS an industrialized world, for example. And he
Christopher Carroll, American Statistical Association missed entirely issues relating to the distribu-
Jean-Paul Chavas, Agricultural and Applied Economics Association tion of income, either within countries or across
Martin Gruber, American Finance Association
Ellen Hughes-Cromwick, National Association for Business Economics countries. This too contributes to my desire to
Thea Lee, American Federation of Labor and speak about one generation rather than more.
Congress of Industrial Organizations I believe in a much more anecdotal way
William W. Lewis, Committee for Economic Development
Robert Mednick, American Institute of Certified Public Accountants than Dale Jorgenson, who has quantified it to
Alan L. Olmstead, Economic History Association an extraordinary degree, that the defining fea-
Peter L. Rousseau, American Economic Association ture of economic growth in this era is the set
Gregor W. Smith, Canadian Economics Association
Bart van Ark, The Conference Board of changes that are associated with information
technology. The single example I find most strik-
The NBER depends on funding from individuals, corporations, and private foun-
dations to maintain its independence and its flexibility in choosing its research ing is the self-driving automobile. Automobiles
activities. Inquiries concerning contributions may be addressed to James M. have now been driven from California to New
Poterba, President & CEO, NBER 1050 Massachusetts Avenue, Cambridge, MA York, stopping at red lights, accelerating, going
02138-5398. All contributions to the NBER are tax deductible.
through green lights, accelerating through yel-
The Reporter is issued for informational purposes and has not been reviewed by low lights without being touched by a human
the Board of Directors of the NBER. It is not copyrighted and can be freely repro-
duced with appropriate attribution of source. Please provide the NBERs Public hand. And if one thinks about almost any aspect
Information Department with copies of anything reproduced. of economic activity, it either has been, is being,
Requests for subscriptions, changes of address, and cancellations should be sent or quite possibly will be revolutionized by the
to Reporter, National Bureau of Economic Research, Inc., 1050 Massachusetts application of information technology. In my
Avenue, Cambridge, MA 02138-5398 (please include the current mailing label), friend Marc Andreessens phrase, software is eat-
or by sending email to Print copies of the Reporter are only mailed
to subscribers in the U.S. and Canada; those in other nations may request elec- ing the economy.
tronic subscriptions at
2 NBER Reporter 2013 Number 4
I am told that there exist software taught that the smart people were right. in a disadvantaged group than if you are
programs that can grade at least some Until a few years ago, I didnt think in an advantaged group. This is associ-
kinds of student papers with more reli- this was a very complicated subject; the ated with what is also a defining feature
ability relative to human beings than Luddites were wrong and the believers of our time. In the United States today a
human beings can grade essays relative in technology and technological progress higher fraction of the workforce receives
to other human beings. Larry Katz has were right. Im not so completely certain disability insurance than does production
famously remarked that computers do now. I have done the simplest of statisti- work in manufacturing. (Many workers
not do empathy, but there have existed for cal exercises, plotting the non-employ- in the manufacturing sector are not pro-
many years computer programs that actu- ment rate for men 25 to 54 and then duction workers.)
ally do a credible job of providing psycho- adjusting for trend and cycle and extrap- These phenomena are related. No
therapy. In response to confessionals, they olating. Not, I hasten to say, because one could give a Feldstein lecture without
prompt with responses like: Tell me a lit- theyre the most important group in our recognizing the possibility that a social
tle bit more about whats distressing you. society (and they are, by the way, a group insurance program had a distorting dis-
That must have been very hard for you. of which I am no longer a part), but only incentive effect and that is certainly the
Can you explain a little more fully? On because they are a group where there is case with respect to disability insurance.
at least some occasions these programs the strongest prevailing social expecta- But I think it is also fair to say that the
have been an important source of solace. tion that they will be working. evolution and growth of disability insur-
In Heathrow Airport, you now check What you see is that in a secular ance is substantially driven also by the
out of the newsstands without passing a sense, going back a long time, the frac- technological and social changes that are
human being. Increasing amounts of sur- tion of them who are not working once leading to a smaller fraction of the work-
gery are done remotely. Think of an indus- one takes the cycle out has been increas- force working.
try that a group like this has a particular ing. I summarize this by saying that in the At the same time, as has famously
attachment tothe publishing industry. 1950s and 60s, one in 20 men between and repeatedly been noted, the share of
It is perhaps prototypical of where things the age of 25 and 54 was not working. If income going to the top one percent
are going. you do a simple extrapolation based on of our population has steadily increased.
First there were bookstores, then trend and cycle to the period a decade One can debate how to treat capital gains.
there were superstores, then there was from now, between one in six and one in One can debate whether to talk about
Amazon, and now there are the Kindle seven men between the age of 25 and 54 individuals or about family units. There
and e-books. And at every stage it was bet- will not be working. are a hundred aspects of the numbers that
ter to be a reader, better to be an author, And as you would expect, these pat- one can debate, but I think it will be diffi-
and worse to be an ordinary person terns are substantially more pronounced cult to escape the conclusion that the very
involved in the intermediation between if you are less educated. They are sub- top group in our society is receiving about
the authors and the readers. stantially more pronounced if you are ten percent more of the total income than
This set of developments is going to
be the defining economic feature of our
Unemployment and Nonemployment Rates
era, and we are seeing its consequences in
many aspects. When I was an MIT under- 20
graduate in the early 1970s, a young eco-
nomics student was exposed to the debate 15
about automation. There were two fac-
Percent (%)

tions in those debates. There were the

stupid Luddite people, who mostly were 10
outside of economics departments, and
there were the smart progressive people,
who at that time were personified by Bob 5
Solow. The stupid people thought that
automation was going to make all the 0
jobs go away and there wasnt going to
Jan1950 Jan1970 Jan1990 Jan2010
be any work to do. And the smart peo-
ple understood that when more was pro-
duced, there would be more income and Unemploy. rate 2554yo Men Not Working
therefore there would be more demand. It Unemploy. rate (CBO forecast) 2554yo Men Not Working (Projected)
wasnt possible that all the jobs would go Data: BLS, CBO, author calculations
away, so automation was a blessing. I was

NBER Reporter 2013 Number 4 3

Top 1% Share of Total Pre-Tax Income, 1913-2010 exactly what labor did before. I am sug-
gesting replacing the production function
25% Y = F(K, L)
1928 with
19.6% Y = F(K, L + (1)K).
2010 In this setting one unit of capital
17.4% is the equivalent of units of labor. A
15% moments thought will reveal that capital
will be deployed in these two uses to the
point where their marginal productivity
is the same, and that will determine what
share of the capital stock is used in the
customary way and what share is used to
substitute for labor.
If you reflect on this a bit longer,
0% youll realize that three things happen.
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 One, the availability of capital that sub-
stitutes for labor augments production
Source: ThomasPiketty
Picketty and
and Emanuel Saez,
Emmanuel Saez,Income
UnitedStates, 191398,
States, Quarterly
1913-1998," opportunities. You can always choose not
Quarterly of of
Journal Economics, 118(1),
Economics, 2003.
118(1), Updated
2003. to 2010
Updated at
to 2010
2010 at to use it. So, the level of output has to rise.
Second, when capital is reallocated to sub-
they were a generation ago, that that is is a function of capital and labor. Capital stituting for labor, the stock of effective
the equivalent of $10,000 per household augments labor: it raises the productivity labor rises and the stock of conventional
unit for everyone else, and that it repre- of labor. If there are only two factors, they capital falls, and so wage rates fall. Third,
sents a substantial portion of median fam- have to be complements. If theres more the capital share, understood to include
ily income. capital, the wage has to rise. Now imagine the total return to capital of both variet-
At the same time the profit share in that capital can be put to one of two uses. ies, rises. Thats just a corollary of output
total income has been rising. This is a sub- It can be put to the use in the production rising and wages falling. This pattern is
ject dear to my heart because it dates back function that we are accustomed to think- similar to what we have seen take place.
to the first paper that I was privileged ing about or it can be used to substitute I suspect that this reflects the nature of
to publish, a paper with Marty in 1977. for labor. That is, you can take some of the technical changes that we have seen:
Marty and I wrote a paper entitled, Is the stock of machines and, by designing increasingly they take the form of capital
the Rate of Profit Falling? And we man- them appropriately, you can have them do that effectively substitutes for labor.
aged to look at the data and conclude that
the rate of profit was not falling. That is a Pretax Profits, as share of GDP
reflection of the fact that we were looking
at the rate of return, not the profit share, .14
and had a variety of refinements that are
not there.
It is also a reflection, no doubt, of
Martys prescience. He knew that the rate
of profit would not be falling. So, I am
glad to have answered the question, Is
the rate of profit falling? in the nega- .1
tive in 1977. And theres a question as
to whether our paper is due for a sequel,
perhaps entitled, Is the Rate of Profit .08
Rising? because it does seem to be rising
in recent years.
What is a way of thinking about all .06
of this? Ive come to a very simple meta-
Jan1950 Jan1970 Jan1990 Jan2010
phor (I hesitate to dignify this thought Date
with the word model). We are used to
Data: Federal Reserve (FRED)
thinking of production functions. Output

4 NBER Reporter 2013 Number 4

Now one could augment this story going to be very important for under- in the United States. The observation
in various ways. If one augmented the standing the evolution of our econo- that real wages are stagnant reflects wages
production function to include entrepre- mies going forward. The obvious exam- measured in terms of the overall con-
neurs, for example, it would not be diffi- ple, of course, is agriculture where today sumer price index. But this obscures the
cult to address the rising share of income less than one percent of the population truth that real wages measured in terms
going to the top one percent of the pop- produces enough food for all of us and of different goods have behaved very
ulation. My conjecture is that for the much more. Headed in this direction also, differently.
next generation we are likely to see this potentially, is manufacturing. The most In those parts of the economy that
process continue, both because of the recent data Ive been able to find, which are well modeled by the introductory eco-
very substantial scope for current levels of are about five years old, suggest that in nomics textbook treatment of widgets
computing power to support capital-labor China a smaller fraction of the workforce firms producing a thing with workers with
substitution on a larger scale, and because is engaged in manufacturing employment increasing marginal costs in a somewhat
of the scope for increased computational today than was in 1990, despite the tre- competitive industry, such as durables,
power to make possible capital-labor sub- mendous progress and gains in competi- clothes, and carsweve seen continu-
stitution of a kind that we have not seen tiveness that the Chinese manufacturing ing, very substantial growth in real wages
to date. sector has enjoyed. It is the same story as as measured by the purchasing power of
The likely consequence? Increased above: rapid productivity growth associ- things that our economy produces. The
levels of output but at the same time grow- ated with inelastic demand leads to fewer reason that real wages in aggregate have
ing pressure on wages. Given the observa- and fewer people being engaged in the stagnated is that much of what people buy
tion I noted earlier, this will greatly pres- activity. are things where there are issues of funda-
sure the income distribution. Not only The extent to which differential pro- mental scarcity: energy, the land under
will divergent wages increase inequal- ductivity growth characterizes our econ- the houses we buy, and goods and services
ity but the supply response will magnify omy is, I think, sometimes underappre- that are produced in complicated, heavily
these effects. It may well be that, given the ciated. The Bureau of Labor Statistics public-sector-inflected ways. Medical care
possibilities for substitution, some catego- normalizes the consumer price indices at and educational services are examples of
ries of labor will not be able to earn a sub- 100 in the period 1982 to 1984. Below are the latter category.
sistence income. some recent values of the Consumer Price Where production has taken place
I think this description captures a Index (CPI) for 2012. in the classic way we teach, productiv-
very important aspect of what may play Television sets at five stand out. That ity growth has continued. There has been
out over the next generation. But there is obviously a reflection of a rather ener- progress. Real wages measured in those
is a second aspect that I think is also pro- getic hedonic effort by the Bureau of terms have increased substantially. Its just
foundly importantthe reality that a Labor Statistics. One suspects that equally that a larger and larger share of our econ-
sectors great success in spurring produc- energetic hedonic
tivity can make it less and less important efforts are not applied Good or Service September 2012 CPI
economically. This is something that was to every consumer Value (19824 = 100)
first pointed up for me by Bill Nordhaus, price. But nonethe-
who demonstrated that not quite at the less, the simple fact is College Tuition and Fees 706
pace of Moores Law, but at something that the relative price Medical Care Services 445
close, the illumination sector of our of toys and a college Medical Care 419
economy has enjoyed great productivity education has changed
growth. Theres only one problem. Most by a factor of ten in Services 272
of us actually want it to be dark at night a generation. The rel- Energy 258
and there would be no particular advan- ative price of durable Food 234
tage to this room being substantially more goods or clothing as a
brightly lit. And so, vast productivity category and all goods All Items 231
growth in illumination has been associ- has changed by a fac- Housing 223
ated with the substantial shrinkage of the tor of almost two in a Transportation 224
illumination sector, at least as measured generation.
by the share of employment in it. Candle This table pro- Apparel 127
making was an important occupation and vides a somewhat dif- Durables 112
an important industry in the 1800s. The ferent perspective on Toys 53
production of light is no longer a defining the common and valid
aspect of economic activity today. observation that real Televisions 5
I believe phenomena of this type are wages have stagnated Source: Bureau of Labor Statistics

NBER Reporter 2013 Number 4 5

omy is in sectors that are not well thought Baumols Law is the set of observations Whether the expansion of those sec-
of as widgets produced by competitive surrounding productivity growth in some tors as a share of the economy necessitates
firms. They are sectors where property but not all sectors, which I have sought to a growing share of the public sector in the
rights, scarcities, intellectual property, and discuss. Moynihans Corollary is the pro- economy, or whether the share of health-
the like are of fundamental importance. pensity for the slow-growing sectors to care and education that takes place in the
This is a way of thinking about a ques- end up in the public sector. public sector should decline will be a mat-
tion that has always, and to some extent It is conventional to discuss the ter of great public debate. As a country,
continues, to puzzle mewhat I think future of the public sector in terms of the and not without controversy, we do not
of as the paradox of alternative dysto- past of the public sector, to suggest that seem to be moving toward a smaller pub-
pias. On the one hand there is the Peter the United States historically has some lic role in healthcare. Nor do other coun-
Thiel-Robert Gordon dystopia that holds threshold of revenue generated or public tries in the world. But that will, perhaps,
that we used to make rapid productiv- spending that is in the range of 20 percent change over time.
ity growth progress and we no longer do. of GDP, and that those are norms that In conclusion, I invite you to consider
And lookreal wages and median fam- should carry us forward. One of the first how the prodigious change associated
ily income have been relatively stagnant things I learned from Marty, the observa- with information technology that may be
for a long time. On the other hand there is tion that the distortion associated with qualitatively different from past techno-
the Erik Brynjolfsson-Mark Andreessen- taxes rises not with the tax rate but with logical change may have defining impli-
Kurt Vonnegut dystopia that holds that the square of the tax rate, suggests a cer- cations for our economy going forward.
machines are going to displace labor and tain caution about the expansion of the If I have caused you to reflect on the fact
so there are going to be very few jobs left public sector. Yet if one thinks about the that very substantial relative price changes
for regular people. It seems like they cant 100-to-1 relative price change between are likely to be associated with dramatic
both be true, that it cant both be that television sets and goods of that kind that changes in the structure of employment,
machines have the capacity to displace all are dominantly produced in the private the nature of economic activity, and the
the labor and that there is no capacity to sector, and goods like healthcare and edu- relative importance of the widget-produc-
enjoy rapid productivity growth. cation, in which the public sectors role ing firm in our economy, and to consider
Perhaps the resolution lies in the fact is substantially greater, one has to admit the implications this will have for the
that a great deal of productivity growth that it is not entirely apparent that the future of the subject with which I began
can take place but it is in a sense self- past should necessarily be a guide for the my career in economics under Martys
limiting by demand. A larger share of future with respect to the scale of the pub- tutelage, public economics, then I will
the economy will inevitably migrate to lic sector. have served my purpose this afternoon.
those remaining residual sectors where
Employment Growth by Industry, projection 20102020
the capacity to generate rapid productiv-
ity growth is low.
Let me close with a final observa-
Health care & social
tiona projection. To the right is the assistance, 26.75%
BLSs projection of where job growth is
going to come from over the next decade.
What stands out as by far the larg-
est industry is healthcare and social assis-
tance, clearly public-sector inflected.
Other important growth sectors are state
and local government, construction (in
Data: BLS Employment Projections

part something that takes place in the

public sector), and educational services.
I bet that when BLS next updates this,
the projections on growth in retail trade,
transportation and warehousing, and Health care & social assistance Profes. & bus. services
wholesale trade are going to have come Construction Retail trade
considerably down given the trends that State and local government Leisure and hospitality
are underway. Transportation & warehousing Other services
As a society, we are going to need Educational services Financial activities
to come to grips over the next couple Nonagriculture selfemployed Wholesale trade
of decades with what has been called Information Secondary jobs
Moynihans Corollary to Baumols Law. Mining
Data: BLS Employment Projections
6 NBER Reporter 2013 Number 4
Research Summaries

The Economics of Obesity

John Cawley*

During the past three decades in the economics of risky health behaviors, in might have been detected earlier, and
United States, many indicators of pop- particular the economics of obesity. In public health responses initiated sooner,
ulation health such as life expectancy, a series of studies, my co-authors and I if epidemiological surveillance had not
the prevalence of smoking, and drug have investigated the economic causes relied so exclusively on BMI. Although
and alcohol use among youths improved and consequences of obesity and evalu- many social science datasets continue
significantly.1 In stark contrast to these ated policies and programs to improve to collect only self-reported weight and
trends, over the same period the United diets and increase physical activity. This height, some innovative surveys such as
States also experienced a doubling of the research summary provides an overview the Health and Retirement Study (HRS)
prevalence of obesity, which is defined as of several recent projects and findings. A and the Household, Income and Labour
a body mass index (BMI) of greater than broader review of the economics of risky Dynamics in Australia (HILDA) Survey
or equal to thirty, which corresponds health behaviors that I co-authored with are collecting additional measures of fat-
to a weight of 221 pounds for someone Christopher Ruhm is also available.4 ness such as waist circumference.
six feet tall. As of 2009 to 2010, more
than one-third of adult Americans are Measurement and Trends Economic Causes and
obese.2 The United States is not alone; Consequences of Obesity
many countries worldwide have experi- An important limitation of BMI, the
enced a significant increase in obesity, and standard measure of fatness in epidemi- Many theories have been advanced
the World Health Organization estimates ology, is that it does not distinguish fat to explain the rise in obesity. To mea-
that 2.8 million people die each year as a from lean mass: it simply measures weight sure the extent to which income affects
result of excess weight.3 for height. A study that I conducted with obesity, John Moran, Kosali Simon, and
This has led to considerable debate Richard Burkhauser5 found that BMI, rel- I exploit the natural experiment of the
about the causes and consequences of obe- ative to more accurate measures of fatness Social Security Benefits Notch.7 The
sity and what can be done to prevent and such as percentage of body fat, misclassi- Notch is the result of a legislative acci-
treat it. Answering these questions is com- fies substantial percentages of individuals dent that created variation in retirement
plicated because in many cases researchers as obese and non-obese. BMI tends to be income that was large, unanticipated,
cannot conduct randomized experiments: less accurate at classifying men (among and beyond the control of the individ-
it would be unethical to experimentally whom there is more variation in mus- ual, making it a suitable instrument. We
manipulate individuals weight. For this cularity) than women. The use of BMI estimate models of instrumental variables
reason the empirical methods of econom- also results in biased estimates of health (IV) using data from the National Health
ics, particularly the attention to issues of disparities; the black-white gap in obe- Interview Survey and find little evidence
selection and omitted variables, are espe- sity among women is only half as large if that income affects weight. The small
cially useful for identifying causal effects. one defines obesity using percentage of effects are precisely estimated: for a per-
My primary research interest is the body fat rather than BMI. Moreover, the manent $1,000 increase in Social Security
timing of the rise in obesity is sensitive income (in 2006 dollars) our confidence
Cawley is a Research Associate in the to the measure of fatness used; Richard intervals rule out a change in weight of
NBERs Programs on Health Economics Burkhauser, Max Schmeiser and I find more than 1.4 pounds in either direction
and Health Care and a Professor in that if one uses skinfold thickness rather for men or women.
the Departments of Policy Analysis and
Management, and Economics, at Cornell than BMI to define obesity then the rise in Understanding the consequences of
University, where he co-directs the Institute obesity becomes apparent 10 to 20 years obesity is important for evaluating calls
on Health Economics, Health Behaviors earlier, which suggests that more gradual for government intervention and for mea-
and Disparities. His profile appears later or long-run influences may be responsi- suring the cost-effectiveness of treatment
in this issue. ble.6 It also suggests that the rise in BMI and prevention programs. One important

NBER Reporter 2013 Number 4 7

potential consequence of obesity is higher than non-obese individuals. To estimate activity and obesity, Meyerhoefer, David
medical care costs. Fat releases hormones the effect of weight on wages, I esti- Newhouse and I exploit variation across
that lead to insulin resistance and damage mate models of instrumental variables states in PE requirements.11 To minimize
the cardiovascular system, with the result that exploit the heritable component of the risks of policy endogeneity or unob-
that obesity is associated with a wide vari- weight as a natural experiment using data served heterogeneity biasing the results,
ety of health conditions such as diabetes, from the National Longitudinal Survey of we control for a host of state characteris-
heart disease, and cancer. Previous stud- Youth (NLSY) 1979 Cohort.9 I find that tics, such as the prevalence of adult obe-
ies estimated the correlation of obesity weight lowers wages for white females: an sity, the socioeconomic status of residents,
with medical care costs, which is difficult increase in weight of two standard devia- and resources provided to public schools.
to interpret because weight may be cor- tions (roughly 64 pounds) is associated Using data on high school students from
related with important unobserved fac- with 9 percent lower wages. In general, the Youth Risk Behavior Surveillance
tors (such as socioeconomic status) and the labor market consequences of obesity System (YRBSS) we find that increasing
there may be reverse causality (an expen- are greater for women than for men, and PE requirements increases physical activ-
sive back injury may lead to weight gain). greater for white females than for other ity among girls (not boys) but has no
To estimate the causal effect of obesity females. Based on the NLSY data, it is detectable effect on weight.
on medical care costs, Chad Meyerhoefer impossible to say whether the labor mar- To complement that study of high
and I exploit the heritable component of ket consequences of obesity are the result school students, Meyerhoefer, David
weight as a natural experiment.8 The iden- of relatively worse health impairing pro- Frisvold and I estimate the impact of PE
tifying assumption is that the similarity ductivity, or to employer discrimination, on elementary school children using data
in weight of biological relatives is caused but other studies suggest that discrimina- from the Early Childhood Longitudinal
by genetics rather than shared environ- tion plays an important role. Study, Kindergarten Cohort (ECLS-K).12
ment, an assumption that is supported by Some occupations and industries The results of the IV model that exploits
a large number of studies in genetics. We are more affected by employee obesity variation over states and time in PE
estimate the IV model using data from than others. For the military, fitness is an requirements indicate that an additional
the Medical Expenditure Panel Survey, important job requirement and thus rising 60 minutes per week spent in PE reduces
and the results indicate that obesity raises obesity is a particular concern. Johanna the probability of obesity in fifth grad-
medical costs by $2,741 per obese indi- Catherine Maclean and I examine data ers by 4.8 percentage points. There is no
vidual (in 2005 dollars). This is higher from the National Health and Nutrition significant effect in earlier grades, which
than the non-IV estimate because the IV Examination Surveys and find that the could be attributable to differences in
method corrects for both the endogeneity percentage of age-eligible civilians who PE curriculum, variation of the treat-
of weight and reporting error in weight. exceed the U.S. Armys weight-for-height ment effect with age, or to several states
Medical costs are much greater for those requirements more than doubled for men instituting substantial PE requirements
whose weight places them well above the and tripled for women between 1959 and before the fifth grade wave, increasing the
threshold for obesity than for those who 2008.10 Excess weight is now the primary power of the instrument. Taken together,
are only slightly obese. Thus obesity is a reason that applicants to the military are the results suggest that increasing PE
heterogeneous category, with much of the rejected, and a coalition of retired gener- requirements increases physical activity
medical costs occurring among a small als and admirals has called obesity a threat and decreases the risk of obesity for cer-
percentage of individuals with extremely to military readiness. tain subgroups, but not for all students.
high BMI. The results imply that obesity- However, the limitations of BMI are rele-
attributable medical costs for non-insti- Policies to Prevent or vant here. The YRBSS and ECLS-K data-
tutionalized adults in the United States Reduce Obesity sets contain only height and weight, but
totaled $190.2 billion in 2005, or 20.6 no information about body composition.
percent of national health expenditures. There are a staggering number of pol- It is possible that increased PE require-
These estimates suggest that the mag- icies and programs to prevent and reduce ments increase muscle mass and decrease
nitude of the obesity-related externali- obesity, and an important contribution fat mass, with little net effect on weight.
ties imposed through public and private that economists can make is to evaluate An innovative approach is to offer
health insurance is greater than previ- these programs effectiveness. For exam- obese individuals financial rewards for
ously appreciated, and that historically ple, the Centers for Disease Control, the weight loss. Insurance companies may
the cost-effectiveness of methods of pre- American Academy of Pediatrics, and face lower claims and employers may
venting and treating obesity may have the Institute of Medicine have called for experience lower job absenteeism and
been underestimated. increases in physical education (PE) for higher productivity if their enrollees or
Given the effect of obesity on health, school children, despite a lack of evidence employees lose weight; as a result, these
one would expect obese individuals to that it has any impact on youth weight. organizations are increasingly seeking a
experience worse labor market outcomes To assess how PE affects youth physical win-win solution by offering overweight

8 NBER Reporter 2013 Number 4

individuals financial rewards for weight the Federal Trade Commission for this Diseases, 2010, Geneva: World Health
loss. In addition, people with time-incon- specific market. To address the targeting Organization, 2011.
sistent preferences may be willing to put of ads, we control for each magazine read 4 J. Cawley and C. Ruhm, The
their own money at risk, hoping that loss and each television show watched, and we Economics of Risky Health Behaviors.
aversion will provide them with incen- identify the effect of exposure to advertis- NBER Working Paper No. 17081,
tives to lose weight in order to get the ing using changes over time in the num- May 2011, and published as chapter 3
money back. To evaluate the effectiveness ber of ads within individual magazines in Handbook of Health Economics,
of these approaches, Joshua Price and I and shows. We find little evidence that Volume 2, T.G. McGuire, M.V. Pauly,
examine outcomes in a workplace well- advertising of OTC weight loss products and P.P. Barros, eds., New York: Elsevier,
ness program that offers financial rewards expands the size of the market. Instead, 2012, pp. 95199.
and deposit contracts for employee weight advertising seems to be a way to battle for 5 J. Cawley and R.V. Burkhauser,
loss.13 Interesting features of this pro- market share. Beyond BMI: The Value of More
gram include its large sample size (2,635 Accurate Measures of Fatness and
workers across 24 work sites) and long Future Directions Obesity in Social Science Research,
duration (one year). We find that attri- NBER Working Paper No. 12291, June
tion in this program is high: 42.9 per- Given the scarcity and low quality 2006, published in Journal of Health
cent dropped out by the end of the first of data on calories consumed and calo- Economics, 27(2) (2008), pp. 51929.
quarter, and 68.0 percent by the end of ries expended, it may never be possible 6 R.V. Burkhauser, J. Cawley, and M.
the year-long program. We find mod- to affirm with any degree of certainty the Schmeiser. Differences in the U.S. Trends
est results in the program. Those offered percentage of the rise in obesity attribut- in the Prevalence of Obesity Based on
financial rewards for weight loss have no able to specific factors. However, it will Body Mass Index and Skinfold Thickness,
higher year-end weight loss than those in continue to be important to exploit natu- NBER Working Paper No. 15005, May
the control group, and those who make ral experiments in order to determine the 2009, published in Economics and Human
deposit contracts have year-end weight extent to which economic variables such Biology, 7(3) (2009), pp. 30718.
loss that is roughly two pounds greater as food prices, income, and technologi- 7 J. Cawley, J.R. Moran, and K.I. Simon.
than that of the control group after adjust- cal change affect the risk of obesity, and The Impact of Income on the Weight
ing for attrition. An important next step to estimate the various economic conse- of Elderly Americans, NBER Working
is to determine the optimal structure of quences of obesity. Measuring the effec- Paper No. 14104, June 2008, published
such programs, such as the most cost- tiveness, and calculating the cost-effec- in Health Economics, 19(8) (2010), pp.
effective size of financial reward, what tiveness, of anti-obesity programs and 97993.
should be rewarded (loss of pounds, loss policies will help ensure that the public 8 J. Cawley and C. Meyerhoefer. The
of fat, increase in physical activity), the and private sectors get the biggest bang Medical Care Costs of Obesity: An
optimal number and timing of measure- for the buck from their expenditures on Instrumental Variables Approach, NBER
ments of progress, whether group chal- obesity prevention and treatment. Working Paper No. 16467, October
lenges can be designed to create beneficial 2010, published in the Journal of Health
peer effects, and how to avoid creating Economics, 31(1) (2012), pp. 21930.
incentives for the use of unhealthy meth- 1 See, for example, Centers for Disease 9 J. Cawley, Body Weight and Womens
ods of weight loss. Control, Deaths: Final Data for 2007, Labor Market Outcomes, NBER Working
Discouraged by failed attempts at National Vital Statistics Reports, 58(19) Paper No. 7841, published as The Impact
weight loss through dieting and exercise, (2010) pp. 117; L.D. Johnston, P.M. of Obesity on Wages, Journal of Human
substantial percentages of Americans have OMalley, J.G. Bachman, and J.E. Resources, 39(2) (2004), pp. 45174.
taken over-the-counter (OTC) weight loss Schulenberg, Monitoring the Future: 10 J. Cawley and J.C. Maclean, Unfit for
products. There is very little, if any, evi- National Results on Adolescent Drug Service: The Implications of Rising Obesity
dence suggesting that these products are Use, Overview of Key Findings, 2010. for U.S. Military Recruitment, NBER
effective, and some have potentially fatal Ann Arbor: Institute for Social Research, Working Paper No. 16408, September
side effects. Rosemary Avery, Matthew The University of Michigan, 2011. 2010, published in Health Economics,
Eisenberg and I study the impact of expo- 2 K.M. Flegal, M.D. Carroll, B.K. Kit, 21(11) (2012), pp. 134866.
sure to advertising on the probability of and C.L. Ogden. Prevalence of obesity 11 J. Cawley, C.D. Meyerhoefer, and D.
consuming such products using data from and trends in the distribution of body mass Newhouse, The Impact of State Physical
the Simmons National Consumer Survey index among U.S. adults, 19992010. Education Requirements on Youth
merged with data on magazine and televi- Journal of the American Medical Physical Activity and Overweight, NBER
sion advertising.14 We measure the extent Association, 307(5) (2012), pp. E1E7. Working Paper No. 11411, June 2005,
to which advertisements are deceptive 3 World Health Organization, Global published in Health Economics, 16(12)
using detailed guidelines developed by Status Report on Noncommunicable (2007), pp. 1287301.

NBER Reporter 2013 Number 4 9

12 J. Cawley, D. Frisvold, and C. Rewards for Weight Loss, NBER for Weight Loss, Journal of Health
Meyerhoefer, The Impact of Physical Working Paper No. 14987, May 2009, Economics, 32(5) (2013), pp. 794803.
Education on Obesity among Elementary and published as chapter 4 in Economic 14 J. Cawley, R.J. Avery, and M.
School Children, NBER Working Paper Aspects of Obesity, M. Grossman and Eisenberg, The Effect of Deceptive
No. 18341, August 2012, published in N. Mocan, eds., Chicago, IL: University Advertising on Consumption of the
the Journal of Health Economics, 32(4) of Chicago Press, 2011, pp. 91126. See Advertised Good and its Substitutes: The
(2013), pp. 743-55. also J. Cawley and J.A. Price, A Case Case of Over-the-Counter Weight Loss
13 J. Cawley and J.A. Price, Outcomes Study of a Workplace Wellness Program Products, NBER Working Paper No.
in a Program that Offers Financial That Offers Financial Incentives 18863, March 2013.

Public Sector Retirement Plans

Robert Clark*

Public sector pension plans and torical origins of retirement plans in the ties established pension plans for their
retiree health plans have been front page United States. In order to consider cur- police officers, firefighters, and teachers
news during the past decade. While the rent retirement policies, it is important during the late nineteenth century.2
popular press has focused almost exclu- to understand when public sector retire- By the first decade of the twenti-
sively on the underfunding of these plans, ment plans were established, why they eth century, a few states offered plans for
economic research has examined how were made more generous in the last public school teachers, but the first pen-
these plans affect state and local budgets, quarter of the twentieth century, and sions for general (that is, non-teacher)
intergenerational equity, and the behav- what human resource objectives they state employees were established in the
ior of public employees. Public employees are trying to achieve. The earliest retire- 1910s; however, only after the enact-
account for 14 percent of the labor force ment plans can be found in the pub- ment of Social Security did most states
and employee benefits comprise about 35 lic sector, dating at least from the early begin to establish retirement plans for
percent of the employment cost of public Roman Empire. The first public pension their employees, with the last state plan
employees.1 Thus, a clear understanding plans in North America were those estab- being implemented in the 1960s. Initially,
of the cost and benefits of pension and lished in the English colonies which pro- employer-provided pension plans were
health plans is central to understanding vided benefits for the members of their the only retirement plans available to pub-
this sector of the U.S. economy. Along local militias. During the earliest stages of lic employees, because public employees
with colleagues, I have examined the labor the Revolutionary War, the Continental were excluded from the Social Security
market effects of public pension plans Congress established a retirement plan for system until the 1950s. Through the mid-
and retiree health plans. The following its naval officers and enlisted sailors. The dle of the century, except for several of
describes my research on primary pension plan was funded primarily from booty the countrys larger cities, local teacher
plans, retiree health plans, and supple- seized on the open seas. (Later a plan plans were consolidated into state-man-
mental retirement plans offered by state was created for the Continental Army.) aged plans, and in about half of the states,
and local governments to their employees. The history of the Navy Pension Fund teacher plans merged with plans cover-
offers an interesting narrative of the man- ing general state employees. By the 1970s,
Public Pension Plans agement of early pension funds, includ- public sector plans had matured and
ing periodic benefit increases, which ulti- covered most full-time state and local
I began my research on public pen- mately led to the funds exhaustion and employees.
sion plans through a study of the his- a subsequent U.S. Treasury bailout. This These early public sector plans were
fund was revived and prospered during almost exclusively defined benefit plans,
*Clark is a Research Associate in the
NBERs Program on Aging. He is the the Civil War and was eventually rolled providing life annuities to retired pub-
Zelnak Professor of Economics in the into the federal governments pension sys- lic employees. The last quarter of the
Poole College of Business at North tem for Union veterans and later military twentieth century saw public employers
Carolina State University. His profile plans for regular army and navy person- increasing the generosity of their plans3
appears later in this issue. nel. At the local level, larger municipali- by: increasing the multiplier for benefits

10 NBER Reporter 2013 Number 4

per year of service, reducing retirement As part of the second project, Morrill, Newhouse and I organized an NBER
ages, reducing vesting periods, and adding David Vanderweide, and I examine the research project in 2013 examining the
cost-of-living adjustments to retirement decisions of public employees who ter- economic effects of retiree health plans in
benefits.4 To some extent, todays funding minate employment but have not yet the public sector.10
problems are based on these decisions to met the age and service requirements to I contributed two papers to this
increase benefits without providing ade- begin their pension benefits.8 In general, project. One, co-authored with Olivia
quate revenue to support them. employees at termination have the option Mitchell, estimates the effect of cover-
Private sector employers began offer- of requesting a lump sum distribution age by retiree health insurance on indi-
ing pension plans on a wide scale later of their pension or leaving their funds vidual saving.11 There is a long literature
than the public sector, though, like the in the system. Our analysis finds that in by economists estimating the impact of
public sector, most of the early plans the public sector the lump sum distribu- employer pensions, Social Security, and
were defined benefit plans. After the pas- tion amount is not typically equivalent Medicare coverage on personal saving but
sage of the Employee Retirement Income to the present discounted value of the our paper is the first examination of the
Security Act (ERISA) in 1974, retirement annuity payments, as it is in the private impact of retiree health insurance on sav-
plans in the private sector began a long- sector. Thus, although there is a consid- ing and wealth accumulation. We find
term movement away from defined ben- erable literature examining pension par- that public sector workers aged 50 and
efit plans toward defined contribution ticipants that finds workers have a pref- over covered by retiree health insurance
plans.5 Public sector plans were not sub- erence for lump sums, when considering had accumulated $70,000 to $100,000
ject to ERISA, and government employ- public sector workers, a very different less in net wealth than comparable private
ers continued to offer defined benefit pattern is observed. In this study, we find sector employees without retiree health
plans. However, since 2000 one third of no such preference for lump sum distribu- insurance. Thus, workers expecting that
the states have altered their plan struc- tions among public employees in North their employer will subsidize their health
tures by adopting defined contribution Carolina. Terminated workers tend to insurance in retirement tend to save less.
plans, cash balance plans or hybrid plans, leave their accounts open even when the In a second paper, Morrill,
either as replacements for traditional lump sum has a higher present value, sug- Vanderweide, and I examine the impact
defined benefit plans or as options that gesting an important role for framing, of policy changes on the choice of health
new employees can select. inertia, and defaults. plans by retirees in North Carolina.12 All
There is a long history of economic retirees receiving a pension were eligible
research examining the effects of pension Retiree Health Insurance to remain in the state health plan at no
plans in general, but relatively few studies premium. Retirees had a choice between
examine the effects of public sector plans. Compared to the literature on pen- two plans with one plan (Standard Plan)
In part because of the lack of research sion plans, much less is known about being more generous than the other
on public retirement plans, along with the development of retiree health plans, (Basic Plan). Retirees could select either
several collaborators I helped to orga- how they are financed, and their effects plan, but if they wanted to add depen-
nize NBER research projects in 2010 and on employee behavior. Employers began dents to their plan both the retiree and
2012 that explored various issues involv- to extend health coverage to retirees on the dependent had to be in the same
ing retirement plans and retiree health a large scale after the implementation of plan with the retiree paying the full cost
insurance offered by state and local gov- Medicare.9 While coverage in the private of his dependents coverage. In 2009, 93
ernments.6 As part of the first project, sector has been declining rapidly, inci- percent of retirees were in the more gen-
Melinda Morrill and I examine the initial dence of retiree health insurance remains erous Standard Plan. Over a four-year
actuarial reports on retiree health insur- very high in the public sector. In 2004, period, non-Medicare-eligible retirees
ance of all 50 states.7 Our survey shows the Governmental Accounting Standards were subjected to changes in the default
that all states offered their retirees access Board issued a ruling requiring public plan, introduction of a Comprehensive
to some form of retiree health insurance, employers to report their unfunded liabil- Wellness Initiative (CWI), the elimina-
although there are significant differences ities associated with the promise of health tion of the CWI, and the introduction of
in the generosity of these plans across the insurance in retirement. Prior to this time, a premium for enrollment in the Standard
states. Some states provide this insurance very little was known about the magni- Plan.
and pay the entire premium for their retir- tude of these liabilities. Statistical analysis shows that these
ees, while some states merely offer retir- Even though retiree health plans are policy changes significantly altered enroll-
ees the opportunity to remain in the state an expensive component of employee ments in the two plans. The results indi-
plan if the individual pays the entire pre- compensation in the public sector, there cate that the policy initiatives caused retir-
mium. Given this range of generosity, the is relatively little research on the impact ees to change to the less generous health
unfunded liability associated with these of these programs on employee behavior. plan, thus shifting costs from the state
plans varies substantially across the states. To address this need for research, Joseph to these retirees. The evidence suggests a

NBER Reporter 2013 Number 4 11

strong role for defaults in retiree health ment saving plans will become increas- Economics of State and Local Public
plan choices. The findings suggest that ingly important for public sector employ- Pensions, NBER Working Paper No.
plan sponsors can effectively move retirees ees. Future public employees will assume 16792, February 2011, and Journal of
from one plan to another through the use more responsibility for their retirement Pension Economics and Finance, 10(2)
of plan characteristics and requirements. income. The importance of financial lit- (April 2011), pp. 16172. The list of
We are now engaged in a similar project eracy and the need to understand some- research studies that were conducted as
examining how active workers responded times complicated retirement plans will part of the second project can be found at
to similar changes and the introduction of increase over time. In papers with Steven
a new consumer-driven health plan. Allen, Morrill, and Jennifer Maki, I exam- SLP/summary.html
ine the role of employer-provided retire- 7 R.L. Clark and M.S. Morrill, Retiree
Supplemental Retirement Plans ment planning programs,16 financial Health Plans in the Public Sector: Is
and Financial Education literacy programs,17 and the success of There a Funding Crisis? Northampton,
informational nudges18 in retirement MA: Edward Elgar Publishing, 2010.
Many public sector employees are planning. Our analysis shows that these Also see R.L. Clark and M.S. Morrill,
offered the opportunity to enroll in sup- types of programs have been successful The Funding Status of Retiree Health
plemental retirement saving plans. State in enhancing financial literacy, increas- Plans in the Public Sector, NBER
and local employers can sponsor 401(k) ing the knowledge of retirement benefits, Working Paper No. 16450, October 2010,
and 457 plans while schools, universities, altering saving behavior, and modifying and Journal of Pension Economics and
and health care organizations can also retirement plans. Finance, 10(2) (April 2011), pp. 291
establish 403(b) plans for their employ- 314.
ees. Very little is known about the par- 8 R.L. Clark, M.S. Morrill, and D.
ticipation and contribution rates of pub- 1 Information on employment from the Vanderweide, Defined Benefit Pension
lic employees in these plans. However, Bureau of Labor Statistics, August 2013, Plan Distribution Decisions by Public
it does appear that public employers are Sector Employees, NBER Working Paper
much less likely to offer employer matches t17.htm No. 18488, October 2012, and forthcom-
to these plans or to have adopted auto- 2 This discussion is based on R.L. Clark, ing in the Journal of Public Economics.
matic enrollment or auto-escalation poli- L.A. Craig, and J.W. Wilson, A History 9 In the private sector, coverage was
cies relative to private sector employers.13 of Public Sector Pensions in the United generally limited to large companies,
The current state of supplemental plans States, Philadelphia: University of unionized firms, and of course, only
raises important questions about the fac- Pennsylvania Press, 2003. employers who offered health insurance
tors that prompt public employers to offer 3 R.L. Clark and L.A. Craig, to active workers. In 1989, the Financial
one of these plan types over another, and Determinants of the Generosity of Accounting Standards Board required
why some employers offer two or three Pension Plans for Public School Teachers, firms to determine the unfunded liabil-
different retirement saving plans. 19822006, Journal of Pension ity associated with the promise of health
In the educational sector, manage- Economics and Finance, 10(1) (January insurance to retirees. Subsequent to this
ment of 403(b) plans appears to be inef- 2011), pp. 99118. This paper reports new accounting policy, coverage in the
ficient and likely inhibits wealth accu- that the typical career teacher retiring in private sector began to decline. Other fac-
mulation by teachers. David Richardson 1982 had a replacement rate of 50 percent tors influencing this decline were the rise
and I find that states that allow all inter- of their final average salary while for a in the ratio of retirees to active workers,
ested vendors to offer investment options similar teacher retiring in 2006 benefit the increase in medical cost that outpaced
to 403(b) plan participants had higher increases had raised the replacement rate the general rate of inflation, and Medicare
administrative fees and were more likely to 56 percent. policy changes.
to include other fees, such as front-end 4 R.L. Clark, L.A. Craig, and J. 10 Joseph Newhouse and I were co-
fees and surrender charges for similar Sabelhaus, State and Local Retirement directors of this project. The list of research
investment products.14 Emma Hanson Plans in the United States, Northampton, studies can be found at http://conference.
and I review 403(b) plans in all 50 states MA: Edward Elgar Publishing, 2011.
and find that in over two-thirds of the 5 R. L. Clark and A.A. McDermed, The html
states, 403(b) plans were managed at the Choice of Pension Plans in a Changing 11 R.L. Clark and O.S. Mitchell, How
school district level. In most cases, there Regulatory Environment, Washington: Does Retiree Health Insurance Influence
was little or no oversight of the vendors American Enterprise Institute, 1990. Public Sector Employee Saving? NBER
or restrictions on their fees.15 6 Jeffrey Brown and Joshua Rauh were Working Paper No. 19511, October 2013.
As states reform their primary pen- co-directors of these projects. A summary 12 R.L. Clark, M.S. Morrill, and
sion plans and reduce the generosity of of the first project can be found in J.R. D.Vanderweide, The Effects of Retiree
retiree health plans, supplemental retire- Brown, R.L. Clark, and J.D. Rauh, The Health Insurance Plan Characteristics on

12 NBER Reporter 2013 Number 4

Retirees Choice and Employers Costs, 19231, July 2013.
NBER Working Paper No. 19566, institute/research/dialogue/rd_98.html. 17 R.L. Clark, M.S. Morrill, and S.G.
October 2013. 15 R.L. Clark and E. Hanson, 403(b) Allen, The Role of Financial Literacy in
13 R.L. Clark and J.M. Franzel, Plans for Public School Teachers: How Determining Retirement Plans, NBER
Adopting Automatic Enrollment They Are Monitored and Regulated in Working Paper No. 16612, December
in the Public Sector: A Case Study, Each State, Research Dialogue, No. 107 2012, and Economic Inquiry, 50(4)
Government Finance Review, 27(1) (March 2013), TIAA-CREF Institute, (October 2012), pp. 85166.
(February 2011), pp. 428. 18 R.L. Clark, J.A. Maki, and M.S.
14 R.L. Clark and D.P. Richardson, pdf/institute/research/dialogue/107b.pdf Morrill, Can Simple Informational
Who Is Watching the Door? How 16 S.G. Allen, R.L. Clark, J.A. Maki, and Nudges Increase Employee Participation
Controlling Provider Access Can Improve M.S. Morrill, Golden Years or Financial in a 401(k) Plan? NBER Working Paper
Teacher K-12 Retirement Outcomes, Fears? Decision Making After Retirement No. 19591, October 2013, and forthcom-
Research Dialogue, November 2010, Seminars, NBER Working Paper No. ing in the Southern Economic Journal.

High-Skilled Immigration, Domestic Innovation, and Global Exchanges

William Kerr*

High-skilled immigrants account consequences of high-skilled emigration Several features of patent litigation make
for about 25 percent of the workers in for the home countries of those who it advisable to correctly list the identities
the most innovative and entrepreneur- move to the United States. of those truly doing the innovative work
ial U.S. industries, and they are respon- when filing for a patent, and through the
sible for a roughly similar share of out- Developing Data assignment of patents, this inventor role
put measures like patents or firm starts. can be separated from ownership of the
Immigrants have also accounted for the While the substantial role of immi- property rights to the patent.
majority of the growth in the U.S. sci- grants in U.S. technological develop- I use the names of inventors to assign
entific workforce since the 1990s. The ment has long been recognized, data their probable ethnicities. This procedure
magnitudes of these contributions make constraints have posed a significant chal- exploits the fact that individuals with
understanding the economic conse- lenge for research. Some datasets, like surnames of Gupta or Desai are likely
quences of immigration an important the decennial Censuses, provide rich to be Indian, Wang or Ming are likely to
research priority. cross-sectional accounts but limited lon- be Chinese, and Martinez or Rodriguez
In this piece, I summarize the major gitudinal variation. Others, such as the are likely to be Hispanic. Name match-
themes that have emerged from my work Current Population Survey, provide bet- ing procedures have been developed to
on high-skilled immigration. I start by ter longitudinal detail but less cross-sec- provide probabilistic ethnicities for vir-
describing the construction of the ethnic tional heterogeneity. Moreover, it has tually all inventors in the USPTO sys-
patenting records that I use in most of my been especially difficult to collect data tem. The name approach is compara-
studies. I then outline projects that have on the role of high-skilled immigrants in tively stronger at separating among Asian
considered the economic consequences research-oriented firms and universities. ethnic groups than among European or
of high-skilled immigrants for the United Most of my work on high-skilled Hispanic names. This approach does not
States. The last part of this research sum- immigrants builds off the assignment isolate immigration status directly for
mary focuses on the outbound economic of probable ethnicities to individuals multiple reasons, but it does provide an
who appear in U.S. patent records. The indirect measure that proves useful in
*Kerr is a Faculty Research Fellow in United States Patent and Trademark research.
the NBERs Program on Productivity, Office (USPTO) publishes all the pat- The appeal of this approach is that it
Innovation, and Entrepreneurship. He ents it grants, which have exceeded permits assignment of ethnicities to indi-
is an Associate Professor at Harvard 200,000 grants in recent years. Every vidual patent records. With this granu-
Business School. His profile appears later patent must list at least one inventor, and larity, the USPTO records can be aggre-
in this issue. patents are allowed multiple inventors. gated in many ways, for example by

NBER Reporter 2013 Number 4 13

two decades, and the program is a point
of significant controversy in the public
debate over immigration. Proponents and
detractors disagree about how important
H-1B admissions are for U.S. technology
advancement and whether native workers
are displaced by immigrants.
We study how changes in H-1B
admissions impact the growth and char-
acter of U.S. invention. Our central
analysis exploits differences across cit-
ies in their dependence on immigrants
for their science and engineering work-
force. Dependent cities experience sub-
stantially stronger growth in Indian and
Chinese ethnic inventions when H-1B
admission rates are higher. We do not
find evidence of adverse effects for inven-
tors with Anglo-Saxon names, which are
our proxy for native U.S. workers. If any-
thing, the project suggests that native
year, by city, by very detailed technology skilled immigration affects the rate of invention may grow slightly when the
codes, and by institution. Moreover, the U.S. technology development and its spa- number of immigrant scientists and engi-
patent data include a wealth of infor- tial allocation. One project with William neers is increasing in a city. Aggregating
mation, so one can, for example, study Lincoln examines how immigration pol- across ethnic groups, total U.S. invention
citations that patents make to other pat- icy influences the rate of U.S. innovation increases by a small amount in the short
ents for evidence of ethnic networks through changes in the supply of poten- run with higher H-1B admissions. This
in knowledge flow. One can also use tial inventors to the economy.1 We focus increase is primarily through the direct
measures developed in the technological on the H-1B visa program that is the pri- contributions of immigrant inventors.
change literature (such as patent origi- mary visa category for temporary work- These results are important for
nality scores) to compare inventor con- ers entering the United States for employ- understanding the consequences of
tributions across ethnicities. ment in high-skilled occupations related more flexible immigration policies for
Figure 1 shows the tremendous to science and engineering. The U.S. high-skilled workers. In contrast to the
increase in the ethnic contribution of national cap on new H-1B admissions demand side of innovation where
U.S. inventors over the last 30 years, has fluctuated substantially over the last entrepreneurial innovation responds
focusing only on inventors residing in
the United States at the time of their
work. The contribution of Chinese and
Indian ethnic inventors displays excep-
tional growth, increasing from under 2
percent each to 9 percent and 6 per-
cent respectively. Ethnic contributions
are disproportionately concentrated in
high-tech fields, and Figure 2 shows the
Chinese and Indian inventor shares for
several noteworthy companies. The data
underlying Figures 1 and 2 are the basis
for most of my research on high-skilled
immigration in the U.S. economy.
Domestic Inbound
One portion of my work uses the
USPTO data to examine how high-

14 NBER Reporter 2013 Number 4

to market needs and growth in market Pekkala Kerr, we link the ethnic patent- cantly in recent years from greater con-
sizesthis supply side of innovation is ing dataset to the U.S. Census Bureaus sideration of the role of the firm, and I
less understood. It can be very challeng- Longitudinal Employer Household believe a similar outgrowth will occur
ing for workers to move across occupa- Database.4 This is a very exciting research for high-skilled immigration research in
tions and industries, especially in knowl- platform because the employer-employee coming years.
edge-intensive sectors. The heavy U.S. data allow us to follow individuals and
dependence on immigrants for its scien- firms over time. Moreover, the data Home-Country Consequences
tific workforce makes immigration pol- directly identify the immigrant status of of High-Skilled Emigration
icy an important supply-side determi- employees, which is particularly power-
nant of U.S. innovation, as it governs the ful in combination with the ethnic pat- The studies described above analyze
entry of workers who can perform key enting data. how immigrants influence U.S. innova-
tasks in innovation-intensive industries. Our key paper analyzes how fluctua- tion. My research also considers the rela-
A subsequent project, also using tions in the H-1B program impact the tionships that high-skilled immigrants
cross-city variation, considers the degree hiring of different groups of workers. We in the United States maintain with their
to which immigrants aid the efficient explore the idea that high-skilled immi- home countries. Case studies of Silicon
reallocation of inventors toward areas gration allows dependent firms to keep Valley depict powerful ethnic business
where breakthrough inventions occur.2 their workforces younger. Advocates networks that transfer knowledge and
Urban economists have long discussed against the H-1B program voice this con- technology across countries, but the
cases in which innovation shifts to be cern, arguing anecdotally that the pro- broader strength and generality of these
near the source of the next great mouse- gram is used in high-tech firms for labor networks have been rarely tested.
trap, for example, the quick shift of semi- cost minimization by displacing older My initial research on this question
conductors from Boston to Silicon Valley and more expensive workers. While the establishes some key macroeconomic
and the rapid rise of Micron Technology, vast majority of H-1B workers are under relationships using country-industry
Inc. in Boise, Idaho. As part of a broader the age of 40, this proposed relationship data in combination with the ethnic
effort to quantify this effect, this proj- has not been rigorously examined. patenting series.5 This work quantifies
ect showed the substantial degree to We find evidence that increased how a larger ethnic scientific commu-
which immigrant inventors lead the shifts employment of high-skilled immigrants nity in the United States aids the trans-
across space to new industrial clusters. in the firm links to younger workforces. fer of new technologies to the home
This greater mobility results partly from Whereas younger native groups expand country. This transfer is strong enough
immigrant inventors being more mobile their employment in step with immi- to show up in manufacturing output
than native workers, but it is particularly grants, there are very limited adjust- and productivity data for the home
connected to the fact that initial location ments regarding the employment of country, and it is also evident in trade
decisions upon moving to the United older natives. As a consequence, the share patterns.6 At several points, my work
States can be easily shaped. of older workers in the firm declines, has used the Immigration Reform Act
More recent work has turned to both in total and among native workers of 1990, which differentially affected
uniting the ethnic patenting data with only. On the other hand, it is important high-skilled immigration from coun-
administrative data on the employment to note that absolute declines in older tries based upon how general quota
structures of U.S. firms. From a con- worker employment are not observed. changes interacted with country size, to
ceptual perspective, this integration is We consider some differences in effects tease out causal relationships.
very important since most forms of high- by occupation, and we discuss how our Understanding the channels behind
skilled immigration are 1) done through results reflect a blend of cost minimi- this technology transfer has been the
firms that sponsor visas, and 2) have many zation and access to scarce skills. These subject of subsequent work. One chan-
non-market aspects to their allocation. findings describe a pattern of substi- nel is clearly inventor-to-inventor com-
Examples of the latter are the regulated tution and complementarity between munication. Ethnic networks are evident
supply of new high-skilled immigrants immigrants and natives that could not in global patent citations, where overseas
by the government, their allocation to have been discerned with prior tech- inventors display a 50 percent higher
firms without a pricing mechanism, and niques and data. citation rate for members of their own
the tied employer-employee relationships Overall, the development of new ethnicity working in the United States,
that follow. Given that firms effectively employer-employee data offers great conditional on technology area and simi-
conduct much of the selection of U.S. promise for expanding our understand- lar controls. This ethnic transfer is partic-
high-skilled immigrants, it is imperative ing of the immigration process from ularly powerful in the first five years after
to understand better how they utilize the both empirical and theoretical perspec- a new discovery is made, and it is no lon-
visas.3 tives. The literature on international ger present after technologies have been
In projects with Lincoln and Sari trade, for example, has benefited signifi- around for ten years as a result of wide-

NBER Reporter 2013 Number 4 15

spread diffusion. pora connections have historically over- Skilled Immigration, Innovation,
My work with C. Fritz Foley also come (such as information asymmetries and Entrepreneurship: Empirical
establishes that foreign direct invest- and reputation-based contracts), the Approaches and Evidence, NBER
ment (FDI) is an important mecha- diaspora makes effective use of these Working Paper No. 19377, August
nism and introduces again the theme tools and their role even strengthens 2013. Under these conditions, it is not
of understanding the role of firms in with familiarity with the platform. This surprising that firms lobby extensively
these global linkages.7 We match the suggests that the importance of ethnic about immigration. We use the high-
ethnic patenting data to confidential networks for international exchanges skilled immigration lens to study lob-
data on the foreign activities of U.S. is unlikely to decline, and may even bying in W.R. Kerr, W.F. Lincoln, and
multinationals collected by the Bureau increase, with the advent of online plat- P. Mishra, The Dynamics of Firm
of Economic Analysis. This platform forms and related reductions in trans- Lobbying, NBER Working Paper No.
allows us to see how growth in a firms portation and communication costs. 17577, November 2011, and forthcom-
ethnic scientific workforce in the Overall, these studies find that ing in the American Economic Journal:
United States relates to FDI placement, larger high-skilled immigrant popula- Economic Policy.
both in total and also in activities spe- tions in the United States from a given 4 S.P. Kerr, W.R. Kerr, and W.F.
cifically related to R&D and patent- country provide partial access to U.S. Lincoln, Skilled Immigration and the
ing. We find that within-firm growth resources and opportunities for those Employment Structures of U.S. Firms,
in the number of U.S.-based inventors who live in that country. This resource NBER Working Paper No. 19658,
of a particular ethnicity translates into assembly through ethnic and profes- November 2013; S.P. Kerr and W.R.
higher FDI placement by that firm in sional networks complements resource Kerr, Immigration and Employer
countries associated with that ethnic assembly through spatial proximity in Transitions for STEM Workers,
group. This effect is particularly strong industrial clusters. It contrasts with tra- American Economic Review, 103(3)
for location decisions related to innova- ditional economic models where, for (May 2013), pp. 1937.
tion. Our results suggest that employ- example, technology diffusion occurs 5 W.R. Kerr, Ethnic Scientific
ing innovators of a certain ethnicity instantaneously or declines uniformly Communities and International
increases some aspects of the competi- with geographic distance. Technology Diffusion, Review of
tiveness of U.S. multinational firms in Economics and Statistics, 90(3)
countries associated with that ethnicity. (August 2008), pp. 51837.
Another project with Ejaz Ghani 1 W.R. Kerr and W.F. Lincoln, The 6 W.R. Kerr, Heterogeneous
and Christopher Stanton examines the Supply Side of Innovation: H-1B Visa Technology Diffusion and Ricardian
outsourcing channel using contract- Reforms and U.S. Ethnic Invention, Trade Patterns, NBER Working Paper
level data from oDesk, the worlds larg- NBER Working Paper No. 15768, No. 19657, November 2013.
est online platform for outsourcing.8 February 2010, and Journal of Labor 7 C.F. Foley and W.R. Kerr, Ethnic
oDesk links firms and workers from Economics, 28(3) ( July 2010), pp. Innovation and U.S. Multinational
many countries; India is the largest des- 473508. Firm Activity, NBER Working
tination country on oDesk in terms of 2 W.R. Kerr, Breakthrough Inventions Paper No. 17336, August 2011, and
outsourcing. We study the role of the and Migrating Clusters of Innovation, Management Science (2013).
ethnic Indian diaspora worldwide in NBER Working Paper No. 15443, 8 E. Ghani, W.R. Kerr, and C.T.
sending contracts to India and in influ- October 2009, and Journal of Urban Stanton, Diasporas and Outsourcing:
encing the traits of these contracts. Economics, 67(1) ( January 2010), pp. Evidence from oDesk and India, NBER
An important finding from this work 4660. Working Paper No. 18474, October
is that while tools like oDesk mini- 3 These issues are further elabo- 2012, and forthcoming in Management
mize many of the frictions that dias- rated upon in W.R. Kerr, U.S. High- Science.

16 NBER Reporter 2013 Number 4