In 2021, The Hamilton Project conducted original research and commissioned policy proposals from leading economic thinkers as part of its core mission of promoting opportunity, prosperity, and inclusive economic growth. Given the urgency around responding to the COVID-19 recession and the need to understand in real-time how conditions are changing, The Hamilton Project focused on providing evidence and proposals to support the economic recovery. In this review, we highlight some of the key figures The Hamilton Project produced over the past year. These figures and the linked related work tell the story of an irregular, uneven economic recovery and policy proposals aimed at a strong, equitable recovery.

      

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Decreases in reimbursement rates save money, don’t reduce amount of health care  

The U.S. spends more than any other country on health care, which has led to calls to lower reimbursement rates to health providers. The risk is that providers would respond to lower payments by restricting supply, impeding access to health care and worsening patient health outcomes. Marcus Dillender from the University of Illinois at Chicago, Anthony T. Lo Sasso from DePaul University, and Lu G. Jinks from Analysis Group examine provider responses to a 30% cut in reimbursement rates in the Illinois workers’ compensation system—one of the highest-reimbursing workers’ compensation insurance systems in the nation. Using data on more than 1.5 million claims from 2009 to 2013, they find that lowering maximum reimbursement rates reduced annual costs by over $400 million with no detectable effect on the amount of care injured workers received. The authors conclude that reducing reimbursement rates for high-reimbursing payers could reduce health care costs without major changes in care.  

US-China trade war boosted global trade   

The U.S. and China imposed tariffs on imports from each other in 2018 and 2019. Using bilateral trade data from the top 50 exporting countries over the 2014-2019 period, Pablo Fajgelbaum of Princeton and co-authors find that the trade war boosted global trade by 3%. While the U.S.-China trade war lowered trade between the two countries, it caused other exporting countries to trade more with each other in products that had higher U.S.-China tariffs. Other countries also reallocated exports toward the U.S. and away from China, the authors find. The export response — which varied across countries — was driven by the sensitivity of each country’s exports to price changes rather than its specialization in the tariff-targeted items. Factors such as pre-trade war reallocation capacity and scale economies may have enabled the boost in exports, the authors suggest, ensuring that “the trade war created new trade opportunities in aggregate and did not simply reshuffle trade flows.”  

Job training program gains were erased during the pandemic   

Using data from a randomized control trial in Cali, Colombia, Felipe Barrera-Osorio of Vanderbilt, Adriana D. Kugler of Georgetown, and Mikko I. Silliman of Harvard find that workers who received job training fared no better during the pandemic than those without job training. Participants randomly assigned to receive job training (primarily in service fields) initially saw higher monthly earnings and employment rates, they find. However, the differences were erased when the pandemic hit, with both groups having similar employment outcomes starting in March 2020. The authors note that the pandemic uniquely affected service workers, which may have played a role in these results. Moreover, the training program included only 160 classroom hours and was completed only a year and a half before the start of the pandemic; longer training programs and workers with longer tenures at their jobs may have fared better, they say.  

Chart of the week: US 2-year Treasury yield rises sharply as Fed signals interest rate increases in 2022 

Source: Tullett Prebon, The Wall Street Journal  

Quote of the week:  

“[I] think we are well-positioned to deal with what’s coming, with the range of plausible outcomes that can come. I think if you look at how we got here, I do think we’ve been adapting to the incoming data, really all the way along, and noticing and calling out that both the effects and the persistence of inflation, of bottlenecks, and labor shortages, and things like that. We’ve been calling out the fact that those were becoming longer and more persistent and larger. And now we’re in a position where we’re ending the taper by March…and we’ll be in a position to raise interest rates as and when we think it’s appropriate. And we will, to the extent that’s appropriate,” says Jerome Powell, Chair of the Federal Reserve. 

“I think that the data that we got toward the end of the fall was a really strong signal that inflation is more persistent and higher and that the risk of it remaining higher for longer has grown. And I think we’re reacting to that now, and we’ll continue to adapt our policy. So, I wouldn’t look at it that we are behind the curve. I would look at it that we’re in position now to take the steps that we need to take in a thoughtful manner to address all of the issues including that of too high inflation.” 

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

      

Digital technology was a reoccurring theme last week at the Biden administration’s Summit for Democracy on “defending against authoritarianism, addressing and fighting corruption, promoting respect for human rights.” COVID-19 has highlighted how central digital capabilities are for all aspects of life—work, health, education, commerce, and government. Digital infrastructure and government services are no longer just nice to have, but essential elements of a 21st century nation. Digital capabilities are ideologically neutral and can serve authoritarian as well as democratic tendencies, so development donors must be wary of whom they partner with and how they deliver assistance for digital government.

Components of digital government

In a new working paper, we identify the key elements of digital government, present data on how developing countries are adopting digital government, and provide recommendations for donor support.

There is no definitive definition of digital government, sometimes referred to as e-government, nor agreement on its principal components. The paper, based on an assessment of what is required for a government to effectively function digitally, identifies six key components of digital government:

• Digital infrastructure. A comprehensive network of digital infrastructure is required to run digital government platforms and for individuals, business, and civil society to access and utilize those resources.
• Digital literacy. Government staff and digital users must be literate, not just digitally, but in the basic skills of traditional school learning.
• Digital data/communications/services. Digital government data and services need to be constructed on a common platform, not department-by-department or service-by-service, that is based on whole-of-government standards and interoperable.
• Digital participation. Digital government must facilitate and encourage citizen use by being easy to access and responsive to user input and needs.
• Digital institutions/policies/regulations. Existing institutions and policies must be modified to function alongside digital applications and adapted for digital use, depending on whether the specific application lends itself to being fully digital or requires companion analog operations.
• Digital security and rights. The systems must be secure from cyberattack and protect data privacy and rights.

The digital divide among countries

Digital development largely tracks with national income (Figure 1). Eighty-seven percent of the population in developed countries is reached by 4G coverage, compared with 65 percent in developing countries and 25 percent in least-developed countries. The urban-rural divide is 87 percent-81 percent in developed countries, 65 percent-28 percent in developing countries, and 25 percent-10 percent in least-developed countries. The gender gap in internet usage is modest in developed countries, at 88 percent-86 percent; the gap widens to 49 percent-40 percent in developing countries and to 28 percent-15 percent in least-developed countries.

Consistent with the level of economic development, the sub-Saharan Africa region scores the lowest on indexes of overall digital government readiness and lags on all six components. South Asia follows next and is particularly in need of support in digital literacy and digital infrastructure. There is a wider range of digital readiness across the six components for East Asia & Pacific, Middle East & North Africa, and Latin America & Caribbean. The developing countries of Europe & Central Asia score better than other regions, but still lag considerably behind wealthy countries. Overall, developing countries score best on digital literacy and worst on government effectiveness.

How donors can engage

Low-income countries (LICs) and lower-middle-income countries (LMICs) are in dire need of assistance in all aspects of digital government. Support is required not only on the strictly digital components of ICT (information and communication technology) infrastructure, digital data and services platforms, digital participation, and digital security, but also on upgrading and adapting to the digital world the analog components of government institutions and regulations, in addition to digital literacy and human capital development.

Donors are currently supporting various digital development initiatives, but too often in one-off, siloed applications rather than as part of a comprehensive, strategic plan. Donors should build their support around national digital strategies and find ways to overcome barriers to donor coordination. The scale and urgency of need are such that donors should collaborate through establishing a comprehensive global digital initiative and regional efforts like the African Union’s digital transformation strategy for Africa. As appropriate, they should draw from and contribute to global public goods, as cataloged by the Digital Impact Alliance in its Catalogue of Digital Solutions, and utilize existing capabilities and platforms as provided by Future State, MOSIP, and GovStack.

Expectations for donor support must be realistic. An initiative can undertake only so much. A digital government initiative, even a comprehensive one, is likely to focus mainly on digitally specific components—telecommunications infrastructure, government digital capacity and online services, digital participation, and cybersecurity. For the other components that support digital government, there are existing well-established donor programs in building human capacity through education and training, in strengthening government institutions, services, policies, and regulations, and in advancing democracy and political participation. Ideally, a digital lens would be embedded in these traditional programs to create mutually strengthening synergies with digital government: education programs addressing digital literacy, institution building efforts adapted to the digital world, and democracy programs focused on citizen engagement in an online world.

The benefits and challenges ahead

If there is any question about the value and urgency of moving to digital government, one need only look at how a few digitally ready developing countries responded rapidly to COVID-19. Sri Lanka was able in two days to configure an existing digital health platform to track incoming travelers from high risk areas. India was able within a few weeks to use its Aadhaar digital ID system to begin transferring $8 per month to 200 million vulnerable women. Within 10 days, Togo built on an existing digital platform a system to enroll and transfer monthly cash payments via mobile phone.

The benefits of digital government are clear. Done properly, it allows government to be more efficient, more responsive to citizen input and needs, more transparent and accountable, and to act and adapt more quickly. With the right data and “last mile” connection efforts, it allows government services to be better targeted and to reach remote and underserved communities.

But along with the benefits come dangers. The misuse of digital capabilities extends from demagoguery to repression and abuse of human rights. Digital technology can be deployed by authoritarian regimes to maliciously strengthen their power over citizens. The same digital capabilities that allow government to be more engaged with and responsive to citizens also allow it to be more controlling. It provides government the tools to infringe on citizen privacy and track their communications and movements. It can be used for misinformation and disinformation and to misrepresent and block communications of opposition forces.

Principles of good digital government

As donors work to advance the digital capabilities of developing country governments, they must be constantly alert as to how those capabilities can be misused. They must carefully choose the partners with whom they work. The support they provide must be accompanied by the ethos of full transparency and, first and foremost, be citizen-centric.

At the Summit for Democracy, USAID Administrator Samantha Power called for a Surveillance Principles Initiative, consistent with the Universal Declaration of Human Rights and the rule of law, that protects user data and fights discrimination. Beyond that, donors, to ensure their support for digital development is deployed for benevolent and constructive purposes, should develop a set of principles designed to wall off the capabilities of digital government from misuse and abuse and protect open government and the rights and privacy of citizens.

This is not something for government to do alone. The private sector possesses the technology, does much of the investment, and is constantly innovating, so must be a party to any set of principles. Civil society is best at protecting the rights of individuals and holding government and the private sector accountable. Partner countries have to be in accord with what is put forward. So, if it is to be effective, this set of principles must be a multi-stakeholder charter jointly built and with mutual accountability.

      

On November 8, Tony Pipa hosted Mayor Brian Bowman of Winnipeg, Canada for a discussion of Winnipeg’s leadership on indigenous inclusion, climate change, COVID-19 resilience, and smart technology.

Watch the whole conversation here or read the highlights below.

Bowman entered office in 2014, at a time when public trust in Winnipeg’s government was especially low. His ambition included growing Winnipeg to a population of 1 million in a way that builds community trust and cohesion. Winnipeg has the largest population of Indigenous peoples in Canada, about 12.5 percent, a proportion that is expected to hit 25 percent when the city reaches its goal of 1 million residents.

Rebuilding trust started with reconciling Winnipeg’s history. The first Indigenous mayor of a Canadian city, Mayor Bowman confronted the legacy of colonization head-on and sought to leverage the knowledge and contributions of First Nations, Métis, and Inuit Peoples in local policymaking. Under his leadership, and through active participatory processes that engaged citizens across diverse perspectives, the city created an Indigenous Advisory Council, designated 2016 as the Year of Reconciliation, and developed the Welcoming Winnipeg initiative, which reexamines and updates historical markers to reflect the community’s recognition of Indigenous perspectives and contributions. In 2017, the City Council adopted an Indigenous Accord to foster partnerships and translate commitments into action.

As a physically isolated city, Winnipeg must reckon with a car-centric transportation system if it is to reach its sustainability aspirations—residential vehicles accounting for close to one-third of total emissions. Its climate action plan includes greenhouse gas (GHG) emissions reduction targets of 20 percent below 2011 levels by 2030 and 80 percent by 2050. The climate crisis reinforced the importance of sustainable development to Bowman, highlighting the interconnectedness of economic growth, connectivity, health, and community. The city expanded its Climate Action Plan into the OurWinnipeg 2045 strategy, which was aligned with the Sustainable Development Goals (SDGs) to capture global governance and collaboration. Peg, a local data dashboard aligned with the SDGs, forces the city’s leadership to face the facts and identify the key gaps of municipal action, paving the way for the city’s first Voluntary Local Review (VLR).

      

In spring 2020, millions of Americans lost or left their jobs. While many continued to search for work, ready to take a job, others left the labor force entirely. Even as the unemployment rate has fallen back to historically low levels, the labor force participation rate (LFPR, which measures the share of the population that is employed or is unemployed and looking for work) remains depressed. This report takes a deeper dive into who is returning to work—and who is not—to better understand how the balance of the recovery might unfold.

LFPR fell precipitously at the onset of the COVID-19 pandemic and has only partially recovered (figure 1). Overall LFPR (16+) fell from 63.3 to 60.2 percent in April 2020. It has since risen to 61.8 percent, still about 1 percentage point below the pre-pandemic projection of LFPR by the Congressional Budget Office and its lowest level in 45 years. LFPR among prime-age people (between ages 25 and 54) fell from 82.9 percent to a low of 79.8 percent. That rate rose in spring 2020 and has risen somewhat steadily since spring 2021; by November 2021, it had recovered to 81.8 percent, making up about two-third of the rate’s initial loss.

One way to gauge the sustained progress and strength of the economic recovery is to assess when and which people are returning to the labor market. This piece explores the flows in and out of the labor force and how changing participation rates by different groups is contributing to the labor market recovery. As we continue to grapple with the evolving pandemic and its effects, we identify causes for hope and concern.

Since April 2020, younger workers have led the rebound in LFPR. In contrast, older workers—particularly those 65 and older—have remained out of the labor force. For the most part, this piece leaves the analysis of older and younger people to future work. Instead, we focus on prime-age workers, for whom the level of churn out of and into the labor force has been elevated relative to the years prior to the pandemic. Although people out of the labor force continue to enter each month at elevated rates, two findings suggest particular risk for the labor market outlook going forward: (1) the exit rate out of the labor market is generally more elevated among those without a four-year postsecondary degree and (2) people who are unemployed continue to leave the labor force at surprisingly high rates given the strength of labor demand.

Who is contributing to the labor market rebound?

To measure the contribution of different groups to aggregate labor force participation rate, we decompose the changes in the overall LFPR (16+) into changes in the age composition of the adult population and changes in the propensity of different age-by-sex groups to be in the labor force. We perform this exercise for the pre-pandemic peak (February 2020) to now (November 2021). Within that time period, we look at the contributions of each age-by-sex group to the initial decline in LFPR (February 2020 to April 2020), the first year of the recovery (April 2020 to April 2021), and the most-recent seven months (April 2021 to November 2021) when the adult population was universally eligible for vaccination. That most recent period might provide the best signal for the extent of the recovery in LFPR going forward. Figure 2 shows the effect of changing participation rates (by men and women in discrete age bins: 16-24, 25-34, 35-44, 45-54, 55-64, 65+) and each group’s contribution to aggregate changes in LFPR. Women are represented by purples and men by teals; the darkest colors are younger age groups and lighter colors are older age groups. Negative values (to the left of the vertical line at zero) show declining LFPR from the initial month to the final month of the designated period.

From February 2020 to November 2021, we find that population aging contributed -0.45 percentage points and changing participation contributed -0.87 percentage points to the total decline in LFPR.

At the onset of the recession (February 2020 to April 2020), the unemployment rate spiked to 14.8 percent and exits from the labor market also spiked: LFPR declined by 3.2 percentage points. Roughly 1 percentage point of that decline owed to workers between the ages of 16 and 24; and almost another 1 percentage point owed to workers between the ages of 25 and 34. For every age group except 55-64, declines were larger for women than for men. Because LFPR among older workers was lower at the onset of the pandemic, their labor market exits contributed least to the aggregate decline in LFPR from February 2020 to April 2020.

Since April 2020, LFPRs for the youngest workers have snapped back. For prime-age men, LFPRs have increased somewhat steadily since the trough. For prime-age women, however, LFPRs have come back in two waves. The initial decline in LFPR was larger for women and the recovery for women between ages 35 and 54 was slower in the first year. But, since April 2021, and especially since the start of the 2021 school year, LFPR among prime-age women have accelerated; these women have contributed more to aggregate LFPR than men of the same age.

We note that declines in LFPR among those over the age of 55 account for about half of the decline in aggregate LFPR since February 2020, after rising substantially between 2000 and 2019. Nie and Yang find that an increase in retirement during the course of the pandemic has been primarily due to a lack of re-entry among retirees and not elevated exits. On the other hand, youth (whose engagement in school rather than the labor market had been pulling down aggregate LFPR for decades) are exceeding (true for men) or close to exceeding (true for women) their pre-pandemic LFPR.

Labor Market Exits and Entries Among Prime-Age People

The above decomposition analysis shows the net effect of substantial churn that has occurred into and out of the labor market. In any given month, millions of people flow in and out of the labor force. Indeed, small changes in those enormous flows largely determine whether labor force participation among prime-age workers rises or falls. In the remainder of this piece (shown in figures 3-5) we look at month-to-month labor force exits and entrances among prime-age workers by key factors: sex, education, and employment status.

Prime-age workers have had unusually high rates of transitions between labor force participation and non-participation since February 2020 as measured by survey respondents who are observed in two consecutive months (figure 3). From March to April 2020, 4.5 percent of the prime-age population exited the labor force. The exit rate came down in subsequent months and in the past year but remains elevated over the prior five-year average. From November 2020 to October 2021, the exit rate has averaged about 0.2 percentage points higher relative to the average over the five years prior to the pandemic (2.2 percent; shown by the green dotted line). In October, it ticked below its pre-pandemic average; this is good news to the extent that October 2021 marks a turning point in exit rates, but we should be cautious in taking signal from one month. Entry into the labor force was highest in May 2020 and remains elevated. Over the last 12 months, the entrance rate has been about 0.3 percentage points higher than its pre-pandemic average of 1.9 percent.

An examination of labor market churn among prime-age people by education and gender shows that those with less than a bachelor’s degree have the most elevated churn rates in general (figures 4a and 4b). For example, the labor force exit rate more than doubling in April 2020 relative to the average over the five years preceding the pandemic for those with less than a B.A. In addition, over 12 months through October 2021, the exit rates are still about 0.4 percentage points higher, although they have come down in recent months. Entrance rates for those with less than a bachelor’s degree are also elevated.

In contrast, exits from the labor market for men and women with college degrees have hovered close to their pre-pandemic average since summer 2020. Trends in entrance rates among those with a college degree have differed notably by gender. As noted, for women the rate has been elevated relative to its pre-pandemic average and has risen notably in recent months. In contrast, for men with college degrees the entrance rate was elevated early in 2021 and has been more in line with its pre-pandemic average since then.

Given our attention to the quit rate as well as declining unemployment, we next distinguish consecutive-month labor force exits by whether the person was initially observed as employed or unemployed (figure 5). After an immediate (and unusual) spike of prime-age labor force exits straight from employment to labor force nonparticipation in April 2020, those rates are roughly back to pre-pandemic levels (figure 5). Although the month-to-month movements in those rates are noisy, it is worth noting that exit rates out of employment were higher from summer 2021 through October than in late spring 2021, perhaps reflecting workers’ response to risks from the Delta variant.

The share of the population who are unemployed and exiting the labor force tends to rise when the labor market is relatively weak. At first, both after 2009 and after March 2020, this increase in the number of unemployed leaving the labor market as a share of the population owed to a rising number of unemployed workers. From 2009 to 2012 (when the labor market was slow to recover after the Great Recession) a rising propensity among the unemployed to exit meant that the share of the population leaving the labor force remained elevated, even as the pool of unemployed slowly shrank (figure 5b); at the time, observers worried that this trend reflected the unemployed being discouraged in the face of weak labor demand.

Turning to the current period, in the past six months the unemployed as a share of the population have been exiting at Great Recession rates (figure 5a). At the same time, the propensity of the unemployed to exit is roughly at its pre-recession rate (figure 5b). With labor market demand so much higher than before the pandemic, this is surprising and indicates a worrying level of discouragement among the unemployed. Further study will examine whether these people who are exiting are long-term unemployed who are perhaps losing their attachment to the labor market. Also worrying is the recent uptick in the propensity of the employed to exit (figure 5b), which since the summer has been elevated slightly relative to its pre-pandemic average.

Exit rates may have been depressed through summer 2021 to the degree that people remained in the labor force in order to collect expanded and more generous Unemployment Insurance (UI) benefits. Between June and September 2021, some states curtailed benefits early and then in September enhanced benefits sunset nationwide. Over those months, millions of people lost access to UI and those who maintained access saw a reduction in generosity. Exits from the labor market among the unemployed in recent months may reflect a postponement of planned exits from earlier in the pandemic. Nonetheless, given the very elevated level of labor demand and strong increases in wages, the rate of exits among the unemployed is an indicator that we will continue to monitor as it represents a clear risk to the economic recovery.

Conclusion

As the turn of the year approaches, we pause to take stock of the labor market. We find that as of the fall of 2021:

• Labor force exits by those who are unemployed are concerning given the high number of job openings. Moreover, the uptick since the summer in exit rates among the employed is small but, because the pool of employed is so large, has a significant effect on LFPR and deserves attention.
• Elevated churn among the prime-age population is being driven by the churn of lower-educated workers.
• Labor force participation rates need to continue to increase for the economy, and particularly women, to get back on track.

These developments in labor force participation are taking place in a broader context: the labor force will be smaller because almost 200,000 people between the ages of 18 and 64 died due to COVID-19 in 2020 and 2021 and because lower immigration between 2020 and 2022 relative to pre-pandemic projections probably means that there are one million fewer people in the U.S.

Beyond the prime-age population, we have documented here and elsewhere that youth LFPR is elevated, but at what cost? If their rebound is being driven by more new post-education entrants getting immediately attached to the labor force, that’s good news; if it’s postsecondary pipeline disruption, less so. Trends in labor force participation among those aged 55 to 64 are harder to interpret. On one hand, LFPR has essentially moved sideways for this group after it partially recovered from its initial fall. That suggests that a large number of these workers simply aren’t returning, having taken early retirement. On the other hand, in the last year, changes in labor market churn for this group have resembled the changes we document here for prime-age workers (not shown). That suggests the youngest of the older workers are not facing unique labor market challenges on an ongoing basis. In contrast, we note that those 65 and older exited the labor force at the onset of the pandemic and remain out of the labor force. Because they are a small portion of the population with a low LFPR, these changes are a small but not negligible contributor to LFPR decline from the pre-recession peak to now.

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

      

A study conducted by the Social Policy Institute at Washington University in St. Louis shows that among surveyed parents in Israel, only 37 percent intended to vaccinate their child (aged 5-11) against COVID-19 when the option became available, while 23 percent of parents were undecided and 40 percent had no intention to vaccinate their children.

The study was conducted November 3-8, 2021, among a representative sample of Israeli parents of children aged 5-11 (N = 912).

Unlike COVID-19 vaccination among adults, where the uptake rate varies among population groups, intention to vaccinate children varies much less, from 34 percent among ultra-Orthodox (Haredi) and traditional Jews to 40 percent among secular Jews. (Figure 1).

Child age, however, appears to make a difference in parents’ decision on vaccination. As children’s age increases, parents are more likely to intend to vaccinate them. Accordingly, intention to vaccinate children rises from 30 percent for children aged 5 up to 46 percent for 11-year-old children. Child gender on the other hand, does not matter (Figure 1).

The findings also suggest that parents who oppose child vaccinations against COVID-19 do not oppose vaccinations on principle. Even among parents who are vaccinated themselves against COVID-19, the majority are either still undecided or not intending to vaccinate their children against COVID-19, as only 42 percent of parents claim that they intend to vaccinate their children. Furthermore, previous vaccination of a child is also not an indicator of intention to vaccinate them against COVID-19; only 40 percent of parents who gave their children all their infant and toddler vaccinations on time intend to give them the COVID-19 vaccine as well (Figure 1).

That is, it seems that resistance to vaccinate children against COVID-19 does not exclusively stem from parent fear of child vaccinations, nor from deterrence from COVID-19 vaccines in general. Instead, the circumstance that deters parents is the combination of the two: COVID-19 vaccines in children. The aforementioned unwillingness to vaccinate younger children illustrates that the fear of COVID-19 vaccines for children is related to their young age.

What deters parents from the child COVID-19 vaccine?

In a previous study we found that the perception of lack of transparency about vaccines from the government deterred Israeli adults from getting vaccinated. Out of a desire to encourage children’s vaccination and because of the previous experience with adult vaccines, the Israeli Ministry of Health decided to increase transparency by opening one of its discussions on COVID-19 child vaccination to the public on November 4, 2021.

Our study finds that indeed this measure positively influenced parents to vaccinate their children. Nevertheless, it seems that one instance of transparency is not enough to achieve a significant effect, indicating that more effort in this direction is needed. Our findings suggest a modest impact, as 37 percent of undecided parents report that this measure encouraged them to vaccinate their children, compared to only 7 percent of parents who do not intend to vaccinate them.

According to our study, transparency is a focal issue for parents, as approximately half of them feel that it lacks in many aspects: 45 percent of parents feel there is not enough transparency on vaccine side effects, 59 percent of them feel the state’s agreement with Pfizer lacked transparency, and 55 percent feel that there is not enough transparency in the government’s decisionmaking process (Figure 2).

These perceptions made the difference in parents’ willingness to vaccinate their children: Parents who felt there’s enough transparency were approximately three times more likely to intend to vaccinate their children compared to those who felt that there is not enough transparency (Figure 2). Furthermore, parents claim that once they feel that there’s full transparency, they will vaccinate their children at higher rates. Among those who do not intend to vaccinate, 50 percent report that pro-transparency measures will encourage them to vaccinate their children, and, among undecided parents, up to 90 percent claim that they would be encouraged by these measures.

It seems that the Israeli government’s decision to open its discussion to the public was a move in the right direction. Scaling up the increased transparency through open governmental meetings has the potential to double vaccination takeup among children.

Why does Israel’s vaccine hesitancy matter to the US?

Since Israel was one of the first countries in the world to vaccinate its population, its pandemic experience has become a test case for the other countries to learn from. Israeli vaccination rate declines created by vaccine hesitancy have been early warning signals to other countries that having a sufficient supply of COVID-19 vaccines is just the first barrier to vaccine uptake.

Although child vaccination against COVID-19 started in Israel very recently (on November 22, 2021) and a few weeks after the U.S., uptake rates in the U.S. and Israel are quite similar, as two-thirds of American parents of children aged 5 to 11 are either reluctant or adamantly opposed to children’s vaccination against COVID-19. That is, the need for the authorities to increase the proportion of vaccinated children is common to both countries. Moreover, the public’s wish for more transparency, and the significant effect better transparency can have on COVID-19 vaccine uptake, is also common to more nations including the U.S.

In conclusion, the Israeli experience brings unequivocal findings that can be used by governments around the globe, suggesting that efforts to improve transparency and convey information to the public are an effective policy measure that encourages COVID-19 vaccinations. Our findings also show that while this is true for vaccinations of adults and adolescents, it is twice as true for vaccinations of children whose parents’ protectiveness increases hesitation. Increasing transparency is the most effective way to address vaccine hesitation among parents.

      

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Standard of living varies more across cities for low income and less educated households  

Using bank and credit card transaction data from a large sample of U.S. households, Rebecca Diamond of Stanford and Enrico Moretti of the University of California, Berkeley create local price indexes to estimate how households’ standard of living varies across cities. The authors find large geographic differences in the cost of living, particularly for low-income families (measured using nominal income), for whom living costs in the most expensive city (San Jose, CA) are 49% higher than the median city, Cleveland, and 99% higher than the least expensive (Natchez, MS). Standard of living (expenditures adjusted for local prices) follows the same pattern: low-income families in the least affordable city consume 74% less than those in the most affordable. Furthermore, the authors find that low-income households reduce their consumption less than high-income households in response to higher prices, likely because they are already paying mostly for necessities; as a result, low-income households in expensive cities face high rates of financial distress (including negative savings and overdraft fees). Diamond and Moretti also compare geographical variation in consumption by level of education. For college-educated households, they find that higher costs of living and taxes are offset by higher wages, and consumption varies little geographically. For high school graduates and dropouts, however, wages adjust less to meet local prices and consumption is more sensitive to local affordability. Consequently, the authors say, consumption inequality in a given city increases with the cost of living.  

Wages lag productivity, but faster productivity growth still boosts pay  

In recent decades, pay for the typical worker has fallen increasingly behind average labor productivity in both the U.S. and Canada. Does higher productivity no longer push up compensation? Or are wages held back by other factors unrelated to productivity? Anna Stansbury of MIT and Jacob Greenspon and Lawrence Summers of Harvard find that, in the U.S., marginal increases in productivity growth still raise pay if all else is held equal: a 1 percentage point increase in productivity growth is associated with 0.6-0.8 percentage points faster average compensation growth. This linkage is weaker in Canada, with a 1 percentage point increase in productivity leading to a 0.3-0.7 percentage point increase in pay growth. (The authors suggest that wages in Canada’s smaller, more open economy are more sensitive to trends abroad rather than domestic productivity alone.) These results suggest that economic policies that encourage higher productivity, like increased investment in technology, “should be expected to increase the pay of typical workers… even as there may at the same time be other variables reducing the relative growth in incomes [for low- and middle-income workers].”  

Lockdowns dampen the effectiveness of fiscal stimulus  

Economic theory suggests that fiscal stimulus is effective under conditions of high unemployment and excess capacity. However, little is known about the effects of fiscal stimulus during a pandemic recession with widespread shelter in place policies. Exploiting high-frequency data on government defense spending, stay-at-home orders, consumption, mobility, and employment, Alan J. Auerbach from the University of California, Berkeley. and co-authors show that the effects of government spending on employment were stronger during the peak of the pandemic recession than in normal times, but only in cities that were not subject to strong stay-at-home orders. However, government spending had no effect on consumption—even in unrestricted locations. The lack of a consumption response implies that the larger employment effects are because supply is more responsive to demand-side stimulus in the presence of slack and not because income declines led to higher marginal propensities to consume out of additional income. The authors conclude that “the nature of economic downturns is potentially important for the effectiveness of government spending in stimulating aggregate demand”.  

Chart of the week: After soaring over the past year, commodity prices have declined in recent weeks 

Quote of the week: 

“As the data have continued to evolve, I think I would attach much more likelihood to the view that this is not a question of demand at pre-COVID levels and supply taking a while to reach back up to that pre-COVID capacity. Rather we have sustained higher demand, and this is not really solely — maybe not even primarily — a bottleneck story anymore. It’s a question that we’ve got to increase productive capacity to meet that sustained higher level of demand and that takes time,” says Randal Quarles, Member, Federal Reserve Board. 

“That is exactly what monetary policy is designed to prevent: a sustained period of inflation from that imbalance possibly unanchoring inflation expectations if that were to last for a long period of time. Therefore, we should respond more quickly to constrain that demand and allow supply and demand to come together over a longer period of time and with less inflation over the process.”  

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

      

The pace of recovery from the COVID shock differs across major advanced economies. In contrast to Europe and Japan, U.S. GDP exceeded its pre-COVID level in the third quarter of 2021 and may reach its pre-crisis trend in the fourth quarter. The pace of recovery in Europe in the second and third quarters was still very substantial; as a result, the GDP gap vis-à-vis the U.S. narrowed. But the U.S. stands out in a couple of respects:

• Domestic spending has recovered even faster than GDP because so much of the demand has been for imported goods; the trade deficit has been growing as import growth has been buoyant and exports have been contracting.
• The U.S. fiscal stimulus was large both in absolute terms and relative to other countries.
• The U.S. economy is more services-oriented than some other big economies, and domestic demand has shifted towards goods.

In the charts below, we survey consumption, investment, government spending, and trade for major advanced economies, comparing the most recent data to the fourth quarter of 2019, the last full quarter before the onset of the pandemic.

Europe’s GDP growth spurt has reduced the gap with the U.S.

Economic activity around the world plunged in the first few months of 2020, as the pandemic spread around the world and severe lockdowns were put in place, first in China and then across most advanced economies. The depth of the contraction during the first half of 2020 differed across countries: the UK was hit particularly severely, as were some euro area countries, while the contraction was more moderate in Japan and the U.S. With the re-opening in the third quarter of 2020, GDP levels among the G7 economies grew closer, but during the last quarter of 2020 and the first quarter of 2021, European countries fell further behind the U.S. as lockdowns were imposed to contain the pandemic and vaccine availability lagged relative to the U.S. During the second and third quarters of 2021, however, European economies staged a strong recovery, as a rapid pace of vaccinations was associated with reduced restrictions on mobility and activity. U.S. growth has remained strong, while growth in Japan has stalled, as COVID cases increased.^[1] By the end of the third quarter of 2021, the U.S. had surpassed the pre-COVID level of GDP (fourth quarter of 2019). Among larger euro area economies, France has virtually recovered that level of activity, and GDP remains substantially below its pre-COVID level only in Spain, severely affected by the pandemic and the ensuing tourism collapse.

In contrast, most smaller European advanced economies—such as Austria, Belgium, Finland, and the Netherlands in the euro area, as well as Denmark, Norway, Sweden, and Switzerland—have already reached their pre-COVID GDP level. These countries generally had lower exposure to the most affected service sectors. Ditto for smaller advanced economies in Asia. Taiwan—a manufacturing powerhouse—has done particularly well, with GDP in the third quarter exceeding its end-2019 level by 7 percent.

U.S. GDP is closer to pre-COVID trend than other advanced economies

A comparison of GDP levels understates the impact of the crisis because, if not for the pandemic, economies would probably have grown over 2020-21. We therefore compare GDP at the end of the third quarter of 2021 with its pre-crisis trend. With this metric, economic activity in all G7 economies (as well as Spain) has not yet reached its pre-COVID trend. On current projections, the U.S. is expected to reach its pre-COVID trend in the fourth quarter of 2021, with most other countries doing so in 2022. However, a fourth wave of infections and the emergence of the new omicron variant have increased uncertainty about the speed of recovery, especially during the winter months in the Northern Hemisphere.

U.S. Consumption Rising Faster Than GDP

Compared to other advanced economies, the recovery in the U.S. stands out because domestic consumer spending has risen so much.^[2] As the pandemic curtailed consumption of contact-intensive services around the world, the U.S. consumption of services, despite a very strong rebound, remained in the third quarter of 2021 some 1 ½ percent below its pre-pandemic level while consumption of goods was up by 15 percent. Consumption of durable goods rose more than 20 percent, despite a sharp decline in car purchases in the third quarter driven by supply constraints. The U.S. also faced labor shortages, as labor force participation remained substantially below its pre-pandemic levels despite strong labor demand. In contrast, labor force participation remained broadly stable in other major advanced economies, where ties between firms and workers were generally maintained through furlough schemes. These differences, together with those in the strength of domestic demand, have contributed to stronger inflationary pressures in the U.S. than in other major advanced economies.

Government consumption up across the board

A common element across all advanced economies has been a rise in government consumption (which includes government wages and salaries and government purchases of goods and services). Note that the increase in the U.S. is slightly more modest because this category does not include government transfers, which were particularly substantial in the U.S. Also, health spending is mostly public in the other countries in the table.

Investment has rebounded, but the capital stock is down

Data on gross fixed capital formation shows a pattern broadly similar to private consumption, with a much stronger contraction in European countries than in the U.S. and Japan. Despite the subsequent recovery, the capital stock remains below its pre-crisis trend, especially in Europe, as new investment has not compensated for the sizable shortfall during the first half of 2020. Lower investment in the transportation sector, affected by the semiconductor shortage and the decline in air travel, is an important reason for the shortfall.

Trade growth: strong demand for goods, supply constraints

While trade in some services—particularly tourism—came to a virtual standstill in 2020 and is only slowly recovering, trade in goods rebounded sharply after an initial decline, as demand for goods has been very strong. Three key factors have shaped the dynamics of exports and imports across countries.

The first is the strength of domestic demand—in the case of private consumption, driven primarily by household disposable income. The hefty size of fiscal stimulus in the United States—in absolute terms and relative to other countries—has played a key role in sustaining U.S. consumption and imports. In turn, the strength of U.S. demand has helped export growth in U.S. trading partners, while the more subdued pace of domestic demand in U.S. trading partners is one factor holding back U.S. exports.

The second factor is the composition of economic activity pre-COVID—countries where manufacturing is a more important share of GDP have generally benefited from an increase in foreign demand, given the nature of the shock which has shifted spending from services to goods, while countries relying to an important extent on exports of services (think of tourism exports for countries such as Greece, Portugal, and Spain) have been hurt.

The third factor is supply constraints, which have affected goods’ production across the world. These have been triggered by a variety of factors, including reduced production and orders during the initial downturn, subsequent COVID-related shutdowns, and the unexpectedly rapid rebound in demand. For instance, constraints in the availability of semiconductors have put a dent in global production of a variety of goods, such as autos, and affected exports in advanced economies, especially in the third quarter. Globally, firms facing supply bottlenecks accommodated strong demand by running down inventories, which are particularly low, and inflationary pressures increased across the globe, with soaring commodity prices and goods prices rising notably after a long period of stability.

Overall, looking across all advanced economies, exports have been weaker than imports.^[3] In contrast, exports have grown faster than imports in China and other economies in emerging Asia. Chinese exports of manufactured goods have benefited greatly from shifts in global demand, while Chinese imports of services, which were particularly substantial for travel (both tourism and education expenditures) plummeted with the closure of borders.

U.S. consumption recovery boosts imports of consumer goods

The composition of U.S. trade provides an additional explanation for the different dynamics of exports and imports, over and above the difference in the growth rate of domestic demand in the U.S. relative to its trading partners. Specifically, the U.S. is a net importer of goods and a net exporter of services, and consumer products account for a larger share of imports of goods relative to exports.

The strong recovery in spending on consumer goods has therefore boosted U.S. imports and widened the U.S. trade deficit. Furthermore, the more rapid recovery in capital spending in the U.S. compared to its trading partners has also implied faster growth in imports of industrial supplies and capital goods relative to exports. The trade data also highlights the importance of supply bottlenecks and constraints: these are particularly visible in the data for trade in cars and car parts in the third quarter of 2021.

Recovery prospects

Growth prospects for the fourth quarter and 2022 looked pretty strong for advanced economies until a few weeks ago, but a new wave of infections hitting European countries, especially Germany, and the discovery of the new omicron variant have increased uncertainty over short-term prospects. This notwithstanding, growth prospects for advanced economies have remained much more favorable than those for many emerging and developing economies, where vaccination rates are much lower and economic activity remains substantially below the pre-crisis trend. An important question for advanced economies is going to be the speed with which supply capacity will rise, both in the goods sector and in services as re-opening occurs. This will be key to allow the recovery to continue without the need for a more drastic policy tightening to reduce inflationary pressures.

^{[1] For the euro area we also show GDP and its components, excluding Ireland. This is because Irish national accounts are heavily affected by financial operations of multinational corporations, particularly in regard to transfers of intellectual property (IP) to Irish affiliates of U.S. companies. These transfers (which were very large in Q4 2019 and Q1 2020, for instance) boost investment and imports (they are recorded as imports of IP matched by new investment in IP), and to a somewhat lesser extent, GDP.}

^{[2] Indeed, total demand in the United States (a measure of domestic spending) was 3.3 percent above its level in the last quarter of 2019, while the corresponding figure for U.S. GDP was 1.4 percent.}

^{[3] The weakness of UK imports and especially exports in the aftermath of Brexit is particularly notable.}

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

      

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Immigration lowers the share of US elderly in institutions by making home care more affordable  

Immigration allows more U.S. elderly to age outside institutions by lowering the cost of home-based care, find Kristin F. Butcher of Wellesley, Kelsey Moran of MIT, and Tara Watson of Williams College. The authors show that a 10-percentage point increase in the less educated, foreign-born share of the local labor force lowers the probability of institutionalization of individuals over 65 and 80 by 26% and 29%, respectively. Had immigration remained at 1980 levels, their estimates imply, the average over-65 American in 2000 would have been 10% more likely to live in an institution. Immigration makes labor-intensive home care both more affordable and more available, the authors say: higher immigration rates lower wages for less-educated workers and increase employment of health and nursing aides, as well as other home-support workers like housekeepers and gardeners. In contrast, wages for highly trained workers like registered nurses — more likely to work in institutional settings — increase, and their hours worked fall.  

Democrats lost support in the 1990s due to NAFTA   

Jiwon Choi of Princeton and co-authors find that U.S. counties that were more exposed to import competition from Mexico as a result of the 1994 North American Free Trade Agreement (NAFTA) suffered employment declines and, as a result, became less supportive of Democrats. Specifically, NAFTA-exposed counties historically voted Democrat in House and Presidential elections but began to lean Republican in the early- to mid-1990s, and voted majority-Republican by 2000. Using election survey data for the U.S., the authors find that the majority of voters with protectionist views shifted from identifying as Democrats in the 1986-1992 period to identifying as Republican from 1992 onwards. The shift was especially pronounced for white men, those without a college degree, and those with conservative social views. The heterogeneous response to the trade agreement suggests “an interactive effect whereby racial identity and social-issue positions mediate reactions to economic policies,” the authors conclude.   

Households of color face higher constraints when searching for rental properties  

Using fictitious inquiries in over 25,000 interactions with rental property managers across the 50 largest U.S. cities and using first and last name combinations that signal race, Peter Christensen from the University of Illinois at Urbana-Champaign, Christopher Timmins from Duke, and Ignacio Sarmiento-Barbieri from the University of Los Andes find that households of color face discrimination when searching for rental properties in most U.S. markets. Inquiries sent from white renters receive an average response rate of 60% while inquiries sent from Black and Latinx renters were 5.6 and 2.8 percentage points lower. However, the authors note that “overall differences in response rates mask important variation between and within regions of the United States.” They show that the strongest discriminatory constraints facing African Americans are in Chicago, Los Angeles, and Louisville, and for Latinx renters, they are in Louisville, Houston, and Providence. Stronger discriminatory constraints — particularly for Black renters — are strongly associated with higher levels of residential segregation and larger gaps in intergenerational income mobility.  

Chart of the week: American household spending on goods is well above pre-pandemic levels, not so spending on services 

Source: The Wall Street Journal  

Quote of the week: 

“I think the word ‘transitory’ has different meanings to different people. To many, it carries a time — a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean … [T]he most recent data, particularly since the November FOMC [Federal Open Market Committee] meeting show elevated inflation pressures, a rapid improvement in many labor market indicators without an accompanying addition of labor supply. And also, strong spending that really signals big, significant growth in coming months,” says Jerome Powell, Chair of the Federal Reserve Board. 

“Remember that every dollar of asset purchases actually adds accommodation to the economy. But at this point, the economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases — which we actually announced at the November meeting — perhaps a few months sooner. And I expect that we will discuss that at our upcoming meeting in a couple of weeks. Of course, between now and then we will see another labor market report, another inflation report. And we’ll also get a better sense of the new COVID variant as well before we make that decision.” 

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

      

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Firm-level uncertainty about future sales growth roughly doubled in response to the pandemic  

In a survey of U.S. and U.K. business executives, Philip Bunn of the Bank of England and co-authors find that firms’ average uncertainty in the spring of 2020 about sales growth over the coming year (measured by the standard deviation of the distribution of their sales growth forecasts) roughly doubled due to COVID-19, rising in the U.S. from about 3% pre-pandemic to 6.4% in May 2021 and in the U.K. from 4.9% to 8.5%. Firm-level uncertainty has since fallen as the COVID shock recedes, but remains elevated compared to pre-pandemic levels. The distribution of firms’ uncertainty has shifted considerably, however. At the beginning of the pandemic, firms weighted the probability of sharply negative growth rates as highly likely, but in recent months, firms report more uncertainty about high sales growth. “In short,” the authors say, “business executives went from worrying about how bad COVID might get to wondering about how strongly they might bounce back.”  

Test scores declined in the 2020-21 school year  

Using data on standardized test scores from school districts in 12 states, Clare Halloran of Brown University and co-authors find that, on average, math test passage rates declined by 14.2 percentage points in the 2020-21 school year compared to the 2015-16 through 2018-19 school years. They estimate that for school districts offering fully in-person instruction (rather than partially or entirely virtual), the decline was 10.1 percentage points smaller. In addition, they note that school districts with larger Black and Hispanic student populations were less likely to offer in-person learning, and suffered larger declines in test scores. The authors caution that it is difficult – if not impossible – to disentangle the extent to which the in-person learning itself caused differential outcomes, as opposed to the additional pandemic-related changes in students’ lives that correlate with access to in-person learning.   

Supply constraints in the US manufacturing sector began easing in June  

Using the deviations of unfilled orders and inventories from their long-term relationships with shipments to estimate output losses caused by supply chain bottlenecks, Charles Gilbert, Maria Tito, and Cynthia Doniger of the Federal Reserve Board find that supply chain bottlenecks lowered monthly production growth in manufacturing industries excluding transportation by 0.2 percentage point in the first half of 2021, but began easing in June. Nonetheless, production in September 2021 was 0.6 percentage point below what it would have been had there been no bottlenecks. The authors note that their findings are correlated with reports of materials shortages in the manufacturing sector, a prevailing indicator of bottlenecks.   

Chart of the week: Japan’s price levels remain steady while inflation climbs in the US and in Europe 

Source: The Wall Street Journal

Quote of the week: 

“[I]nflation has escalated substantially this year, along with a significant rise in inflation expectations … I expect that these pressures are related to both supply constraints, which may be beginning to improve, and strong demand, which shows no sign of abating. Wages continue to grow quickly on a more sustained basis than they have in more than 20 years, most recently reflected in a striking increase in the employment cost index, which considers both pay and benefits. Wages and employment costs seem to be widespread across industries and among businesses of different sizes. Crucial to the path of inflation will be whether we see input cost increases consistently reflected in final goods prices. Our business contacts report that companies are comfortable passing along these cost increases to their customers,” says Christopher Waller, Member, Federal Reserve Board. 

“It has been argued that because price pressures connected to supply constraints are transitory, they will come to an end, so monetary policy does not need to respond to temporary price pressures. I find this argument puzzling for a few reasons. First, all shocks tend to be transitory and eventually fade away; by this logic, the Fed should never respond to any shocks, but it sometimes does, as it should. Second, the macroeconomic models we use to guide policy typically have cost shocks built in that cause inflation to move. In those models, appropriate monetary policy responds to these inflation movements; it doesn’t ignore them, even though they are transitory. Finally, the choice to take a policy action depends on how large the shocks are and how long they are expected to persist … To me, the inflation data are starting to look a lot more like a big snowfall that will stay on the ground for a while, and that development is affecting my expectations of the level of monetary accommodation that is needed going forward.” 

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.