Klaus Wälde Core Research Activities
Looking at my past activities clearly shows that specialization is not one of my preferred approaches to research. While I could have profited much more from scale economies if I had stayed in one or two fields, general curiosity and the quest for truth brought me from one area to another.
I started my activities in the area of international trade and endogenous growth. Why are some countries rich and some others poor? Do the rich countries exploit the poor? Policy discussion of that time - the time I became interested in economics was at the end of the 1980s - on international trade focused a lot on fair trade, victims of globalization (yes, globalization was around already in the 1980s ...) and the like.
After having realized that fair trade was not the main interest of the average academic economist neither of the average inhabitand of any industrialized country, my research interest moved on to labour markets. If there is little altruism in people's thinking about far away poor countries, there must surely be more altruism and compassion when thinking about the life of the unemployed, the homeless, those who are apparently disadvantaged by life. This led me - via many intermediate steps - to the first core research activity currently being undertaken.
Labour markets and macroeconomics
All men are created equal. But not all men live equal. Somewhere between birth and life, equality gets lost. This is obvious from looking at any distribution of income, wealth, consumption, happiness or the like.
Understanding economic policies
The distribution of income and wealth have always been at the center of public interest and academic analysis. This not less so in days of biased technological change, globalization and severe economic crisis. A lot of attention is paid to the determinants of income and wealth distributions and their changes. Often, analyses of these determinants then suggest which policy measures should be undertaken in order to correct undesirable effects.
Having worked in policy environments for several years, policy recommendations based on abstract concepts do not always find a lot of attention. While it is generally acknowledged that understanding the role of - say - globalization is of utmost importance, it is in most cases believed that globalization (or biased technological change) are transformations of economies which can be controlled or even influenced only - if at all - in a relatively limited way.
To the contrary, one of the main justifications for existing policy measures installed through the political process (labour market policies, competition policies, trade policies and many more) are their alleged efficiency and distributional effects. In this sense, policy is being undertaken everyday and is - by definition - under the control of the government. It therefore seems very natural and pressing to understand these distributional effects. If a government wants to influence relative well-being, it should start by looking at the distributional effects of own actions.
One of the driving forces in my research is therefore to understand distributional effects of real world policies. This is to understand whether rising inequalities are really the effect of abstract and hard-to-control processes like globalization and biased technological change or maybe much more "home made" by policies. When it comes to analyses of labour market policies, the the field macro and labour is the place to start.
Macro and labour
The field macro and labour is fascinating to me for two reasons: It allows me to talk about current labour market policies and reforms by using and developing up-to-date methods and it provides many
challenges to innovative economic modelling. Current research with Andrey Launov on the one hand and Christian Bayer on the other covers these two areas. The structural estimation paper with Andrey analyses recent labour market reforms in Germany.
It finds that so-called Hartz IV reforms implemented in 2005 - while going into the right direction - had a quantitatively very small effect on the unemployment rate. Only 0.3% of the observed drop in the unemployment rate can be attributed to the reform. On the other hand, more surprising from a qualitative perspective, we find that workers as a whole gain while firms lose! This is mainly due to the increase in the net wage of employed workers. As contributions to unemployment insurance systems go down with lower unemployment, workers gain and so do even short-term unemployed. Firms lose as the increase in the net wage also means an increase in the gross wage. With higher gross wages, profits of firms go down.
The papers written and being written with Christian Bayer are of a more theoretical nature. Since long, there is a missing link in macro and labour between standard savings behaviour on the one hand and unemployment following the tradition of search and matching models on the other. The papers written with Christian fill this gap. Labour income of individuals jumps between two states - a wage when employed and benefits when unemployed. At the same time, individuals can self-insure by saving in a riskless asset. Other than that, there are no insurance mechanisms available. The first paper presents the model and provides all results. The second paper constains all proofs, existence of an equilibrium, derivation of Fokker-Planck equations and proof of existence and stability of a long-run distribution of wealth and labour income. As the papers are written in continuous time, a lot of the analysis can be illustrated with phase diagrams and very informative Keynes-Ramsey rules.
The third paper - still to be completed - undertakes a numerical solution of the model, including the partial differential equations (the Fokker-Planck equations) that describe distributional properties of the model. A fourth paper - still in the process of being designed - would use this framework for structural estimation. Given that densities are described by differential equations, evaluating likelihood functions will be much faster than in models where distributions are simulated.
Understanding the role of emotions in life - this is the modest objective of this research project ... This is a very young project and a lot of work still goes into reading,
understanding basic modelling techniques and concepts - both in the economics but also in the psychology literature. Are economic models useful to understand arguments made by psychologists? Can psychologists inform economists about how individuals really "function", how decisions are "really made"? This project will probably keep me busy over the next years to come.
It will form my "second leg" in research besides macro and labour. All activities started and are currently being undertaken jointly with James Hillis from the Department of Psychology at the University of Glasgow.
More information on this can be found at www.emotional.economics.uni-mainz.de.
Some metaphysical thoughts are available in an interview (in German).