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The Contribution of Vocational Education and Training to Innovation and Growth  

Uschi Backes-Gellner and Patrick Lehnert

Despite the common view that innovation requires academically educated workers, some countries that strongly emphasize vocational education and training (VET) in their education systems—such as Switzerland and Germany—are highly competitive internationally in terms of innovation. These countries have dual VET programs, that is, upper-secondary-level apprenticeship programs, that combine about three quarters of workplace training with about one quarter of vocational schooling, and design them in such a way that their graduates (i.e., dual apprenticeship-graduates) play crucial roles in innovation processes. Regular updates of VET curricula incorporate the latest technological developments into these curricula, thereby ensuring that dual apprenticeship-graduates possess up-to-date, high-level skills in their chosen occupation. This process allows these graduates to contribute to innovation in firms. Moreover, these graduates acquire broad sets of technical and soft skills that enhance their job mobility and flexibility. Therefore, conventional wisdom notwithstanding, dual apprenticeship-graduates in such countries not only have broad skill sets that accelerate innovation in firms, but also willingly participate in innovation because of their high flexibility and employability. Moreover, Switzerland and Germany have tertiary-level VET institutions that foster innovation. These are universities of applied sciences (UASs), which teach and conduct applied research, thereby helping build a bridge between different types of knowledge (vocational and academic). UAS students have prior vocational knowledge through their dual apprenticeship and acquire applied research skills from UAS professors who usually have both work experience and a doctoral degree from an academic university. Thus UAS graduates combine sound occupational knowledge with applied research knowledge inspired by input from the academic research frontier and from practical research and development (R & D) in firms. Firms employ UAS graduates with their knowledge combination as an important input for R & D. Consequently, regions with a UAS have higher levels of innovation than regions without one. This effect is particularly strong for regions outside major innovation centers and for regions with larger percentages of smaller firms.


Crises in the Housing Market: Causes, Consequences, and Policy Lessons  

Carlos Garriga and Aaron Hedlund

The global financial crisis of 2007–2009 helped usher in a stronger consensus about the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. The latest research regards the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000s experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge. Research indicates that fundamentals such as productivity, income, and demographics play an important role in generating sustained movements in house prices. While these forces can also contribute to boom-bust episodes, periods of large house price swings often reflect an evolving housing premium caused by financial innovation and shifts in expectations, which are in turn amplified by changes to the liquidity of homes. Regarding credit, the latest evidence indicates that expansions in lending to marginal borrowers via the subprime market may not be entirely to blame for the run-up in mortgage debt and prices that preceded the 2007–2009 financial crisis. Instead, the expansion in credit manifested by lower mortgage rates was broad-based and caused borrowers across a wide range of incomes and credit scores to dramatically increase their mortgage debt. To whatever extent changing beliefs about future housing appreciation may have contributed to higher realized house price growth in the 2000s, it appears that neither borrowers nor lenders anticipated the subsequent collapse in house prices. However, expectations about future credit conditions—including the prospect of rising interest rates—may have contributed to the downturn. For macroeconomists and those otherwise interested in the broader economic implications of the housing market, a growing body of evidence combining micro data and structural modeling finds that large swings in house prices can produce large disruptions to consumption, the labor market, and output. Central to this transmission is the composition of household balance sheets—not just the amount of net worth, but also how that net worth is allocated between short term liquid assets, illiquid housing wealth, and long-term defaultable mortgage debt. By shaping the incentive to default, foreclosure laws have a profound ex-ante effect on the supply of credit as well as on the ex-post economic response to large shocks that affect households’ degree of financial distress. On the policy front, research finds mixed results for some of the crisis-related interventions implemented in the U.S. while providing guidance for future measures should another housing bust of similar or greater magnitude reoccur. Lessons are also provided for the development of macroprudential policy aimed at preventing such a future crisis without unduly constraining economic performance in good times.


The Hong Kong Housing Market  

Lok Sang Ho and Yonglin Wang

The Hong Kong Special Administrative Region (SAR) government made a tremendous effort to raise the homeownership rate, starting with Mr. Tung Chee-hwa, the first Chief Executive, who, in his Policy Address in 1997, vowed to raise the homeownership rate from below 50% to 70% in 10 years. The figures showed, however, that while the total homeownership rate had gone up by 18 percentage points in 15 years prior to 1997, from 1997 to Q3 2022, in the space of 25 years, the total homeownership rose from 46.7% to 52.6%, or a mere 5.9 percentage points in 25 years. The nonsubsidized private homeownership rate rose from 30% in 1985 to 36.2% in 1997 (6.2 percentage points in 12 years), yet it rose only from 36.2% in 1997 to 37.2% in 2022Q3, amounting to only 1 percentage point in 25 years. The puzzle may lie in the SAR government’s mistaken strategy of providing increasing opportunities for public housing tenants and subsidized flat owners to profit from the housing benefits. These benefits turn out to be at the expense of the middle-class people who provide much impetus to economic growth and who bear the brunt of the tax burden. The various transaction taxes meant to curb speculation turn out to impede the trading-up process. By significantly reducing the supply of existing homes, and especially that of starter homes, an unintended consequence is much sharper price increases for starter homes than for larger homes. This leads to the proliferation of so-called nanoflats that are tiny yet very expensive.


Housing Policy and Affordable Housing  

Christian A.L. Hilber and Olivier Schöni

Lack of affordable housing is a growing and often primary policy concern in cities throughout the world. The main underlying cause for the “affordability crisis,” which has been mounting for decades, is a combination of strong and growing demand for housing in desirable areas in conjunction with tight long-term supply constraints—both physical and man-made regulatory ones. The affordability crisis tends to predominately affect low- and moderate-income households. Increasingly, however, middle-income households—which do not usually qualify for government support—are similarly affected. Policies that aim to tackle the housing affordability issue are numerous and differ enormously across countries. Key policies include mortgage subsidies, government equity loans, rent control, social or public housing, housing vouchers, low-income tax credits, and inclusionary zoning, among others. The overarching aim of these policies is to (a) reduce the periodic housing costs of or (b) improve access to a certain tenure mode for qualifying households. Existing evidence reveals that the effectiveness and the distributional and social welfare effects of housing policies depend not only on policy design but also on local market conditions, institutional settings, indirect (dis)incentives, and general equilibrium adjustments. Although many mainstream housing policies are ineffective, cost-inefficient, and/or have undesirable distributional effects from an equity standpoint, they tend to be politically popular. This is partly because targeted households poorly understand adverse indirect effects, which is exploited by vote-seeking politicians. Partly, it is because often the true beneficiaries of the policies are the politically powerful existing property owners (homeowners and landlords), who are not targeted but nevertheless benefit from positive policy-induced house price and rent capitalization effects. The facts that existing homeowners often have a voter majority and landlords additionally may be able to influence the political process via lobbying lead to the conundrum of ineffective yet politically popular housing policies. In addition to targeted policies for individuals most in need (e.g., via housing vouchers or by providing subsidized housing), the most effective policies to improve housing affordability in superstar cities for all income groups might be those that focus on the root causes of the problem. These are (a) the strongly and unequally growing demand for housing in desirable markets and (b) tight land use restrictions imposed by a majority of existing property owners that limit total supply of housing in these markets. Designing policies that tackle the root causes of the affordability crisis and help those in need, yet are palatable to a voter majority, is a major challenge for benevolent policymakers.


New Economic Geography  

Ching-mu Chen and Shin-Kun Peng

For research attempting to investigate why economic activities are distributed unevenly across geographic space, new economic geography (NEG) provides a general equilibrium-based and microfounded approach to modeling a spatial economy characterized by a large variety of economic agglomerations. NEG emphasizes how agglomeration (centripetal) and dispersion (centrifugal) forces interact to generate observed spatial configurations and uneven distributions of economic activity. However, numerous economic geographers prefer to refer to the term new economic geographies as vigorous and diversified academic outputs that are inspired by the institutional-cultural turn of economic geography. Accordingly, the term geographical economics has been suggested as an alternative to NEG. Approaches for modeling a spatial economy through the use of a general equilibrium framework have not only rendered existing concepts amenable to empirical scrutiny and policy analysis but also drawn economic geography and location theories from the periphery to the center of mainstream economic theory. Reduced-form empirical studies have attempted to test certain implications of NEG. However, due to NEG’s simplified geographic settings, the developed NEG models cannot be easily applied to observed data. The recent development of quantitative spatial models based on the mechanisms formalized by previous NEG theories has been a breakthrough in building an empirically relevant framework for implementing counterfactual policy exercises. If quantitative spatial models can connect with observed data in an empirically meaningful manner, they can enable the decomposition of key theoretical mechanisms and afford specificity in the evaluation of the general equilibrium effects of policy interventions in particular settings. Several decades since its proposal, NEG has been criticized for its parsimonious assumptions about the economy across space and time. Therefore, existing challenges still require theoretical and quantitative models on new microfoundations pertaining to the interactions between economic agents across geographical space and the relationship between geography and economic development.


Urban Sprawl and the Control of Land Use  

Alex Anas

Urban sprawl in popular sources is vaguely defined and largely misunderstood, having acquired a pejorative meaning. Economists should ask whether particular patterns of urban land use are an outcome of an efficient allocation of resources. Theoretical economic modeling has been used to show that more not less, sprawl often improves economic efficiency. More sprawl can cause a reduction in traffic congestion. Job suburbanization can generally increase sprawl but improves economic efficiency. Limiting sprawl in some cities by direct control of the land use can increase sprawl in other cities, and aggregate sprawl in all cities combined can increase. That urban population growth causes more urban sprawl is verified by empirically implemented general equilibrium models, but—contrary to common belief—the increase in travel times that accompanies such sprawl are very modest. Urban growth boundaries to limit urban sprawl cause large deadweight losses by raising land prices and should be seen to be socially intolerable but often are not. It is good policy to use corrective taxation for negative externalities such as traffic congestion and to implement property tax reforms to reduce or eliminate distortive taxation. Under various circumstances such fiscal measures improve welfare by increasing urban sprawl. The flight of the rich from American central cities, large lot zoning in the suburbs, and the financing of schools by property tax revenues are seen as causes of sprawl. There is also evidence that more heterogeneity among consumers and more unequal income distributions cause more urban sprawl. The connections between agglomeration economies and urban sprawl are less clear. The emerging technology of autonomous vehicles can have major implications for the future of urban spatial structure and is likely to add to sprawl.