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 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

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.

Emotional economics

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).

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