St. Louis Fed's Review: Human Capital Growth in a Cross Section of U.S. Metropolitan Areas; Entrepreneurship and the Policy Environment; Macroeconomic News and Real Interest Rates; Using Cyclical Regimes of Output Growth to Predict Jobless Recoveries

ST. LOUIS — The March/April issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available on the St. Louis Fed's web site.

• "Human Capital Growth in a Cross Section of U.S. Metropolitan Areas." Human capital—the skills possessed by an economy's workforce—is considered by many economists to be a prime factor in promoting both technological advancement and productivity growth. But how do the decisions by the members of that workforce regarding where they live affect the communities in which they reside? Analyzing data for about 200 U.S. metropolitan areas from 1980 to 2000, economist Christopher H. Wheeler finds that the majority of college-educated workers tend to be drawn to the nation's largest metro areas, which in turn have people with already high levels of education among their resident populations. He concludes that the smaller cities and rural communities may have difficulty attracting the workers they need to thrive.

• "Entrepreneurship and the Policy Environment." Entrepreneurship is thought to be an important factor in cultivating innovation, employment and economic growth. Consequently, a case is often made that policymakers should pay more attention to those factors that will most enhance—or constrain—entrepreneurship. Economists Yannis Georgellis and Howard J. Wall investigate whether marginal income tax rates and bankruptcy exemptions influence rates of entrepreneurship. They find that although personal income tax rates affect entrepreneurship, the effect is relatively small. On the other hand, they find that changes in the level of homestead exemption allowed by state bankruptcy laws can have a very large impact on the number of entrepreneurs.

• "Macroeconomic News and Real Interest Rates." News about the economy affects the perceptions of investors, forecasters and policymakers about the strength or weakness of the economy. As surprises regularly occur in macroeconomic data, those expectations, of course, are updated. The response of asset prices to unexpected positive or negative news has been a regular feature of economic literature for more than 20 years. Against that backdrop, economists Kevin L. Kliesen and Frank A. Schmid evaluate responses of the yield of 10-year Treasury inflation-indexed securities to nearly three-dozen macroeconomic announcement. Kliesen and Schmid find that the real long-term rate of interest responds positively to surprises in a handful of key macroeconomic indicators, including labor productivity growth. Also, they find no support for the argument that the Federal Reserve has information about its actions or the state of the real economy that is not in the public domain and, therefore, not already priced in the real long-term interest rate.

• "Using Cyclical Regimes of Output Growth to Predict Jobless Recoveries." Gaps between output and employment growth are often attributed to transitional phases by which the economy adjusts to shifts in the rate of trend productivity growth. Nevertheless, cyclical factors can also drive a wedge between output and employment growth. Economist Michael J. Dueker shows that one measure of cyclical dynamics—the expected output loss associated with a recession—helps predict the gap between output and employment growth in the next four quarters. He finds that this measure of output loss associated with a recession can take unexpected twists and turns as the recovery unfolds. His empirical research supports the proposition that a weaker-than-expected rebound in the economy can partially mute employment growth for a time relative to output growth.

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