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Economic Review

Economic Review
C O N T E N T S
Second Quarter 1998/Volume 83, Number 2

Economic Review articles are posted on the Web as they become available. Page numbers in the PDF file posted here may not reflect the page numbers of the printed version.

These files are in PDF format, which requires Adobe Acrobat Software (links off-site)

The Choice of Capital Instruments Why Minimum Wage Hikes May Not Reduce Employment
Larry D. Wall and Pamela P. Peterson 4 Madeline Zavodny 18

A system of bank supervision and regulation should protect taxpayers and the financial system without imposing unnecessary costs on banks. This article focuses on whether existing capital regulations, one of the primary tools of bank supervision and regulation, are imposing unnecessary costs on banks. In particular, the capital requirements may be requiring banks to issue equity when it would be less costly for them to issue subordinated debt.

The authors obtain evidence on the costs generated by equity issues by examining the type of capital banks issued in response to the capital guidelines of the 1980s, which included a type of debt in capital. The findings suggest that banks prefer to avoid issuing common equity, especially when the ratio of the market price of their stock to its book value is less than one. The results suggest that the option to substitute debt for equity in meeting the capital standards is especially valuable for banks with low market values. The results also suggest that the ability to issue debt as a substitute for equity is more valuable to larger banks.

Recent research has challenged the conventional wisdom among economists that increases in the minimum wage reduce employment among low-wage workers. Although some studies continue to find negative effects, others suggest that moderately raising the minimum wage may not reduce employment. The author of this article describes and evaluates several models that may explain the controversial recent findings and proposes avenues for future research that would help determine the validity of these models.

The author notes that if the recent findings that minimum wage increases do not always adversely affect employment are correct, economists may need to reconsider their views of how labor markets work. In addition, research on other effects of minimum wage increases is needed. For example, the distributional consequences are important, particularly if higher-skilled workers displace lower-skilled workers when the minimum wage is raised. The recent findings challenging traditional thinking about employment and the minimum wage should be taken as the starting point for a larger examination of the effects of the minimum wage rather than an end to the debate.

New Drilling Technology A Primer on Short-Term Linkages between Key Economic Data Series
Thomas J. Cunningham
and Whitney Mancuso
30 R. Mark Rogers 40

Economic shocks are not always negative. Indeed, this article suggests that the energy extraction industry is experiencing a positive shock caused by two new technologies—three-dimensional imaging and directional drilling. Combined, these techniques have lowered the net extraction costs of oil and gas. The new technologies are particularly advantageous for the kinds of fields characteristic of the Gulf of Mexico, and the article points to their early application in Louisiana as indicating the type of impacts one might expect as use of the technologies spreads.

The authors conclude that while the worldwide effects of this technology shock have yet to be felt, particularly its implications for offshore energy development, the impact on costs in fields like those in the gulf is likely to be significant.

Why do analysts look at economic data? The simple answer is that investors and planners must look ahead, and economic data help them forecast. If there is new information on the economy, on demand, on profit potential, or on prices, among other factors, then the underlying value of financial and real investments may shift, leading to changes in financial values as well as business investment projections and plans.

There are a number of time horizons relevant to how analysts evaluate economic data and use them for forecasting. The evaluation of various longer-run fundamentals often begins with examining short-run relationships among economic variables. This article is a brief guide to some of the well-known short-term relationships between economic data series upon which many analysts focus. It explains how analysts use data in concurrent month forecasts and what some key relationships are, outlines the monthly calendar of economic releases, and reports on typical lags between various dependent and explanatory variables. The article attempts to clarify how analysts carry information from one economic release into their view of the strength of other economic indicators.