Leading Indicators
The Evolving Structure of the American Economy and the Employment Challenge
Michael Spence & Sandile Hlatshwayo
Comparative Economic Studies, December 2012, Pages 703-738
Abstract:
This paper examines the evolving structure of the American economy, specifically the trends in employment, value added, and value added per employee from 1990 to 2008. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, US industries are separated into internationally tradable and nontradable components, allowing for employment and value added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the nontradable side, where government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades. There are obvious questions about whether those trends can continue; without fast job creation in the nontradable sector during this period, the United States would already have faced a major employment challenge. The nontradable sector also experienced much slower growth in value added per employee; because value added per employee is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce. The evolution of the US economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States.
----------------------
The Asset Price Meltdown and the Wealth of the Middle Class
Edward Wolff
NBER Working Paper, November 2012
Abstract:
I find that median wealth plummeted over the years 2007 to 2010, and by 2010 was at its lowest level since 1969. The inequality of net worth, after almost two decades of little movement, was up sharply from 2007 to 2010. Relative indebtedness continued to expand from 2007 to 2010, particularly for the middle class, though the proximate causes were declining net worth and income rather than an increase in absolute indebtedness. In fact, the average debt of the middle class actually fell in real terms by 25 percent. The sharp fall in median wealth and the rise in inequality in the late 2000s are traceable to the high leverage of middle class families in 2007 and the high share of homes in their portfolio. The racial and ethnic disparity in wealth holdings, after remaining more or less stable from 1983 to 2007, widened considerably between 2007 and 2010. Hispanics, in particular, got hammered by the Great Recession in terms of net worth and net equity in their homes. Households under age 45 also got pummeled by the Great Recession, as their relative and absolute wealth declined sharply from 2007 to 2010.
----------------------
Justice, Work, and the Ghetto Poor
Tommie Shelby
Law & Ethics of Human Rights, December 2012, Pages 69-96
Abstract:
In view of the explanatory significance of joblessness, some social scientists, policymakers, and commentators have advocated strong measures to ensure that the ghetto poor work, including mandating work as a condition of receiving welfare benefits. Indeed, across the ideological political spectrum, work is often seen as a moral or civic duty and as a necessary basis for personal dignity. And this normative stance is now instantiated in federal and state law, from the tax scheme to public benefits. This Article reflects critically on this new regime of work. I ask whether the normative principles to which its advocates typically appeal actually justify the regime. I conclude that the case for a pro tanto moral or civic duty to work is not as strong as many believe and that there are reasonable responses to joblessness that do not involve instituting a work regime. However, even if we grant that there is a duty to work, I maintain that the ghetto poor would not be wronging their fellow citizens were they to choose not to work and to rely on public funds for material support. In fact, I argue that many among the black urban poor have good reasons to refuse to work. Throughout, I emphasize what too few advocates of the new work regime do, namely, that whether work is an obligation depends crucially on whether background social conditions within the polity are just.
----------------------
Javier Bianchi
NBER Working Paper, December 2012
Abstract:
This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. The optimal policy requires, in general, a mix of ex-post intervention and ex-ante prudential policy. We also analyze the effects of bailouts on financial stability and welfare in the absence of ex-ante prudential policy. Our results show that the moral hazard effects of bailouts are significantly mitigated by making bailouts contingent on the occurrence of a systemic financial crisis.
----------------------
Increase in state suicide rates in the USA during economic recession
Aaron Reeves et al.
Lancet, 24 November 2012, Pages 1813-1814
"In Europe, we previously noted that a one percentage point rise in unemployment was associated with a rise in the suicide rate of 0.79% (95% CI 0.16-1.42; p=0.016). Our findings in the USA are slightly higher: a one percentage point rise in unemployment is associated with a 0.99% increase in the suicide rate (95% CI 0.60-1.38, p<0.0001), which is closer to the association estimated when there were no labour market protections (1.06%)...Since the rate of unemployment between 2007 and 2010 in the USA increased from 5.8% to 9.6%, our model indicates that the rise in US unemployment during the recession is associated with a 3.8% increase in the suicide rate, corresponding to about 1330 suicides. In other words, rising unemployment could account for about a quarter of the excess suicides noted in the USA during this time. Looking across US states between 1999 and 2010, we found that the strongest correlation between unemployment and suicides was in Texas (r=0.91), but overall the correlations were statistically indistinguishable between the north, south, east, and west, or when disaggregating states by Democrat and Republican governors."
----------------------
Offshoring and Directed Technical Change
Daron Acemoglu, Gino Gancia & Fabrizio Zilibotti
NBER Working Paper, December 2012
Abstract:
To study the short-run and long-run implications on wage inequality, we introduce directed technical change into a Ricardian model of offshoring. A unique final good is produced by combining a skilled and an unskilled product, each produced from a continuum of intermediates (tasks). Some of these tasks can be transferred from a skill-abundant West to a skill-scarce East. Profit maximization determines both the extent of offshoring and technological progress. Offshoring induces skill-biased technical change because it increases the relative price of skill intensive products and induces technical change favoring unskilled workers because it expands the market size for technologies complementing unskilled labor. In the empirically more relevant case, starting from low levels, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. However, when the extent of offshoring becomes sufficiently large, further increases in offshoring induce technical change now biased in favor of unskilled labor because offshoring closes the gap between unskilled wages in the West and the East, thus limiting the power of the price effect fueling skill-biased technical change. The unequalizing impact of offshoring is thus greatest at the beginning. Transitional dynamics reveal that offshoring and technical change are substitutes in the short run but complements in the long run. Finally, though offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on elasticities and the equilibrium growth rate.
----------------------
Labor unemployment risk and corporate financing decisions
Ashwini Agrawal & David Matsa
Journal of Financial Economics, forthcoming
Abstract:
This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.
----------------------
The ARRA: Some Unpleasant Welfare Arithmetic
Casey Mulligan
NBER Working Paper, December 2012
Abstract:
Distributions of marginal labor income tax rates for unemployed household heads and spouses are estimated for three benefit and tax rule scenarios: actual rules under the American Reinvestment and Recovery Act, rules as they would have been if they had not been changed since 2007, and rules as they might have been with a bigger fiscal stimulus. About three million unemployed, with a variety of tax situations, had more disposable income while unemployed than they would have by accepting a job that paid 80-100 percent of their previous one. The number would have been less than one million under 2007 rules, and about eight million under a bigger stimulus. Tax obligations and foregone unemployment insurance about equally erode the rewards from retaining a job, or starting a new one.
----------------------
Real Estate Prices During the Roaring Twenties and the Great Depression
Tom Nicholas & Anna Scherbina
Real Estate Economics, forthcoming
Abstract:
Using new data on market-based transactions we construct real estate price indexes for Manhattan between 1920 and 1939. During the 1920s prices reached their highest level in the third quarter of 1929 before falling by 67% at the end of 1932 and hovering around that value for most of the Great Depression. The value of high-end properties strongly co-moved with the stock market between 1929 and 1932. A typical property bought in 1920 would have retained only 56% of its initial value in nominal terms two decades later. An investment in the stock market index (including dividends) would have outperformed an investment in a typical property (including net rental income) by a factor of 5.2 over our time period.
----------------------
The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery
Stephanie Schmitt-Grohé & Martín Uribe
NBER Working Paper, November 2012
Abstract:
The great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.
----------------------
Fiscal Stimulus with Spending Reversals
Giancarlo Corsetti, André Meier & Gernot Müller
Review of Economics and Statistics, November 2012, Pages 878-895
Abstract:
The short-run effects of fiscal policy depend not only on current tax and spending choices, but also on expectations about future policy adjustment. While general equilibrium models typically restrict medium-term adjustment to taxation, we highlight the importance of government spending dynamics. First, we provide time series evidence for the United States suggesting that an exogenous increase in government spending prompts a rise in public debt, followed over time by a reduction in spending below trend. Second, we show how expected spending reversals alter the short-run impact of fiscal policy in a new Keynesian model, bringing it closer in line with the evidence.
----------------------
Happiness, Growth, and Public Policy
Richard Easterlin
Economic Inquiry, January 2013, Pages 1-15
Abstract:
If society's goal is to increase people's feelings of well-being, economic growth in itself will not do the job. Full employment and a generous and comprehensive social safety net do increase happiness. Such policies are arguably affordable not only in higher income nations but also in countries that account for most of the population of the less-developed world. These conclusions are suggested by an analysis of a wide range of evidence on happiness in countries throughout the world.
----------------------
Did the Community Reinvestment Act (CRA) Lead to Risky Lending?
Sumit Agarwal et al.
NBER Working Paper, December 2012
Abstract:
Yes, it did. We use exogenous variation in banks' incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.
----------------------
The Effects of Foreclosure Counseling for Distressed Homeowners
Michael Collins & Maximilian Schmeiser
Journal of Policy Analysis and Management, forthcoming
Abstract:
In the face of the housing market downturn of the late 2000s, policymakers promoted third-party mortgage default counseling as a way to help people at risk of losing their homes to avoid foreclosure. Using a unique data set of monthly loan payments remitted to investors combined with administrative data from a national counseling agency, this study estimates the effects of default counseling on the probability that troubled mortgage borrowers will lose their homes to foreclosure. Borrowers are actually more likely to miss loan payments after receiving counseling, but the probability of losing a home to foreclosure drops after counseling, suggesting that counseling policies may be beneficial during housing crises.
----------------------
Benefit Costs and Employment Dynamics in Recent U.S. Recoveries
Grace Weishi Gu
Cornell Working Paper, November 2012
Abstract:
I document (1) the slow rebound in U.S. aggregate employment following recent recessions, despite recoveries in output, as well as (2) a rising trend in per worker benefit costs, the cyclicality of those costs, and a positive correlation of the cyclical benefit costs with employment growth cycles. I show how these two phenomena are related. Then I develop a DSGE model that includes firms' dynamic benefit costs, financial conditions (i.e., borrowing capacity), and the tradeoff between extensive and intensive labor margins to explore the effects of these features on post-1990 employment dynamics. I find that the benefit costs' rising trend, cyclicality, and interactions with financial conditions have contributed significantly to the observed slow employment growth following the three most recent recessions in the U.S. This paper offers two main improvements over the standard model, which lacks such arrangements: (1) delivering 2-to-7-quarter delays relative to NBER business cycle troughs for the employment recoveries from the 1990, 2001, and 2007 recessions while generating no delay for the pre-1990 period, which is in line with the data; and (2) explaining 40-90 percent of employment volatility and harmonizing with that of output and per worker hours.
----------------------
The increasing financial obligations burden of US households: Who is affected?
Sherman Hanna, Yoonkyung Yuh & Swarn Chatterjee
International Journal of Consumer Studies, September 2012, Pages 588-594
Abstract:
The purpose of this paper is to examine factors associated with changes in the proportion of households with high financial obligations ratios in the United States. The proportion of households paying more than 40% of income for debt, rent, vehicle leases, property taxes and homeowners' insurance, which we refer to as having a heavy burden, increased from 18% in 1992 to 27% in 2007. Multivariate analysis of a combination of six Survey of Consumer Finances data sets indicates that the likelihood of having a heavy burden was positively associated with homeownership, self-employment and retirement status. Those with an optimistic 5-year expectation of the economy were more likely to be in a household with a heavy burden. Education was positively related to having a heavy burden, suggesting that having a heavy burden is not simply a cognitive error.
----------------------
Guns, highways and economic growth in the United States
Christos Kollias & Suzanna-Maria Paleologou
Economic Modelling, January 2013, Pages 449-455
Abstract:
Given its significant policy implications, the nexus between public expenditures and economic growth has been the subject of an extensive and often emotive theoretical and empirical debate. The nexus between two types of public expenditures and economic growth is examined in this paper using both linear and nonlinear causality tests. Both spending on highways and on defence are regarded, albeit with not the same intensity of conviction, as useful counter-cyclical policy instruments and as stimuli to economic growth. Findings reported herein from both linear and non-linear causality tests offer evidence in support for the growth enhancing properties of the former type of public spending but not so in the case of military expenditure.
----------------------
Do Labor Market Policies Have Displacement Effects? Evidence from a Clustered Randomized Experiment
Bruno Crépon et al.
NBER Working Paper, December 2012
Abstract:
This paper reports the results from a randomized experiment designed to evaluate the direct and indirect (displacement) impacts of job placement assistance on the labor market outcomes of young, educated job seekers in France. We use a two-step design. In the first step, the proportions of job seekers to be assigned to treatment (0%, 25%, 50%, 75% or100%) were randomly drawn for each of the 235 labor markets (e.g. cities) participating in the experiment. Then, in each labor market, eligible job seekers were randomly assigned to the treatment, following this proportion. After eight months, eligible, unemployed youths who were assigned to the program were significantly more likely to have found a stable job than those who were not. But these gains are transitory, and they appear to have come partly at the expense of eligible workers who did not benefit from the program, particularly in labor markets where they compete mainly with other educated workers, and in weak labor markets. Overall, the program seems to have had very little net benefits.
----------------------
Subjective Well-Being and Retirement: Analysis and Policy Recommendations
Elizabeth Mokyr Horner
Journal of Happiness Studies, forthcoming
Abstract:
This study examines the relationship between retirement and subjective well-being (SWB), utilizing international data from sixteen countries in Western Europe and the US. Differences in social security regimes are exploited to estimate the retirement decision such that it is exogenous to individual-level characteristics. Although results from traditional ordinary least squares suggest an ambiguous relationship between retirement and SWB, this is due to comparatively lower SWB among those who choose retirement. The removal of selection bias reveals a large, positive effect that fades over a few years, suggesting a multi-stage adjustment to retirement. Individuals facing formal retirement at age 65 or later experience an increase in SWB that is roughly equivalent in total value to that of individuals facing earlier retirement, and both groups return to trend by age 70. This suggests that raising the formal retirement age, which is widely discussed today by policymakers, is relatively neutral with regard to SWB in the long-term.
----------------------
The link between pensions and retirement timing: Lessons from California teachers
Kristine Brown
Journal of Public Economics, forthcoming
Abstract:
I exploit a major, unanticipated reform of the California teachers' pension to provide quasi-experimental evidence on the link between pension features and retirement timing. Using two large administrative data sets, I conduct a reduced-form analysis that leverages the nonlinearities in the return to work generated by the pension features and the reform-induced shifts of these nonlinearities for identification. The implied estimates of the elasticity of lifetime labor supply with respect to the return to work are centered around 0.04 in the medium-run and are less than 0.1 in the long-run.