lecture 4: time series and business cycle patterns in labor supply
Post on 21-Dec-2015
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ALAZ
AR
CA CO
CT
DE
FL
GAID
ILIN
IA
KS
KY
LA
MEMD
MA
MI
MN MS
MOMT
NE
NV
NH
NJ
NM
NYNC
ND
OH
OKOR
PA
RI
SCSD
TN
TX
UT
VT
VA
WA
WV
WI
WY
-.2
-.1
0.1
.2G
row
th in
Hours
Work
ed
.5 1 1.5 2Growth in Per Capita Income
Fitted values gr_annual_hours_m_2_40_80
Men 25-65 Annual Hours UnadjustedGrowth in Hours vs Growth in Per Capita Income
AL
AZ
AR
CA
CO
CT
DE
FL
GA
ID
ILIN
IA
KS
KY
LA
ME
MDMA
MI
MN
MS
MOMT
NE
NV
NH
NJ
NMNY
NC
NDOH
OKOR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
WV
WI
WY
-.15
-.1
-.05
0G
row
th in
Pa
rtic
ipat
ion
.5 1 1.5 2Growth in Per Capita Income
Fitted values gr_working_m_2_40_80
Men 25-65 Participation Unadjusted 1940 - 1980Growth in Participation vs Growth in Per Capita Income
AL
AZ
AR
CA
CO CTDE
FL
GA
ID
ILIN
IAKS
KY
LA
ME
MDMAMI
MN
MS
MO
MT
NE
NV
NHNJ
NM
NY NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
WV
WI
WY
-.15
-.1
-.05
0G
row
th in
Hou
rs W
orke
d
.1 .2 .3 .4 .5Growth in Per Capita Income
Fitted values gr_annual_hours_m_2_80_00
Men 25-65 Annual Hours Unadjusted 1980-2000Growth in Hours vs Growth in Per Capita Income
AL
AZ
AR
CA
CO CTDE
FL
GA
ID
IL
IN
IA
KS
KY
LA
ME
MD MA
MI
MN
MS
MO
MT
NE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
ORPA
RI
SC
SD
TN
TX
UT
VT
VAWA
WV
WI
WY
-.12
-.1
-.08
-.06
-.04
-.02
Gro
wth
in P
art
icip
atio
n
.1 .2 .3 .4 .5Growth in Per Capita Income
Fitted values gr_working_m_2_80_00
Men 25-65 Participation Unadjusted 1980-2000Growth in Participation vs Growth in Per Capita Income
Trends in The Natural Rate In Unemployment
• Did labor market conditions improve during the 1980s and 1990s?
- Unemployment rates fell substantially
• Related concept:
Do income or substitution effects dominate with respect to
labor supply decisions?
• Must reads:
Murphy, Topel, and Juhn “Current Unemployment, Historically Contemplated” (Brookings Papers on Economic Activity, 2002(1)).
Autor and Duggan (QJE 2003)
• For a detailed analysis of the intersection of the role of disability andlabor supply, see Autor and Duggan’s:
“The Rise in the Disability Rolls and the Decline in Unemployment”
• Show that during recessions, the disability margin is much more relevantnow than it was during the 1980s (the benefits to the disabled are nowmore comparable to unemployment benefits than before).
Conclusions
• Decline in unemployment rate may not represent accurately the trends in labor market performance.
• Large decline in participation rates for men.
• Non employment has declined much less than unemployment.
• The decline is much more pronounced for low wage men.
• Does it tell us substitution effects are important? What about changes in transfers?
Part C: A Recent Story – Elsby and Shapiro (AER, 2011)
Why Does Trend Growth Affect Equilibrium Employment? A New Explanation of an Old
Puzzle
(Note: I am using some of Elsby’s slides)
Existing Explanations
• Juhn, Murphy, and Topel (1991, 2002) suggest decline in demand for low-skilled labor in 1970s and 1980s.
• Autor & Duggan (2003), Bound & Waidmann (1992) suggest increase in generosity of disability insurance accounts for declines in employment rates among older men (45+).
Our Contribution
• We emphasize the role of wage growth in reducing work incentives through 2 channels:
a) Reductions in the returns to experience among low-skilled workers; and
b) Reductions in the rate of aggregate wage growth that accompanied the productivity slowdown.
Preview of Findings
Given observed trends in wage growth we find that the model can account for:
a)Most of the long run rise in nonemployment among high school dropouts.
b)One half of the rise in economy-wide nonemployment.
c)The observed age structure of these effects.
The Basic Idea
Consider the following simple problem:
• Infinitely lived worker
• Once-and-for-all decision at start of working life between:a) Working forever; and
b) Not working forever.
• What is the optimal labor supply policy?
The Decision to Work
Work Forever• Accumulate experience, x• Payoff:
Not Work Forever• Do not accumulate x• Payoff:
• Present value:
lnbt lnb0
gbt
• Present value:
PVwork w0, tr gw gx
PVnot work btr gb
ln wx, t ln w0, 0
gwt Agg. Growth
gxx Return to Exp.
The Reservation Wage
It follows that the worker will choose to work if:
w0, t wRt bt
where: r gw gx
r gb
Steady State EmploymentImagine an economy populated by workers facing different
wages,
wix, t iwx, t, where i is “skill”
and different payoffs from nonemployment,
bit ibtThen, aggregate employment is given by:
L Prwi0, t bit 1
where Ω = c.d.f. of ω/β & ρ = replacement rate (bi/wi).
Implications of Simple Model
1. [Well understood.] Increases in ρ, the replacement rate, reduce L*.
2. In the long run, it must be that gb = gw.
Otherwise, ρ = b(t)/w(0,t) → 0 or ∞, and L* → 0 or 1 in the limit.
Thus, r gw gxr gb
1 gxr gw
L 1
Implications of Simple Model
3. Increases in the return to experience gx reduce α and raise aggregate employment.
– gx > 0 drives reservation wage below payoff from nonemployment.
– Future returns to work forgo current earnings.– Increases in gx reduce res. wages still further.
– Effect will be powerful since r – gw likely small.
L 1 1 gxr gw
Implications of Simple Model
4. Increases in aggregate wage growth gw reduce α and raise aggregate employment, IFF gx > 0.
– Increases in gw have a greater impact on PV of earnings for those in work—they compound the return to experience.
– N.B. this effect is absent if gx = 0!
Relates to Blanchard’s neutrality critique:
when gx = 0, gw is neutral w.r.t. employment.
L 1 1 gxr gw
A More General Model
Simple model introduced before, while intuitive, is very stylized in a number of ways:
• Once-and-for-all labor supply decision.• Linear return to experience.• Infinite lifetimes.
To get a sense of the quantitative implications of the model, we now relax these restrictions.
Summary of Qualitative Predictions
a) Increases in the return to experience stimulate employment.
b) If there is a positive return to experience, increases in aggregate wage growth also stimulate employment.
c) These effects are strongest among low-skilled who are marginal to employment decision.
Evidence
We now present evidence on these two forms of wage growth for the US:
• Changes in the return to experience among low-skilled;
• Changes in aggregate wage growth.
Changes in the Return to Experience
Data from 1960–00 Censuses and 2001–07 ACS
Earnings: Annual wages and salary.
Education: dropouts (9-11 yrs), high school, some college, college+.
Experience: Age – education – 6.
Sample: Full-time, full-year non-immigrant white males.
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2
0 10 20 30
Log
Earn
ings
, Nor
mal
ized
Potential Experience, Years
A. 9-11 Years of Education
1960 1970 1980
1990 2000 2001-07
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2
0 10 20 30
Log
Earn
ings
, Nor
mal
ized
Potential Experience, Years
B. 12 Years of Education
1960 1970 1980
1990 2000 2001-07
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2
0 10 20 30
Log
Earn
ings
, Nor
mal
ized
Potential Experience, Years
D. 16+ Years of Education
1960 1970 1980
1990 2000 2001-07
Sensitivity
1. Actual vs. Synthetic Cohorts– Similar picture.
2. Potential vs. Actual Experience– Effects likely to be small.
3. Selection– Hard to generate flattening profile.
4. Relation to Existing Literature– Similar picture using different data/methods.
Cohort Earnings Profiles: A Similar Pattern
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2
0 5 10 15 20 25 30
Log
Earn
ings
, Nor
mal
ized
Potential Experience, Years
A: 9-11 Years of Education
1960 1970 1980
1990 2000
Summary
This paper (hopefully) has:
• Provided an analytical framework in which the labor supply effects of wage growth can be understood.
• Documented the substantial decline in the returns to experience among low-skilled workers.
• Demonstrated that the employment effects of reduced returns to experience and aggregate wage growth are potentially substantial.
Erik’s Comments
Do not allow bi to differ by group
o Value of leisureo Transfer policy
Conduct all analysis using pre-tax dollars
o Do not allow for changes in Tax policy
Assumes changes in wage profile are known ex-ante
o Is that realistic?
Aguiar, Hurst, and Karabarbounis (in progress)
• Calibrate preference parameters for labor supply (and potentially home production and leisure production function parameters) given:
o Observed hours/participation for different skill groupso Observed home production time for different skill groupso Observed wages for different groupso Observed prices of home production, leisure, and other goodso Observed taxes and transfers for different groups
• Goal:
o To match both the time series and cross sectional trends
• Focus on a group where disability is much less of a concern.
Some Facts About The Recent Labor Market
• “The Labor Market In The Great Recession”
Mike Elsby, Bart Hobijn, and Aysegul Sahin
• Compares the labor market during the recent recession to the labor market during all other previous post war recessions.
• Conclusions:
(1) From a wide range of labor market outcomes, the recent recession was the deepest recession in post war period.
(2) Early on, the nature of labor adjustment in the recent recession displayed a notable resemblance to that of other severe
recessions.
(3) During the latter part of recession (and recovery), the path of adjustment exhibited important departures from other deep recessions.
2008Q12008Q2
2008Q3
2008Q4
2009Q1
2009Q22009Q3
2009Q42010Q12010Q22010Q32010Q4
-6
-4
-2
0
2
4
6
-10 -8 -6 -4 -2 0 2 4 6 8
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, and Congressional Budget OfficeOutput gap
Unemployment gap
No recessionRecessions
Figure 3. Okun’s Law, 1949-2010 Q4
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
70
Revisions led to partial reversal Okun’s Law
2011Q2
-4
-3
-2
-1
0
1
2
3
4
5
6
-10 -8 -6 -4 -2 0 2 4 6
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Congressional Budget Office, FRBSF staff
Based on CBO potential output and NAIRU estimates (1949Q1-now)
Okun's Law
Output gap
Unemployment gap
2007 Recessionand after
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
72
Recent drop in unemployment through participation
62
63
64
65
66
67
68
0
2
4
6
8
10
12
1990 1995 2000 2005 2010Source: Bureau of Labor Statistics
Monthly observations; seasonally adjustedUnemployment and Labor Force Participation rates
Percent Percent
Unemployment rate
Labor force participation rate
2
4
6
8
10
12
1990 1993 1996 1999 2002 2005 2008 2011
2
4
6
8
10
12
Unemployment Rate by Gender
Source: Bureau of Labor Statistics
Women
Men
Unemployment Rate Unemployment RateSeasonally Adjusted
Oct
200
9
2.7
1.1
0.1
0.15
0.2
0.25
0.3
1990 1994 1998 2002 2006 2010
0.1
0.2
0.3
0.4
Unemployment to Non-Participation by Gender
Source: Bureau of Labor Statistics
Men
Percent Men
Seasonally Adjusted
Percent Women
Women
0.1
0.2
0.3
0.4
1990 1994 1998 2002 2006 2010
0.1
0.2
0.3
0.4
Unemployment to Employment by Gender
Source: Bureau of Labor Statistics
Men
PercentSeasonally Adjusted
Percent
Women
0
0.01
0.02
0.03
1990 1994 1998 2002 2006 2010
0
0.01
0.02
0.03
Employment to Unemployment by Gender
Source: Bureau of Labor Statistics
Men
PercentSeasonally Adjusted
Percent
Women
0
0.01
0.02
0.03
0.04
0.05
1990 1994 1998 2002 2006 2010
0
0.01
0.02
0.03
0.04
0.05
Nonparticipation to Unemployment by Gender
Source: Bureau of Labor Statistics
Men
PercentSeasonally Adjusted
Percent
Women
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
78
Change in Unemployment RatesTable 1: Change in Unemployment Rates (ppt)
Recession Recovery
Change in Unemployment Rate 5.5 -0.9Gender
Male 6.5 -1.6Female 4.3 -0.2
Age16-24 8.8 -1.625-54 5.4 -0.955+ 4.0 -0.3
EducationLess than High Scool 8.3 -0.6High School 6.5 -1.0Some College 5.3 -0.9College or Higher 2.9 -0.4
RaceWhite 5.2 -1.1Black 7.5 0.3Hispanic 7.2 -1.1
Notes: The recession refers to 2007Q2 to 2009Q4 and the recovery 2009Q4 to 2011Q2
The Unemployment Rate By Skills: All (20-45)
Education2007
UnempRate
2011Unemp
Rate
Change in
Rate
Share of
Pop.
Share Weighted
Change
Percent of Total
Unemp Rate
Explained
High School or Less
7.1% 15.2% 8.2% 41% 3.3% ~65%
Some College 4.2% 8.9% 4.7% 30% 1.5% ~25%
College or More
1.9% 4.5% 2.6% 29% 0.7% ~10%
All 4.6% 9.9% 5.3%
The Unemployment Rate By Skills: All (20-45)
Education2007
UnempRate
2011Unemp
Rate
Change in
Rate
Share of
Pop.
Share Weighted
Change
Percent of Total
Unemp Rate
Explained
High School or Less
7.1% 15.2% 8.2% 41% 3.3% ~65%
Some College 4.2% 8.9% 4.7% 30% 1.5% ~25%
College or More
1.9% 4.5% 2.6% 29% 0.7% ~10%
All 4.6% 9.9% 5.3%
The Non Participation Rate By Skills: All
Education2007
Non-EmpRate
2011Non-Emp
Rate
Change in
Rate
Share of
Pop.
Share Weighted
Change
Percent of Total
Non-EmpRate
Explained
High School or Less
22.1% 24.1% 2.0% 41% 0.8% ~50%
Some College 19.0% 21.8% 2.8% 31% 0.9% ~50%
College or More
12.1% 12.2% 0.1 29% 0% 0%
All 18.4% 19.9% 1.5%
The Non Participation Rate By Skills: All
Education2007
Non-EmpRate
2011Non-Emp
Rate
Change in
Rate
Share of
Pop.
Share Weighted
Change
Percent of Total
Non-EmpRate
Explained
High School or Less
22.1% 24.1% 2.0% 41% 0.8% ~50%
Some College 19.0% 21.8% 2.8% 31% 0.9% ~50%
College or More
12.1% 12.2% 0.1 29% 0% 0%
All 18.4% 19.9% 1.5%
The Non Employment Rate By Skills: All
Education2007
Non-EmpRate
2011Non-Emp
Rate
Change in
Rate
Share of
Pop.
Share Weighted
Change
Percent of Total
Non-EmpRate
Explained
High School or Less
27.6% 35.7% 8.1% 41% 3.3% ~60%
Some College 22.4% 28.7% 6.3% 31% 2.0% ~30%
College or More
13.7% 16.1% 3.4% 29% 1.0% ~10%
All 22.2% 27.7% 5.5%
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
84
Long-term Unemployment Still High
0
2
4
6
8
10
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
79 weeks and over
52-78 weeks
26-52 weeks
15-26 weeks
5-14 weeks
<5 weeks
Source: Bureau of Labor Statistics, Current Population Survery, and authors' calculations
Seasonally adjusted monthly observationsUnemployment rate by duration
Percent
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
86
Historically Low Outflows Even After Recession
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0%
20%
40%
60%
80%
100%
120%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008Source: Bureau of Labor Statistics and authors' calculations
Monthly hazard based on Shimer (2005); 3-month moving averagesFlow hazard rates into and out of unemployment
Outflow hazard Inflow hazard
Outflow hazard, f(t)
Inflow hazard, s(t)
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
87
Pick-up in Outflows to Non-participation
0
5
10
15
20
25
30
35
40
1967 1972 1977 1982 1987 1992 1997 2002 2007Source: Shimer (2007), based on Ritter data provided by Hoyt Bleakley, Bureau of Labor Statistics, authors' calculations
Seasonally adjusted; 3-month moving averageOutflow rates out of unemployment by destination
Percent of unemployed
To Employment
To Non-participation
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
88
Outflow Rates by Duration and Destination
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24+
Source: Current Population Survey and authors' calculations
Average July 2010 - June 2011Monthly outflow rates out of unemployment
Duration (months)
Percent
Total
to employment
to out of the labor force
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
89
Very High Inflows from Non-participation
0
0.5
1
1.5
2
2.5
1967 1972 1977 1982 1987 1992 1997 2002 2007Source: Shimer (2007), based on Ritter data provided by Hoyt Bleakley, Bureau of Labor Statistics, authors' calculations
Seasonally adjusted; 3-month moving averageInflow rates into unemployment by origin
Percent of labor force
From Employment
From Non-participation
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
90
Evidence of increased frictions
Jun-11
1%
2%
3%
4%
5%
2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Source: JOLTS, CPS, and authors' calculations
Monthly observations; pre-2007-recession fitActual and fitted Beveridge Curve
Unemployment rate
Job openings rate
before 2007 recession
since 2007 recession
Fitted
Gap: 2.6%
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
91
Evidence of increased frictions
Jun-11
1%
2%
3%
4%
5%
2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Source: JOLTS, CPS, and authors' calculations
Monthly observations; pre-2007-recession fitFitted and "New" Beveridge Curve
Unemployment rate
Job openings rate
before 2007 recession
since 2007 recession
Fitted "New" BC
Elsby/Hobijn/Sahin/Valletta 9/16/2011
Labor Market In the Great Recession: An Update
92
Broadbased decline in finding rates
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Bureau of Labor Statistics and authors' calculations
12-m moving averages of monthly dataUnemployment Outflow Hazards by Industry
Monthly outflow hazard
Total
Construction
Durable GoodsInformation
Financial
Where Are Potential Long Term Unemployment Forces Coming From
1. Economic boom from the late 1990s through the mid 2000s
o Housing boom
o Credit boom
2. Persistent decline in manufacturing over last 30 years.
Note: These two forces could have important interactions.
Some More Conclusions
• Manufacturing has been steadily declining over past few decades.
• The decline has been felt most by lower educated men.
• The decline has been associated with an exit of lower educated men from the labor force.
Labor Market Break Down of Younger Low Educated (<= 12)Men
Labor Market Status 1997 2007 2010
Out of Labor Force 10.7 12.5 13.9
Unemployed 7.3 6.6 16.0
Construction 13.6 18.8 13.1
Manufacturing 15.5 11.0 8.8
Other 52.1 51.1 48.2
Incarceration Rate about 5% in 2010.
Labor Market Break Down of Younger High Educated (>= 16) Men
Labor Market Status 1997 2007 2010
Out of Labor Force 4.2 5.0 5.6
Unemployed 1.9 1.6 4.7
Construction 1.9 2.4 1.5
Manufacturing 2.1 1.9 1.7
Other 89.9 89.1 86.8
A Potential Hypothesis About Current Unemployment
• The decline of manufacturing would have gradually caused an exodus of low skilled men from the labor market.
• Decline in manufacturing puts downward pressure on wages of low skilled men.
• During previous two decades, such forces was associated with an exodus of low skilled men out of the labor force.
• During the past decade, the housing (construction) boom may have delayed the inevitable (giving low skill men another employment option)
• As construction returns to “normal” and manufacturing has disappeared, what will low skill men do?
• May transition through unemployment before exiting the labor force.