Research Database

We document that the protracted decline in the labor share has been accompanied by a decline in the tightness rate defined as the number of vacancies per job seekers. We argue that these two trends are related. When vacancies and job seekers are complements in the matching process, a decline in the tightness rate reduces workers’ fundamental bargaining power as defined by Hosios (1990), which in turn reduces the labor share of income. We calibrate a search and matching model extended to allow for an endogenous determination of bargaining power. The model can rationalize the common trends in the labor shares and tightness. According to the model, workers’ bargaining power declined by about 15 percent during the 1980–2007 period.

We introduce dynamic incentive contracts into a model of inflation and unemployment dynamics. Our main result is that wage cyclicality from incentives neither affects the slope of the Phillips curve for prices nor dampens unemployment dynamics. The impulse response of unemployment in economies with flexible, procyclical incentive pay is first-order equivalent to that of economies with rigid wages. Likewise, the slope of the Phillips curve is the same in both economies. This equivalence is due to effort fluctuations, which render effective marginal costs rigid even if wages are flexible. Our calibrated model suggests that 46% of the wage cyclicality in the data arises from incentives, with the remainder attributable to bargaining and outside options. A standard model without incentives calibrated to weakly procyclical wages matches the impulse response of unemployment in our incentive pay model calibrated to strongly procyclical wages.

Advanced economies borrowed substantially during the Covid recession to fund their fiscal policy. The Covid recession differed from the Great Recession in that sovereign debt markets remained calm and spreads barely responded. We study the experience of Greece, the most extreme manifestation of the puzzling behavior of spreads during Covid. We develop a small open economy model with long-term debt and default, which we augment with official lenders, heterogeneous households and sectors, and Covid constraints on labor supply and consumption demand. The model is quantitatively consistent with the observed boom-bust cycle of Greece before Covid and salient observations on macro aggregates, government debt, and the sovereign spread during Covid. The spread is stable despite a rise in external borrowing during Covid, because lockdowns were perceived as transitory and the bailouts of the 2010s had tilted the composition of debt at the beginning of Covid away from defaultable private debt. The ECB's policy of purchasing debt in secondary markets during Covid did not stabilize spreads so much, but allowed the government to provide transfers that reduced inequality.

Ways of leaving the labor force has been an understudied aspect of labor market outcomes. Labor market institutions such as occupational licensing may influence how individuals transition to retirement. When and how workers transition from career jobs to full retirement may contribute to pre- and post-retirement well-being. Previous investigations of retirement pathways focused on the patterns and outcomes of retirement transitions, yet the influence of occupational licensing on retirement transition has not been analyzed. In this study, we use the Current Population Survey and Survey of Income and Program Participation to investigate how occupational licensing influences American later-career workers’ choice of retirement pathways. Our results show that licensed workers are less likely to choose to change careers but more likely to reduce work hours in transitioning out of the workforce. These results are consistent with the findings that licensed workers receive more benefits in the form of preferable retirement options, suggesting that these workers tend to have higher wages, benefits, and flexibility even toward the end of their careers.

This paper investigates how a government should manage international reserves when it faces the risk of a rollover crisis. We ask, should the government accumulate reserves or reduce debt to make itself less vulnerable? We show that the optimal policy entails initially reducing debt, followed by a subsequent increase in both debt and reserves as the government approaches a safe zone. Furthermore, we uncover that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads.

We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts.

The appendix accompanies Staff Report 605: How Do Voters Respond to Welfare vis-à-vis Public Good Programs? An Empirical Test for Clientelism.

By preemptive austerity, we mean a policy that increases taxes to deter potential rollover crises. The policy is so successful that the usual danger signal of a rollover crisis, a high yield on new bonds sold, does not show up because the policy eliminates the danger. Mechanically, high taxes make the safe zone in the model - the set of sovereign debt levels for which the government prefers to repay its debt rather than default - larger. By announcing a high tax rate at the beginning of the period, the government ensures that tax revenue will be high enough to service sovereign debt becoming due, which deters panics by international lenders but is ex-post suboptimal. That is why, as it engages in preemptive austerity, the government continues to reduce the level of debt to a point where, asymptotically, high taxes are no longer necessary.

We examine how the distribution of employment tenure has changed in aggregate and for various demographic groups, drawing links to trends in job stability and satisfaction. The fraction of workers with short tenure (less than a year) has been falling since at least the mid-1990s, consistent with the decline in job changing documented over this period. The decline in short-tenure was widespread across demographic groups, industry, and occupation. It appears to be associated with fewer workers cycling among briefly-held jobs and coincides with an increase in perceived job security among short tenure workers. Meanwhile, the fraction of workers with long tenure (20 years or more) has been rising modestly since the early 1980s owing to an increase in long tenure for women and the ageing of the population. The rise in long tenure for women was broad-based across industries and occupations but limited to married women. By contrast, long tenure has declined markedly among older men. This is only partly explained by changing demographics and employment patterns such as the decline in manufacturing and unionization. In addition, an increase in mid-career separations during the 1970s and 1980s appears to have reduced the likelihood of reaching long-tenure for men. Survey evidence indicates that – despite these substantive changes over time – longer-tenure workers report no greater concern about job insecurity or decreases in job satisfaction than four decades ago.

Black Americans face higher cyclical unemployment risk than white Americans: job-finding rates during recessions are lower and the risk of becoming long-term unemployed is higher. Differences in unemployment risk across Black and white Americans imply that Black Americans optimally invest less in risky assets. We show that differences in unemployment risk can explain up to 90% of the gap in the stock market shares of Black and white portfolios, resulting in lower returns on wealth for Black Americans. Through this portfolio channel, adverse labor market conditions for Black Americans translate into lower wealth returns and exacerbate racial wealth inequality.

Spatial differences in labor market performance are large and highly persistent. Using data from the United States, Germany, and the United Kingdom, we document striking similarities across these countries in the spatial differences in unemployment, vacancies, and job filling, finding, and separation rates. The novel facts on the geography of vacancies and job filling are instrumental in guiding and disciplining the development of a theory of local labor market performance. We find that a spatial version of a Diamond-Mortensen-Pissarides model with endogenous separations and on-the-job search quantitatively accounts for all the documented empirical regularities. The model also quantitatively rationalizes why differences in job-separation rates have primary importance in inducing differences in unemployment across space while changes in the job-finding rate are the main driver in unemployment fluctuations over the business cycle.

We measure college graduate quality — the average human capital of a college’s graduates—using the average earnings of the college’s graduates adjusted to a common labor market. Our implementation uses the database of the website Glassdoor, which has the necessary information on earnings and education for non-migrants and migrants who graduate from roughly 3,300 colleges in 66 countries. Graduates of colleges in the richest countries have 50 percent more human capital than graduates of colleges in the poorest countries. Migration reinforces these differences. Poorer countries do not just lose a higher share of their skilled workers; their emigrants are highly positively selected on human capital. Finally, we show that these stocks and flows matter for growth and development by showing that college graduate quality predicts the share of a college’s students who become inventors, engage in entrepreneurship, and become top executives, both within and across countries.

We document four facts about the COVID-19 pandemic worldwide relevant for those studying the impact of non-pharmaceutical interventions (NPIs) on COVID-19 transmission. First: across all countries and U.S. states that we study, the growth rates of daily deaths from COVID-19 fell from a wide range of initially high levels to levels close to zero within 20-30 days after each region experienced 25 cumulative deaths. Second: after this initial period, growth rates of daily deaths have hovered around zero or below everywhere in the world. Third: the cross section standard deviation of growth rates of daily deaths across locations fell very rapidly in the first 10 days of the epidemic and has remained at a relatively low level since then. Fourth: when interpreted through a range of epidemiological models, these first three facts about the growth rate of COVID deaths imply that both the effective reproduction numbers and transmission rates of COVID-19 fell from widely dispersed initial levels and the effective reproduction number has hovered around one after the first 30 days of the epidemic virtually everywhere in the world. We argue that failing to account for these four stylized facts may result in overstating the importance of policy mandated NPIs for shaping the progression of this deadly pandemic.

Using linked employer-employee data from Brazil, we document a large gender pay gap due to women working at lower-paying employers with better amenities. To interpret these facts, we develop an equilibrium search model with endogenous firm pay, amenities, and employment. We provide a constructive proof of identification of all model parameters. The estimated model suggests that amenities are important for men and women, that compensating differentials explain half of the gender pay gap, and that there are significant output and welfare gains from eliminating gender differences. However, equal-treatment policies fail to achieve those gains.

In this appendix, we describe the numerical methods used to compute an equilibrium in the economy with an inelastic labor supply and in the economy with an elastic labor supply (i.e., our benchmark economy). Although the economy with inelastically supplied labor is a special case of the benchmark economy, the equilibrium in the inelastic labor supply case is much easier to compute and is therefore treated separately. In each case, we start with the consumer's problem, assuming the consumer takes prices as given. We then show how the equilibrium prices are determined. To verify that the methods work well with our problem, we apply them to some related test problems that have known solutions.

This paper presents a full characterization of the equilibrium value set of a Ramsey tax model. More generally, it develops a dynamic programming method for a class of policy games between the government and a continuum of consumers. By selectively incorporating Euler conditions into a strategic dynamic programming framework, we wed two technologies that are usually considered competing alternatives, resulting in a dramatic simplification of the problem.

This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. An increase in sovereign risk lowers the price of government debt and has an adverse impact on banks’ balance sheets, disrupting their ability to finance firms. The resulting fall in credit supply impacts firms directly, as they need to borrow at higher interest rates, and indirectly through general equilibrium effects on the price of inputs and other goods. Importantly, firms are not equally affected by these developments: those that have greater financing needs and that borrow from banks that hold more government debt are mostly affected by the change in borrowing rates, while firms that do not borrow are only impacted indirectly. We show that these direct and indirect effects can be recovered using a firm-level regression, which we estimate using Italian data. We calibrate our model to match the measured firm-level elasticities and find that heightened sovereign risk was responsible for one-third of the observed output decline during the Italian debt crisis.

This paper characterizes the allocations that emerge in general equilibrium economies populated by households with preferences of the additive random utility type that make discrete consumption, employment or spatial decisions. We start with a complete markets economy where households can trade claims contingent upon the realizations of their preference shocks. We (i) establish a first and second welfare theorem, (ii) illustrate that in the absence of ex-ante trade, discrete choice economies are generically inefficient, (iii) show that complete markets are not necessary and a much smaller set of securities decentralizes the efficient allocation. We illustrate the relevance of these results in several canonical settings and for measuring how welfare changes in response to changes in prices.

In the U.S, after age 65, households face income and health risks and a large fraction of these risks are transitory. While consumption significantly responds to transitory income shocks, out-of-pocket medical expenses do not. In contrast, both consumption and out-of-pocket medical expenses respond to transitory health shocks. Thus, most U.S. elderly keep their out-of-pocket medical expenses close to a satiation point that varies with health. Consumption responds to health shocks mostly because adverse health shocks reduce the marginal utility of consumption. The effect of health on marginal utility changes the optimal transfers due to health shocks.

A weakening of labor protection policies is often invoked as one cause of observed monopsony power and the decline in labor’s share of income, but little evidence exists on the causal impact of labor policies on wage markdowns. Using confidential Mexican economic census data from 1994 to 2019, we document a rising trend over this period in on-site outsourcing. Then, leveraging data from a manufacturing panel survey from 2013 to 2023 and a natural experiment featuring a ban on domestic outsourcing in 2021, we show that the ban drastically reduced outsourcing, increased wages, and reduced measured markdowns without lowering output or employment. Consistent with the presence of monopsony power, we observe large markdowns for the largest firms, with the decline in markdowns in response to the ban concentrated among high-markdown firms. However, we also find that the reform reduced capital investment and increased the probability of market exit.

Financial integration generates macroeconomic spillovers that may require international monetary policy coordination. We show that individual central banks may set nominal interest rates too low or too high relative to the cooperative outcome. We identify three sufficient statistics that determine whether the Nash equilibrium exhibits under-tightening or over-tightening: the output gap, sectoral differences in labor intensity, and the trade balance response to changes in nominal rates. Independently of the shocks hitting the economy, we find that under-tightening is possible during economic expansions or contractions. For large shocks, the gains from coordination can be substantial.

This paper explores the role of restrictions on the use of international reserves as economic sanctions. We develop a simple model of the strategic game between a sanctioning (creditor) country and a sanctioned (debtor) country. We show how the sanctioning country should impose restrictions optimally, internalizing the geopolitical benefits and the financial costs of a potential default from the sanctioned country.

We characterize the little wage information contained in online job posts. Wage information is rare: only 14% of posts contain any information. Of these, wage ranges are more common than point wages, and are wide on average, spanning 28% of the midpoint (e.g. $32,000-$42,000/yr). Posted wages are highly selected in low income occupations: 40% higher than wages of employed workers. High wage firms are more opaque, with more and wider ranges. We find zero correlation between wage information and local labor market tightness. We provide an example of bias in econometric inference that worsens as wage information falls.

In the 1960 cohort, American men and women graduated from college at the same rate, and this was true for Whites, Blacks and Hispanics. But in more recent cohorts, women graduate at much higher rates than men. To understand the emerging gender education gap, we formulate and estimate a model of individual and family decision-making where education, labor supply, marriage and fertility are all endogenous. Assuming preferences that are common across ethnic groups and fixed over cohorts, our model explains differences in all endogenous variables by gender/ethnicity for the ‘60-‘80 cohorts based on three exogenous factors: family background, labor market and marriage market constraints. Changes in parental background are a key factor driving the growing gender education gap: Women with college educated mothers get greater utility from college, and are much more likely to graduate themselves. The marriage market also contributes: Women’s chance of getting marriage offers at older ages has increased, enabling them to defer marriage. The labor market is the largest factor: Improvement in women’s labor market return to college in recent cohorts accounts for 50% of the increase in their graduation rate. But the labor market returns to college are still greater for men. Women go to college more because their overall return is greater, after factoring in marriage market returns and their greater utility from college attendance. We predict the recent large increases in women’s graduation rates will cause their children’s graduation rates to increase further. But growth in the aggregate graduation rate will slow substantially, due to significant increases in the share of Hispanics – a group with a low graduation rate – in recent birth cohorts.

We analytically characterize the aggregate productivity loss from allocative distortions in a setting that accounts for the sectoral linkages of production. We show that the effects of distortions and the role of sectoral linkages depend crucially on how substitutable inputs are. We find that the productivity loss is smaller if input substitutability is low. Moreover, with low input substitutability, sectoral linkages do not systematically amplify the effects of distortions. In addition, the impact of the sectors that supply intermediate inputs becomes smaller. We quantify these effects in the context of the distortions caused by market power, using industry-level data for 35 countries. With our benchmark calibration, which accounts for low input substitutability, the median aggregate productivity loss from industry-level markups is 1.3%. To assume instead unit elasticities of substitution (i.e., to use a Cobb-Douglas production function) would lead to overestimating the productivity loss by a factor of 1.8. Sectoral linkages do amplify the cost of markups, but the amplification factor is considerably weaker than with unit elasticities.

We derive an optimal labor income tax rate formula for urban models in which tax rates are determined by traditional forces plus a new term arising from urban forces: house price, migration and agglomeration effects. Based on the earnings distributions and housing costs in large and small US cities, we find that in a benchmark model (i) optimal income tax rates are U-shaped, (ii) urban forces serve to raise optimal tax rates at all income levels and (iii) adopting an optimal tax system induces agents with low skills to leave large, productive cities. While agglomeration effects enter the optimal tax formula, they play almost no quantitative role in shaping optimal labor income tax rates.

We benchmark six global optimization algorithms by comparing their performance on challenging multidimensional test functions as well as on a method of simulated moments estimation of a panel data model of earnings dynamics. Five of the algorithms are from the popular NLopt open-source library: (i) Controlled Random Search with local mutation (CRS), (ii) Improved Stochastic Ranking Evolution Strategy (ISRES), (iii) Multi-Level Single-Linkage (MLSL), (iv) Stochastic Global Optimization (StoGo), and (v) Evolutionary Strategy with Cauchy distribution (ESCH). The sixth algorithm is TikTak, which is a multistart global optimization algorithm used in some recent economic applications. For completeness, we add three popular local algorithms to the comparison—the Nelder-Mead downhill simplex algorithm, the Derivative-Free Nonlinear Least Squares (DFNLS) algorithm, and a popular variant of the Davidon-Fletcher-Powell (DFPMIN) algorithm. To give a detailed comparison of algorithms, we use benchmarking tools recently developed in the optimization literature. We find that the success rate of many optimizers varies dramatically with the characteristics of each problem and the computational budget that is available. Overall, TikTak is the strongest performer both on the test functions and the economic application. The next-best performing optimizers are StoGo for the test functions and MLSL and ISRES for the economic application.

To to get the COVID-19 virus under control, many countries have shut down parts of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. We build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and by health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute through taxes and transfers, but where taxation distorts labor supply and output. Optimal redistribution and mitigation policies interact, and more modest shutdowns are optimal when redistribution creates tax distortions. A harder but shorter shutdown is preferred as vaccines become available in the first half of 2021.

We specify and calibrate a life-cycle model of labor supply and savings incorporating health shocks and medical treatment decisions. Our model features endogenous wage formation via human capital accumulation, employer-sponsored health insurance, and means-tested social insurance. We use the model to study the effects of health shocks on health, labor supply and earnings, and to assess how health shocks contribute to earnings inequality. We also simulate provision of public insurance to agents who lack employer-sponsored insurance. The public insurance program substantially increases medical usage by the uninsured, leading to improved health and life expectancy, which generates higher Social Security costs. But the program also creates positive labor supply incentives, and substantially reduces costs of social insurance, Medicaid and free care. On balance the net program cost is modest, and all agents in the model are ex ante better off in a balanced budget simulation. In contrast, improving access to Medicaid has perverse labor supply effects, does little to improve health, and makes almost all agents worse off in a balanced budget scenario.

This paper reports the results of a large, school-level randomized controlled trial evaluating a set of three informational interventions for young people choosing high schools in 473 middle schools, serving over 115,000 8th graders. The interventions differed in their level of customization to the student and their mode of delivery (paper or online); all treated schools received identical materials to scaffold the decision-making process. Every intervention reduced likelihood of application to and enrollment in schools with graduation rates below the city median (75 percent). An important channel is their effect on reducing nonoptimal first choice application strategies. Providing a simplified, middle-school specific list of relatively high graduation rate schools had the largest impacts, causing students to enroll in high schools with 1.5-percentage point higher graduation rates. Providing the same information online, however, did not alter students’ choices or enrollment. This appears to be due to low utilization. Online interventions with individual customization, including a recommendation tool and search engine, induced students to enroll in high schools with 1-percentage point higher graduation rates, but with more variance in impact. Together, these results show that successful informational interventions must generate engagement with the material, and this is possible through multiple channels.

This paper studies the implications of household heterogeneity for trade. I develop a model where household heterogeneity is induced via incomplete markets and results in heterogeneous price elasticities. Conditional on exposure to trade, heterogeneous price elasticities imply that different households value price changes differently, and thus rich and poor households experience different gains from trade. I calibrate the model to match bilateral trade flows and micro-facts about household-level expenditure patterns and elasticities. I find gains from trade that are pro-poor and that the average gains from trade are substantially larger than representative agent benchmarks.

This paper develops a New Keynesian model with sovereign default risk. Inflation is set by forward-looking firms, monetary policy is an interest rate rule, and the fiscal government borrows externally, long-term, with an option to default. In this framework, default risk creates inflation pressures through an expectations channel, and tight monetary policy disincentivizes fiscal overborrowing. The model sheds light on temporary inflation events in emerging market data, short-lived spikes in inflation, spreads, and domestic policy rates. As spreads rise, firms increase their prices in expectation of higher future inflation during defaults. Monetary policy tightens, which reduces inflation and helps bring spreads down by disciplining government borrowing. These monetary-fiscal interactions imply that delivering the flexible price allocation may not be optimal for monetary policy.

How generous should social insurance be when quits account for a large share of transitions into non-employment? We address this question using a multi-sector directed search model extended to incorporate endogenous quits both to other jobs and to non-employment. Workers quit too often in the competitive equilibrium, and private markets co-ordinate on excessively high “efficiency” wages. Quantitatively, we find that unemployment insurance is optimally much less generous in an economy with quits than in one without. An extended Baily-Chetty formula is derived to illustrate the source of this difference.

Multinational affiliates are more productive than domestic firms, so how do they affect a host country through the labor market? We use data for Norway to show that the labor market is characterized by a job ladder, with multinationals on the upper rungs. We calibrate a general equilibrium job ladder model with endogenous multinational entry to the Norwegian data. In a counterfactual where multinationals face an infinite entry cost, payments to labor fall and profits of domestic firms rise, but the impact is heterogeneous. Competition for workers increases low down on the job ladder, while it decreases high up.

We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakraj¡sek, 2012) as proxy for global flight to safety.

Heathcote et al. (2010) conducted an empirical analysis of several dimensions of inequality in the United States over the years 1967-2006, using publicly-available survey data. This paper expands the analysis, and extends it to 2021. We find that since the early 2000s, the college wage premium has stopped growing, and the race wage gap has stalled. However, the gender wage gap has kept shrinking. Both individual- and household-level income inequality have continued to rise at the top, while the cyclical component of inequality dominates dynamics below the median. Inequality in consumption expenditures has remained remarkably stable over time. Income pooling within the family and redistribution by the government have enormous impacts on the dynamics of household-level inequality, with the role of the family diminishing and that of the government growing over time. In particular, largely due to generous government transfers, the COVID recession has been the first downturn in fifty years in which inequality in disposable income and consumption actually declined.

This paper reassesses the conclusions of McGrattan and Prescott (2005), which derived the quantitative implications of growth theory for U.S. corporate valuations. In addition to having two more decades of data, the analysis incorporates recent changes in policies that affect corporate investments, taxes, and legal-form choice. Secular trends identified in the earlier period remain, with little change in the tangible capital-output ratio or profit share of output. Corporate valuations remain high relative to the postwar average, in line with the theoretical prediction. Critical to this prediction is the decline in effective tax rate on distributions and the rise of foreign direct investment abroad. With the recent enactment of the Tax Cuts and Jobs Act, corporate valuations are predicted to rise even further relative to GDP.