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Creator: Guvenen, Fatih and Kuruscu, Burhanettin Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 427 Abstract:
In this paper, we construct a parsimonious overlapping-generations model of human capital accumulation and study its quantitative implications for the evolution of the U.S. wage distribution from 1970 to 2000. A key feature of the model is that individuals differ in their ability to accumulate human capital, which is the main source of wage inequality in this model. We examine the response of this model to skill-biased technical change (SBTC), which is modeled as an increase in the trend growth rate of the price of human capital starting in the early 1970s. The model displays behavior that is consistent with several important trends observed in the US data, including the rise in overall wage inequality; the fall and subsequent rise in the college premium, as well as the fact that this behavior was most pronounced for younger workers; the rise in within-group inequality; the stagnation in median wage growth; and the small rise in consumption inequality despite the large rise in wage inequality. We consider different scenarios regarding how individuals’ expectations evolve during SBTC. Specifically, we study the case where individuals immediately realize the advent of SBTC (perfect foresight), and the case where they initially underestimate the future growth of the price of human capital (pessimistic priors), but learn the truth in a Bayesian fashion over time. Lack of perfect foresight appears to have little effect on the main results of the paper. Overall, the model shows promise for explaining a diverse set of wage distribution trends observed since the 1970s in a unifying human capital framework.
Sujeito: J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, E25 - Aggregate Factor Income Distribution, J31 - Wage Level and Structure; Wage Differentials, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 536 Abstract:
During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.
Palavra-chave: Search and matching, Human capital, Employment, and Debt constraints Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, J21 - Labor Force and Employment, Size, and Structure, and J64 - Unemployment: Models, Duration, Incidence, and Job Search
Creator: Ohanian, Lee E., Restrepo-Echavarria, Paulina, and Wright, Mark L. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 563 Abstract:
After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets — rather than domestic or international capital markets — account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia’s rapid growth.
Palavra-chave: Labor markets, Domestic capital markets, Capital flows, and International capital markets Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, F41 - Open Economy Macroeconomics, F21 - International Investment; Long-term Capital Movements, and J20 - Demand and Supply of Labor: General
Creator: Cagetti, Marco and De Nardi, Mariacristina Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 322 Abstract:
Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in the presence of borrowing constraints. We construct a model that matches wealth inequality very well, for both entrepreneurs and non-entrepreneurs, and find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital, and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.
Palavra-chave: Entrepreneurship, Inequality, Borrowing constraints, and Wealth Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, H20 - Taxation, Subsidies, and Revenue: General, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, and H32 - Fiscal Policies and Behavior of Economic Agents: Firm
Creator: Cagetti, Marco and De Nardi, Mariacristina Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 340 Abstract:
Entrepreneurship is a key determinant of investment, saving, and wealth inequality. We study the aggregate and distributional effects of several tax reforms in a model that recognizes this key role and that matches the large wealth inequality observed in the U.S. data. The aggregate effects of tax reforms can be particularly large when they affect small and medium-sized businesses, which face the most severe financial constraints, rather than big businesses. The consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system insulates smaller businesses from the negative effects of estate taxation, minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing the progressivity of the income tax generates large increases in output, at the cost of large increases in wealth concentration.
Palavra-chave: Entrepreneurship, Taxation, and Wealth Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, H20 - Taxation, Subsidies, and Revenue: General, and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Creator: Krueger, Dirk and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 363 Abstract:
Using data from the Consumer Expenditure Survey, we first document that the recent increase in income inequality in the United States has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which has increased significantly for income but little for consumption. We then develop a simple framework that allows us to analytically characterize how within-group income inequality affects consumption inequality in a world in which agents can trade a full set of contingent consumption claims, subject to endogenous constraints emanating from the limited enforcement of intertemporal contracts (as in Kehoe and Levine, 1993). Finally, we quantitatively evaluate, in the context of a calibrated general equilibrium production economy, whether this setup, or alternatively a standard incomplete markets model (as in Aiyagari, 1994), can account for the documented stylized consumption inequality facts from the U.S. data.
Palavra-chave: Risk Sharing, Consumption Inequality, and Limited Enforcement Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, D31 - Personal Income, Wealth, and Their Distributions, D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement, G22 - Insurance; Insurance Companies; Actuarial Studies, and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Creator: Kocherlakota, Narayana Rao, 1963- and Pistaferri, Luigi Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 372 Abstract:
Typical incomplete markets models in international economics make two assumptions. First, households are not able to fully insure themselves against country-specific shocks. Second, there is a representative household within each country, so that households are fully insured against idiosyncratic shocks. We assume instead that cross-household risk-sharing is limited within countries, but cross-country risk-sharing is complete. We consider two types of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. We show that the models imply distinct restrictions between the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the United States and the United Kingdom. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The analogous restrictions implied by the representative agent model and the DI model are rejected at conventional levels of significance.
Palavra-chave: Precautionary savings, Real exchange rate, Pareto optimality, and Market incompleteness Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement, and F31 - Foreign Exchange
Creator: Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 379 Abstract:
The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the model. The Sims-Cogley-Nason approach instead compares the structural VARs run on the data to identical structural VARs run on data from the model of the same length as the actual data. Chari, Kehoe, and McGrattan (2006) argue that the inappropriate comparison made by the common approach is the root of the problems in the SVAR literature. In practice, the problems can be solved simply. Switching from the common approach to the Sims-Cogley-Nason ap-proach basically involves changing a few lines of computer code and a few lines of text. This switch will vastly increase the value of the structural VAR literature for economic theory.
Sujeito: C52 - Model Evaluation, Validation, and Selection, E21 - Macroeconomics: Consumption; Saving; Wealth, E27 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications, E37 - Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications, E32 - Business Fluctuations; Cycles, E13 - General Aggregative Models: Neoclassical, C51 - Model Construction and Estimation, C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models, and E17 - General Aggregative Models: Forecasting and Simulation: Models and Applications
Creator: Krueger, Dirk, Mitman, Kurt, and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 532 Abstract:
How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one’s job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
Palavra-chave: Welfare loss from recessions, Social insurance, Wealth inequality, and Great Recession Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, and J65 - Unemployment Insurance; Severance Pay; Plant Closings
Creator: Conesa, Juan Carlos, Costa, Daniela, Kamali, Parisa , Kehoe, Timothy Jerome, 1953-, Nygaard, Vegard M., Raveendranathan, Gajendran, and Saxena, Akshar Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 548 Abstract:
This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We ﬁnd that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we ﬁnd lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we ﬁnd that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.
Palavra-chave: Steady state, Medicare, Transition path, Medicaid, and Overlapping generations Sujeito: I13 - Health Insurance, Public and Private, E21 - Macroeconomics: Consumption; Saving; Wealth, E62 - Fiscal Policy, and H51 - National Government Expenditures and Health
Creator: Kehoe, Timothy Jerome, 1953- and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 414 Abstract:
A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994–95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
Palavra-chave: Sudden stop, Nontradable, Real exchange rate, Developing country crisis, Total factor productivity, Mexico, and Tradable Sujeito: F32 - Current Account Adjustment; Short-term Capital Movements, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, F34 - International Lending and Debt Problems, O54 - Economywide Country Studies: Latin America; Caribbean, F21 - International Investment; Long-term Capital Movements, F43 - Economic Growth of Open Economies, O41 - One, Two, and Multisector Growth Models, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 432 Abstract:
This paper develops a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing, and to decompose inequality into life-cycle shocks versus initial heterogeneity in preferences and productivity. Closed-form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption, hours, and wages. We prove identification and estimate the model with data from the CEX and the PSID over the period 1967–2006. We find that (i) 40% of permanent wage shocks pass through to consumption; (ii) the share of wage risk insured privately increased until the early 1980s and remained stable thereafter; (iii) life-cycle productivity shocks account for half of the cross-sectional variance of wages and earnings, but for much less of dispersion in consumption or hours worked.
Sujeito: E52 - Monetary Policy, E21 - Macroeconomics: Consumption; Saving; Wealth, E31 - Price Level; Inflation; Deflation, and E23 - Macroeconomics: Production
Creator: Schulhofer-Wohl, Sam Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 462 Abstract:
How well do people share risk? Standard risk-sharing regressions assume that any variation in households’ risk preferences is uncorrelated with variation in the cyclicality of income. I combine administrative and survey data to show that this assumption is questionable: Risk-tolerant workers hold jobs where earnings carry more aggregate risk. The correlation makes risk-sharing regressions in the previous literature too pessimistic. I derive techniques that eliminate the bias, apply them to U.S. data, and find that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero.
Palavra-chave: Imperfect insurance, Heterogeneity, Risk preferences, and Risk sharing Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Guvenen, Fatih and Smith, Anthony Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 485 Abstract:
This paper uses the information contained in the joint dynamics of individuals’ labor earnings and consumption-choice decisions to quantify both the amount of income risk that individuals face and the extent to which they have access to informal insurance against this risk. We accomplish this task by using indirect inference to estimate a structural consumption-savings model, in which individuals both learn about the nature of their income process and partly insure shocks via informal mechanisms. In this framework, we estimate (i) the degree of partial insurance, (ii) the extent of systematic differences in income growth rates, (iii) the precision with which individuals know their own income growth rates when they begin their working lives, (iv) the persistence of typical labor income shocks, (v) the tightness of borrowing constraints, and (vi) the amount of measurement error in the data. In implementing indirect inference, we find that an auxiliary model that approximates the true structural equations of the model (which are not estimable) works very well, with negligible small sample bias. The main substantive findings are that income shocks are not very persistent, systematic differences in income growth rates are large, individuals have substantial amounts of information about their income growth rates, and about one-half of income shocks are effectively smoothed via partial insurance. Putting these findings together, we argue that the amount of uninsurable lifetime income risk that individuals perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets.
Palavra-chave: Persistence , Labor income risk, Indirect Inference Estimation, Heterogeneous income profiles, and Idiosyncratic shocks Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, C33 - Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models, D81 - Criteria for Decision-Making under Risk and Uncertainty, and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Creator: Heathcote, Jonathan and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 508 Abstract:
Between 2007 and 2013, U.S. households experienced a large and persistent decline in net worth. The objective of this paper is to study the business cycle implications of such a decline. We first develop a tractable monetary model in which households face idiosyncratic unemployment risk that they can partially self-insure using savings. A low level of liquid household wealth opens the door to self-fullfilling fluctuations: if wealth-poor households expect high unemployment, they have a strong precautionary incentive to cut spending, which can make the expectation of high unemployment a reality. Monetary policy, because of the zero lower bound, cannot rule out such expectations-driven recessions. In contrast, when wealth is sufficiently high, an aggressive monetary policy can keep the economy at full employment. Finally, we document that during the U.S. Great Recession wealth-poor households increased saving more sharply than richer households, pointing towards the importance of the precautionary channel over this period.
Palavra-chave: Self-fulfilling crises, Zero lower bound, Aggregate demand, Business cycles, Precautionary saving, and Multiple equilibria Sujeito: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, E21 - Macroeconomics: Consumption; Saving; Wealth, and E52 - Monetary Policy
Creator: Glover, Andrew, Heathcote, Jonathan, Krueger, Dirk, and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 498 Abstract:
We construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of big recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline 2.4 times as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is close to welfare neutral for households in the 20–29 age group, but translates into a large welfare loss of more than 8% of lifetime consumption for households aged 70 and over.
Palavra-chave: Aggregate risk, Asset prices, Great Recession, and Overlapping generations Sujeito: D58 - Computable and Other Applied General Equilibrium Models, E21 - Macroeconomics: Consumption; Saving; Wealth, D31 - Personal Income, Wealth, and Their Distributions, and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Creator: Krueger, Dirk, Mitman, Kurt, and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 529 Abstract:
The goal of this chapter is to study how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the U.S. Great Recession of 2007-2009 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence, we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (i.e. they are not hand-to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies, such as unemployment insurance, play in shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles.
Palavra-chave: Wealth Inequality, Recessions, and Social Insurance Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, and J65 - Unemployment Insurance; Severance Pay; Plant Closings
Creator: Chen, Daphne, Guvenen, Fatih, Kambourov, Gueorgui, Kuruscu, Burhanettin, and Ocampo, Sergio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 764 Abstract:
How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.
Palavra-chave: Capital income tax, Wealth taxation, Wealth inequality, Power law models, and Rate of return heterogeneity Sujeito: E21 - Macroeconomics: Consumption; Saving; Wealth, H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, E22 - Investment; Capital; Intangible Capital; Capacity, and E62 - Fiscal Policy
Creator: Boerma, Job and Karabarbounis, Loukas Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 763 Abstract:
During the past two decades, households experienced increases in their average wages and expenditures alongside with divergent trends in their wages, expenditures, and time allocation. We develop a model with incomplete asset markets and household heterogeneity in market and home technologies and preferences to account for these labor market trends and assess their welfare consequences. Using micro data on expenditures and time use, we identify the sources of heterogeneity across households, document how these sources have changed over time, and perform counterfactual analyses. Given the observed increase in leisure expenditures relative to leisure time and the complementarity of these inputs in leisure technology, we infer a significant increase in the average productivity of time spent on leisure. The increasing productivity of leisure time generates significant welfare gains for the average household and moderates negative welfare effects from the rising dispersion of expenditures and time allocation across households.
Palavra-chave: Leisure productivity, Inequality, Consumption, and Time use Sujeito: J22 - Time Allocation and Labor Supply, D10 - Household Behavior: General, D60 - Welfare Economics: General, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Chen, Peter, Karabarbounis, Loukas, and Neiman, Brent Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 736 Abstract:
The sectoral composition of global saving changed dramatically during the last three decades. Whereas in the early 1980s most of global investment was funded by household saving, nowadays nearly two-thirds of global investment is funded by corporate saving. This shift in the sectoral composition of saving was not accompanied by changes in the sectoral composition of investment, implying an improvement in the corporate net lending position. We characterize the behavior of corporate saving using both national income accounts and firm-level data and clarify its relationship with the global decline in labor share, the accumulation of corporate cash stocks, and the greater propensity for equity buybacks. We develop a general equilibrium model with product and capital market imperfections to explore quantitatively the determination of the flow of funds across sectors. Changes including declines in the real interest rate, the price of investment, and corporate income taxes generate increases in corporate profits and shifts in the supply of sectoral saving that are of similar magnitude to those observed in the data.
Palavra-chave: Cost of capital, Profits, Corporate saving, and Labor share Sujeito: G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, G35 - Payout Policy, E21 - Macroeconomics: Consumption; Saving; Wealth, and E25 - Aggregate Factor Income Distribution