Research Database

It has long been argued that a minimum wage could alleviate efficiency losses from monopsony power. In a general equilibrium framework that quantitatively replicates results from recent empirical studies, we find higher minimum wages can improve welfare, but most welfare gains stem from redistribution rather than efficiency. Our model features oligopsonistic labor markets with heterogeneous workers and firms and yields analytical expressions that characterize the mechanisms by which minimum wages can improve efficiency, and how these deteriorate at higher minimum wages. We provide a method to separate welfare gains into two channels: efficiency and redistribution. Under both channels and Utilitarian social welfare weights the optimal minimum wage is $15, but alternative weights can rationalize anything from $0 to $31. Under only the efficiency channel, the optimal minimum wage is narrowly around $8, robust to social welfare weights, and generates small welfare gains that recover only 2 percent of the efficiency losses from monopsony power.

This note addresses the role of the Taylor principle to solve the indeterminacy of equilibria in economies in which the monetary authority follows an interest rate rule. We first study the role of imposing two additional ad-hoc restrictions on the definition of equilibrium. Imposing the equilibrium to be locally unique never delivers a unique outcome. Imposing the equilibrium to be bounded, renders the outcome unique only if the inflation target is the Friedman rule. Second, we show that the Taylor principle is strongly time inconsistent - in a sense we make very precise - and that policies that implement the Friedman rule are the only sustainable policies.

The racial wealth gap is the largest of the economic disparities between Black and white Americans, with a white-to-Black per capita wealth ratio of 6 to 1. It is also among the most persistent. In this paper, we construct the first continuous series on white-to-Black per capita wealth ratios from 1860 to 2020, drawing on historical census data, early state tax records, and historical waves of the Survey of Consumer Finances, among other sources. Incorporating these data into a parsimonious model of wealth accumulation for each racial group, we document the role played by initial conditions, income growth, savings behavior, and capital returns in the evolution of the gap. Given vastly different starting conditions under slavery, racial wealth convergence would remain a distant scenario, even if wealth-accumulating conditions had been equal across the two groups since Emancipation. Relative to this equal-conditions benchmark, we find that observed convergence has followed an even slower path over the last 150 years, with convergence stalling after 1950. Since the 1980s, the wealth gap has widened again as capital gains have predominantly benefited white households, and income convergence has stopped.

Non-Hispanic whites who do not have a college degree have experienced an increase in “deaths of despair” – deaths caused by suicide, drug use, and alcohol use. Yet, deaths of despair are proportionally largest among Native Americans and the rate of increase of these deaths matches that of non-Hispanic white Americans. Native American women and girls face the largest differentials: deaths of despair comprise over 10% of all deaths among Native American women and girls – almost four times as high as the proportion of deaths for non-Hispanic white women and girls. However, the factors related to these patterns are very different for Native Americans than they are for non-Hispanic white Americans. Improvements in economic conditions are associated with decreased deaths from drug use, alcohol use, and suicide for non-Hispanic white Americans. On the other hand, in counties with higher labor force participation rates, lower unemployment, and higher ratios of employees to residents, there are significantly higher Native American deaths attributed to suicide and drug use. These results suggest that general improvements in local labor market conditions may not be associated with a reduction in deaths of despair for all groups.

The #MeToo movement has demonstrated that assaults between colleagues are an internationally relevant phenomenon. In this paper, we link every police report in Finland to administrative data to identify assaults between colleagues, and the economic consequences for victims, perpetrators, and firms. This new approach to observe when one colleague attacks another overcomes previous data constraints limiting evidence on this phenomenon to self-reported surveys that do not identify perpetrators. We document large, persistent labor market impacts of between-colleague violence on victims and perpetrators. Male perpetrators experience substantially weaker consequences after attacking female colleagues. Perpetrators’ relative economic power in male-female violence partly explains this asymmetry. Turning to broader implications for firm recruitment and retention, we find that male-female violence causes a decline in women at the firm, both because fewer new women are hired and current female employees leave. There is no change in hiring from within existing employees’ networks, ruling out supply-side explanations for the reduction in new female hires via "whisper networks". Management practices play a key role in mediating the impacts on the wider workforce. Only male-managed firms lose women. Female managers do one important thing differently: fire perpetrators.

Emerging markets have experienced large human and economic costs from COVID-19, and their tight fiscal space has limited the support extended to their citizens. We study the impact of an epidemic on economic and health outcomes by integrating epidemiological dynamics into a sovereign default model. The sovereign’s option to default tightens fiscal space and results in an epidemic with limited mitigation and depressed consumption. A quantitative analysis of our model accounts well for the dynamics of fatalities, social distancing, consumption, sovereign debt, and spreads in Latin America. We find that because of default risk, the welfare cost of the pandemic is about a third higher than it is in a version of the model with perfect financial markets. We study debt relief programs and find a compelling case for their implementation. These programs deliver large social gains, improving health and economic outcomes for the country at no cost to international lenders or financial institutions.

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.

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.

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.

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.

Using 50 years of data for emerging markets, we document that sovereign governments partially default often and with varying intensity, resulting in lengthy default episodes with hump-shaped patterns for partial default and debt. Default episodes lead to haircuts for lenders but not to reductions in debt, because the defaulted debt accumulates and the sovereign continues to borrow. We present a theory of partial default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds, as the sovereign chooses its intensity and duration, but it also amplifies debt crises as the defaulted debt accumulates at increasingly high interest rates. This theory rationalizes the patterns of default episodes, the heterogeneity of partial default, and partial default's comovements with spreads, debt, and output. We conduct policy counterfactuals in the form of pari passu and no-dilution clauses and debt relief policies, and we discuss their welfare implications.

We analyze the magnitude and persistence of the racial wealth gap using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous beliefs about risky returns, reflecting differences in dynasties' investment experiences over time. Feeding the exclusion of Black dynasties from labor and capital markets into the model as the only driving force, we find that the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We explore how the future trajectory of the racial wealth gap might change in response to various policies. Wealth transfers to all Black dynasties that eliminate the average wealth gap today do not lead to long-run wealth convergence. The logic is that centuries-long exclusions lead Black dynasties to hold pessimistic beliefs about risky returns and to forgo investment opportunities after the wealth transfer. Investment subsidies toward Black entrepreneurs are more effective than wealth transfers in permanently eliminating the racial wealth gap.

This paper studies the welfare effects of encouraging rural-urban migration in the developing world. To do so, we build and analyze a dynamic general-equilibrium model of migration that features a rich set of migration motives. We estimate the model to replicate the results of a field experiment that subsidized seasonal migration in rural Bangladesh, leading to significant increases in migration and consumption. We show that the welfare gains from migration subsidies come from providing better insurance for vulnerable rural households rather than correcting spatial misallocation by relaxing credit constraints for those with high productivity in urban areas that are stuck in rural areas.

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 return heterogeneity, we revisit this question. With heterogeneity, the two tax systems typically 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 welfare. Turning to optimal taxation, the optimal wealth tax (OWT) is positive and yields large welfare gains by raising efficiency and lowering inequality. In contrast, the optimal capital income tax (OKIT) is negative—a subsidy—and delivers lower welfare gains than OWT, owing to the welfare losses from higher inequality. Furthermore, when the transition path is considered, the gains from OKIT turn into significant welfare losses for existing cohorts, whereas OWT continues to deliver robust welfare gains. These results suggest that moderate wealth taxation may be a more appealing alternative than capital income taxation, which can be significantly more distorting under return heterogeneity than under the equal-returns assumption.

We study the COVID-19 epidemic in emerging markets that face financial frictions and its mitigation through social distancing and vaccination. We find that restricted vaccine availability in emerging markets, as captured by limited quantities and high prices, renders the pandemic exceptionally costly in these countries, compared with economies without financial frictions. Improved access to financial markets enables a better response to the delay in vaccine supplies, as it supports more stringent social distancing measures before wider vaccine availability. We show that financial assistance programs to such financially constrained countries can increase vaccinations and lower fatalities, at no present-value cost to the international community.

The appendix accompanies Staff Report 581: Optimal Cooperative Taxation in the Global Economy.

We show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining the Mussa puzzle and the Backus-Smith puzzle, two of the main puzzles in the international economics literature.

We develop a framework with rich worker heterogeneity, firm monopsony power, and putty-clay technology to study the distributional impact of the minimum wage in the short and long run. Our production technology is disciplined to be consistent with the small estimated employment effects of the minimum wage in the short run and the large estimated elasticities of substitution across inputs in the long run. We find that in the short run, a large increase in the minimum wage has a small effect on employment and therefore increases the labor income of the workers who were earning less than the new minimum wage. In the long run, however, the minimum wage has perverse distributional implications in that it reduces the employment, income, and welfare of precisely the low-income workers it is meant to help. Nonetheless, these long-run effects take time to fully materialize because firms slowly adjust their mix of inputs. Existing transfer programs, such as the earned income tax credit (EITC), are more effective at improving long-run outcomes for workers at the low end of the wage distribution. But combining existing programs with a modest increase in the minimum wage generates even larger welfare gains for low-earning workers.

We consider an economy with perpetual youth and inelastic labor supply that grows endogenously. Consumers are subject to idiosyncratic capital accumulation risk and markets are incomplete. The government purchases consumption goods, makes transfers in the form of baby bonds, and it can use consumption and wealth taxes. The wealth distribution is given in closed form. When the intertemporal elasticity of substitution ɛ is equal to 1, the government can run a permanent primary deficit, up to a finite upper bound, if the coefficient of relative risk aversion is high enough and the factor share of labor is not too close to 1. This causes the risk-free rate r to be below the growth rate g of the economy. But the government can implement Pareto improvements when r - g does not exceed zero by enough. If ɛ ≠ 1, then there may not be an upper bound on the permanent primary deficits of the government. If ɛ Є (0,1), this happens when the economy is relatively unproductive, and then taking deficits to be very large makes all consumers worse off. If ɛ Є (1,∞), very large deficits are possible if the economy is sufficiently productive, and then they imply unbounded Pareto improvements.

This paper posits an information channel as the explanation for sudden inflations. Consumers saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumers' behavior and prices. This setting explains why there can be long stretches of time during which government surpluses have large movements with little inflation response; yet, at some point, something snaps, and a sudden inflation takes off that is strongly responsive to incoming fiscal news.

How should countries cooperate in setting fiscal and trade policies when government expenditures must be financed with distorting taxes? We show that even if countries cannot make explicit transfers to each other, every point on the Pareto frontier is production efficient, so that international trade and capital flows should be effectively free. Trade agreements must be supplemented with fiscal policy agreements. Residence-based income tax systems have advantages over source-based systems. Taxing all household asset income at a country-specific uniform rate and setting the corporate income tax to zero yield efficient outcomes. Value-added taxes should be adjusted at the border.

Between 1880 and 1920, the US agricultural employment share fell from 50% to 25%. However, despite aggregate demand shifting away from their sector of specialization, rural labor markets saw faster wage growth and industrialization than non-agricultural parts of the US. We propose a spatial model of the structural transformation to analyze the link between aggregate structural change and local economic development. The calibrated model shows that rural areas adapted to the decline of the agricultural sector by adopting technologies already in use in urban locations. Without such catchup growth, economic development would have been urban-biased and spatial inequality would have increased.

There have been growing concerns about long-haulers or individuals with long-term COVID-19 health complications (long-haul COVID). While the medical field has been investigating the health complications, there has been limited research on the relationship between long-haul COVID and labor market outcomes. To investigate this relationship, I used the University of Southern California Understanding America Study COVID-19 longitudinal survey to provide a snapshot of mid-2021. I first find about 24.1% of individuals who have had COVID are long-haulers and 25.9% of long-haulers reported that their long-haul COVID affected employment or work hours. I then find that a majority of these affected long-haulers remained employed and in same employment type. But I find that their mean change in work hours and paycheck declined. Afterwards, I tested whether long-haul COVID is associated with negative changes in labor market outcomes. When I combined long-haulers who reported that their health complications did or did not affect work, I failed to find that long-haulers are less likely to be employed relative to individuals without prior COVID infection. But, when I discern long-haulers by whether long-haul COVID affected work, I find that long-haulers who reported long-haul COVID affected work are 10 percentage points less likely to be employed and, on average, work 50% fewer hours than individuals without prior COVID infection. In contrast, I failed to find evidence that affected long-haulers receive a lower paycheck earning relative to individuals without prior COVID infection. Lastly, when comparing these affected long-haulers against similar individuals, I find evidence that they are more impacted in their employed status and work hours. Due to limitations, future data collection and research would provide a more robust picture.