Aggregate Demand, Idle Time, and Unemployment

From Pascal Michaillat and Emmanuel Saez:

This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman (1971) general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms’ employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statistics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness.

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Is Macroeconomics Hard? Brad DeLong

Is Macroeconomics Hard? Brad DeLongs Grasping Reality….

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How big cities that restrict new housing harm the economy

Here’s an interesting article/interview with Enrico Moretti by Emily Badger.

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Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses

From Emmanuel Saez:

This paper analyzes optimal income transfers for low incomes. Labor supply responses are modeled along the intensive margin (intensity of work on the job) and along the extensive margin (participation into the labor force). When behavioral responses are concentrated along the intensive margin, the optimal transfer program is a classical Negative Income Tax program with a substantial guaranteed income support and a large phasing-out tax rate. However, when behavioral responses are concentrated along the extensive margin, the optimal transfer program is similar to the Earned Income Tax Credit with negative marginal tax rates at low income levels and a small guaranteed income. Carefully calibrated numerical simulations are provided.

Diamond Saez JEP Appendix Figure 3 copy

Figure from Diamond-Saez JEP 2011 (here).

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Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence

From Jesse Rothstein:

The EITC is intended to encourage work. But EITC-induced increases in labor supply may drive wages down. I simulate the economic incidence of the EITC. In each scenario that I consider, a large portion of low-income single mothers’ EITC payments is captured by employers through reduced wages. Workers who are EITC ineligible also see wage declines. By contrast, a traditional Negative Income Tax (NIT) discourages work, and so induces large transfers from employers to their workers. With my preferred parameters, $1 in EITC spending increases after-tax incomes by $0.73, while $1 spent on the NIT yields $1.39.

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Sources of Geographic Variation in Health Care: Evidence from Patient Migration

From Amy Finkelstein, Matthew Gentzkow, and Heidi Williams:

We study the drivers of geographic variation in US healthcare utilization, using an empirical strategy that exploits migration of Medicare patients to separate the role of demand and supply factors. Our approach allows us to account for demand differences driven by both observable and unobservable patient characteristics. We find that 40-50 percent of geographic variation in utilization is attributable to patient demand, with the remainder due to supply-side factors. Demand differences do not appear to result from differences in past experiences, and appear to be explained to a significant degree by differences in patient health.

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The Regional Evolution of Prices and Wages During the Great Recession

From Martin Beraja, Erik Hurst and Juan Ospina: 

In this paper, we examine the evolution of prices, wages, employment and output across U.S. states during the Great Recession. To do so, we use over 76 billion price observations from the Nielsen Retail Scanner Database between 2006 and 2011 to construct state speciÖc price indices. We document that local retail prices, controlling for good and store Öxed e§ects, varies with local economic conditions. In particular, we Önd that a one percentage point increase in the unemployment rate between 2007 and 2010 was associated with a 0.4 percentage point lower price growth during the same period. Nominal wages also responded di§erentially across U.S. states during the 2007-2010 period. A 1 percentage point increase in the unemployment rate was associated with a 1.2 percentage point lower nominal wage growth during the same period. However, we conclude that failure to account for the di§erential local ináation rates leads one to overstate the variation in real wage growth across U.S. states during the recession. We conclude by constructing a multi-region New Keynesian model with both price and wage rigidity. Using the regional variations in prices and wages, we estimate the relative importance of price and wage stickiness as a nominal rigidity in explaining the regional di§erences in employment. 

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