Opportunity and Inequality across Generations

March 30, 2022

By Winfried Koeniger and Carlo Zanella


We analyze how intergenerational mobility and inequality would change relative to the status quo if dynasties had access to optimal insurance against low ability of future generations. Based on a dynamic, dynastic Mirrleesian model, we find that insurance against intergenerational ability risk increases in the social optimum relative to the status quo. This implies less intergenerational mobility in terms of welfare but no quantitatively significant change in earnings mobility. Earnings mobility is thus similar across economies with different incentives and welfare, illustrating that changes in earnings mobility cannot be interpreted readily in welfare terms without further analysis.

I must confess that I have a hard time buying that it can be socially optimal to insure successful people against the failures of their offspring. It is natural that talent and entrepreneurship regress to the mean over generations, and successful dynasties insure themselves against that risk by building wealth and buying education and entrance into the right circles. Why would society subsidize that if it leads to lower aggregate outcomes? I think the issue is that when we think about an untalented rich kid going to a top school, it is taking away the spot of a talented poor kid, thus hurting the social outcome. There is not such trade-off in the model. Or maybe I am just confused, there are a lot of margins in play here.


Minimum Wage Shocks in an Estimated DSGE Model with Underreporting

March 25, 2022

By Alisher Tolepbergen


We build and estimate a New Keynesian DSGE model to analyze the macroeconomic effects of minimum wage shocks in an economy characterized by a high degree of wage underreporting. The estimation results suggest that the effect of the minimum wage shocks to all economic aggregates but employment is not significant. The impulse response analysis shows that a higher degree of underreporting results in less responsive dynamics to the minimum wage shocks. In addition, the magnitude of the responses is also affected by the share of Non-Ricardian households in the economy. Overall, we find that an increase in the minimum wage in the economy with a high degree of underreporting does not significantly affect the dynamics of macroeconomic variables.

Not all DSGE models need to be about the US or other western economies. There are good insights to be gained for other economies. This paper is using data from Kazakhstan to study how minimum wages can influence the economy when employers quite systematically report lower wages. Not much. This is mainly due to the leakage, as a simulation with little underreporting show some impact. Thus, while on the surface the economy may show higher wages after an increase in the minimum wage, not much actually changed.

Worker-Firm Screening and the Business Cycle

March 21, 2022

By Jake Bradley


There has been a substantial body of work modeling the co-movement of employment, vacancies, and output over the business cycle. This paper builds on this literature, and informed by empirical investigation, models worker and firm search and hiring behavior in a manner consistent with recent micro-evidence. Consistent with empirical findings, for a given vacancy, a firm receives many applicants, and chooses their preferred candidate amongst the set. Similarly, workers in both unemployment and employment, can evaluate many open vacancies simultaneously and choose to which they make an application. Business cycles are propagated through turbulence in the economy. Structural parameters of the model are estimated on U.S. data, targeting aggregate time series. The model can generate large volatility in unemployment, vacancies, and worker flows across jobs and employment state. Further, it provides a theoretical mechanism for the shift in the Beveridge curve after the 2008 recession – a phenomenon often referred to as the jobless recovery. That is, persistently low employment after the recession, despite output per worker and vacancies having returned to pre-crisis levels.

What attracted me to this paper is the promise to explain the job-less recovery. I understand that the mechanism at play is that half of job matches are with workers who currently have a job. In a sense, a recovery is happening with workers reallocating to more efficient jobs, and thus little change in the number of workers. Fine. But then, why did this not happen in previous recoveries? What changed? The paper left me hanging there.

On the Inefficiency of Non-Competes in Low-Wage Labor Markets

March 15, 2022

By Bart Hobijn, André Kurmann and Tristan Potter


We study the efficiency of non-compete agreements (NCAs) in an equilibrium model of labor turnover. The model is consistent with empirical studies showing that NCAs reduce turnover, average wages, and wage dispersion for low-wage workers. But the model also predicts that NCAs, by reducing turnover, raise recruitment and employment. We show that optimal NCA policy: (i) is characterized by a Hosios like condition that balances the benefits of higher employment against the costs of inefficient congestion and poaching; (ii) depends critically on the minimum wage, such that enforcing NCAs can be efficient with a sufficiently high minimum wage; and (iii) alone cannot always achieve efficiency, also true of a minimum wage-yet with both instruments efficiency is always attainable. To guide policy makers, we derive a sufficient statistic in the form of an easily computed employment threshold above which NCAs are necessarily inefficiently restrictive, and show that employment levels in current low-wage U.S. labor markets are typically above this threshold. Finally, we calibrate the model to show that Oregon’s 2008 ban of NCAs for low-wage workers increased welfare, albeit modestly (by roughly 0.1%), and that if policy makers had also raised the minimum wage to its optimal level (a 30% increase), welfare would have increased more substantially-by over 1%.

While NCAs could make sense for jobs where firms have heavily invested in a worker or where inside knowledge becomes an issue, they are difficult to justify for lower skill jobs. This papers lays out nicely that they serve to depress wages and overall welfare. A 1% welfare impact is not negligible, especially when you consider that the most affected are a fraction of the population, and the poorest one.

Robots and Humans: The Role of Fiscal and Monetary Policies in an Endogenous Growth Model

March 12, 2022

By Óscar Afonso, Elena Sochirca and Pedro Cunha Neves


In this paper we develop a dynamic general equilibrium growth model in which robots can replace unskilled labor and: i) the government uses tax revenues to invest in social capital and compensate those who do not work; ii) there is monetary policy with cash-in-advance restrictions that impact, for example, wages; iii) social capital increases skilled-labor productivity and facilitates the technological-knowledge progress. Our results confirm that by reducing the unskilled-to-skilled-labor ratio, the robotization process increases the skill premium (and thus wage inequality between skilled and unskilled workers), stimulates economic growth and improves welfare. We also show that fiscal and monetary policies can have important roles in amplifying or mitigating these effects of the robotization process and that implementing specific policies can generate an important efficiency-equity trade-off. Despite the existence of this trade-off, the long-run economic growth is higher with than without the fiscal and monetary policies, which underlines their crucial role in attenuating the negative aspects of Industry 4.0.

Interesting analysis of robotization. It is no surprise that it leads to a widening skill wage-gap. I am surprised to see that monetary policy has a role to play here.

Consumption taxation to finance pension payments

March 10, 2022

By Kilian Ruppert, Mattias Schön and Nikolai Stähler


This paper assesses how a permanent shift from financing a public pay-as-you-go pension by direct (labour income) taxation towards financing it by indirect (consumption) taxation affects the economy and welfare. To this end, we use an overlapping-generations-augmented two-region general equilibrium framework with search frictions on the labour market. The analysed tax reform partially shifts the tax burden from domestic to foreign producers and lowers marginal costs of domestic production and generates positive domestic macroeconomic effects. In addition,the partial postponement of a household’s tax burden to retirement leads to higher savings and increases domestic assets. However, for some time after implementation of the tax reform, the policy-induced increase in consumption costs makes retirees and households close to retirement worse off. Moreover, the increase in domestic net foreign assets implies that consumption of foreign households eventually falls, which stands in contrast to what is commonly found in models without an endogenous savings motive.

Great analysis, and I am sure one can improve the scheme with 1) time-varying tax rates to smooth the transition (in the spirit of the work of Conesa and Garriga) and 2) tax some goods more than others (sin taxes dome to mind).

Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach

March 7, 2022

By Wenting Song and Samuel Stern


This paper provides direct evidence of the importance of firm attention to macro-economic dynamics. We construct a text-based measure of firm attention to macro-economic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. We use the measure to calibrate a quantitative model of rationally inattentive firms with heterogeneous costs of information. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.

Neat paper. First it constructs a measure of firm (in)attention, then uses it to show that it varies systematically over the cycle, that it matters, and that it should influence monetary policy. That is a lot to pack in a single paper. And more to add in the complex set of indicators a policy maker needs to consider.