Transcript Growth Accounting - Booth School of Business

TOPIC 2
The Supply Side of the Economy
Goals of Lecture 2
• Introduce the supply side of the macro economy.
• Discuss how countries grow and why some countries grow faster than others.
• Discuss labor productivity
o What does it mean?
o How does it respond coming out of recessions?
• Determine how wages are set in an economy. Determine why people work.
• Understand where unemployment comes from.
2
The Production Function
•
GDP (Y) is produced with capital (K, price-weighted) and labor (N, hours):
Y = A F(K,N)
•
Sometimes, I will modify the production function such that:
Y = A F(K,N, other inputs) – where other inputs include energy/oil!
•
Realistic Example is a Cobb Douglas function for F(.):
Y = A K.3 N.7
A is Total Factor Productivity (TFP), an index of efficiency (technology)
MUST READ: NOTES 3 (my text posted on the teaching page) on the aggregate
production function
3
Measurement
•
Y is GDP (measured in dollars). As noted above, we want to measure Y in “real”
dollars.<<you should know what this means from Notes 1 of the text>>.
•
For our Cobb Douglas production function (previous slide), N and K are both measured
in dollars.
– N often is measured in total wage bill
– K often is measured as the replacement cost of capital
• However, in practice, N can be measured in different ways (hours worked,
number of workers).
– Wage bill is the preferred method (takes into account “skill” differentials).
– However, we will often talk about standard of livings which is income per capita
(Y/N ; where Y is income and N is some population measure).
4
Features of the Aggregate Production Function
Define MPN = Marginal Product of Labor = dY/dN
Define MPK = Marginal Product of Capital = dY/dK
Math Note: You should be comfortable taking these simple partial derivatives– if you are
not, practice this for the quizzes and exams.
Diminishing Marginal Products
From Cobb-Douglas: MPN = .7 A (K/N).3 = .7 (Y/N)
Fixing A and K, MPN falls when N increases
MPK = .3 A (N/K).7 = .3 (Y/K)
Fixing A and N, MPK falls when K increases
Complementarity Across Inputs
Increasing A or K, increases MPN
Increasing A or N, increases MPK
5
Two Measures of Productivity
•
Labor Productivity = Y/N = A (K/N).3
Driven by A and K/N (usually reported in press)
•
Total Factor Productivity (TFP) = A = Y/F(K,N)
•
Basically TFP is a ‘catch-all’ for anything that affects output other than K and N.
–
–
–
–
–
–
–
–
Work week of labor and capital
Quality of labor and capital
Regulation
Infrastructure
Competition
Specialization
Innovation (including innovation in management practices)
Changes in “discrimination” or “culture”
•
Some components of TFP tends to be pro-cyclical
•
(Definition of Pro-cyclical: Variable increases when Y is high, decreases when Y is low)
6
Sub-Section A
Economic Growth
Growth Accounting
Y = A K.3 N .7 (our production function)
%ΔY = %ΔA + .3%ΔK + .7%ΔN
Output, in a country grows from:
Growth in TFP (see entrepreneurial ability, education, roads, technology, etc.)
Growth in Capital (machines, equipment, plants)
Growth in Hours (workforce, population, labor participation, etc).
Perhaps, we care about growth in Y/pop or Y/N (per capita output).
%Δ(Y/pop) = %ΔA + .3%Δ(K/pop) + .7%Δ(N/pop)
or
%Δ(Y/N) = %ΔA + .3%Δ(K/N)
8
Productivity During Recession
Y/N evolves by:
Y falling (holding N constant) decreases Y/N
N falling (holding Y constant) increases Y/N
In recessions, both Y and N fall.
The question of interest:
Does Y or N fall more during a recession?
9
Output Per Worker (All Sectors): 1970Q1 – 2012Q2
10
Output Per Worker: Coming Out of Recessions
From Mulligan (2009): What Caused The Recession of 2008? Hints from Labor Productivity
11
Output Per Worker (Manufacturing): 1970Q1 – 2012Q2
12
Summary
During recent recessions:
N falls more than Y
Y/N (a measure of productivity) actually increases
We are producing more stuff – with less workers – during the recession!
Note:
The fact that productivity increases during recent recoveries is directly
linked to the fact that recent recoveries have been “jobless” (discussed in
lecture 1). The economy recovers but employment lags.
Why are there jobless recoveries?
13
The Role of Investment and Growth
Does a one time increase in investment today increase Y/N today? YES!
Does a one time increase in investment today cause a sustained increase in Y/N
into the future? No!
Back of our mind equations:
S = I + NX (From the first lecture).
Notice the link between saving
and investment.
K(t+1) = (1-δ) K(t) + I(t)
or
ΔK(t, t+1) = I(t) - δ K(t)
Definition of Capital Stock Evolution
All else equal (i.e. holding N constant), increasing I causes K tomorrow to
increase causing K/N tomorrow to increase (i.e. Y/N tomorrow increases).
14
Time Path of Capital Stock: One Time Increase in I
K
No investment
No investment
t+1
time
Suppose there is a one time increase in investment at time t (perhaps due to an investment
tax credit). Suppose no investment either prior to or after the tax credit.
15
Can Higher Investment Lead to Infinite Growth?
Does a sustained increase in investment increase Y/N today? YES!
Does a sustained increase in investment cause a sustained increase in Y/N? No!
Suppose I is fixed at a high level and that K initially is sufficiently small.
K grows if I > δ K: But, notice that δK is also growing each period.
(Summary: To start, higher I will lead to higher K and Y/N will increase).
Eventually, however, I will converge towards δK More and more of the
investment is going to replace outdated capital and the capital stock will grow
by smaller and smaller rates. The increase in Y/N will converge back to zero.
Summary: High levels of investment will increase the capital stock and output,
but both K and Y will eventually converge to a fixed level.
16
Time Path of K: Permanent Increase in I
K
The new level of investment has successively less effect
due to growing depreciation of the capital stock.
No investment
t+1
time
Suppose there is a permanent increase in investment at time t. Suppose no investment
prior to t. In all periods after t, the level of investment remains fixed at the level in t.
17
Can Higher Investment Growth Cause Infinite Growth?
If a one time increase in I gives an increase in Y, why not continuously raise I to
higher and higher amounts??? Answer: Diminishing MPK!!!
MPK = .3 A (N/K) .7; As K increases, MPK falls.
As K goes to infinity, MPK goes to zero (Y stops increasing).
Suppose, we keep rising I (each year), K will increase by the amount of I (after
controlling for depreciation), but Y will increase by continuously smaller and
smaller amounts.
Remember Y = C + I + G + NX. I/Y (investment rate) is bounded by 1 (if you
invest all your output). This caps the increase in I. I cannot grow forever!
Continuously increasing I will NOT lead to sustained economic growth!
NOTE: Investment decisions are NOT made in the dark (i.e. something must
drive firm investment!!!!!)
18
Reading: Notes 5 of the text
What Causes Sustained Growth ?
Sustained Increases in the growth of A are the only thing that can cause a
sustained growth in Y/N.
Empirically, when a country exhibits faster Y/N growth …..
33% typically comes from growth in K/N
67% typically comes from growth in A
(where N = employment (not hours) - limited data).
19
Growth Across Countries
Most developed economies grow at the same rate that the “technological frontier”
grows.
Some helpful definitions:
Convergence – countries inside of the technological frontier move towards the
technological frontier.
Divergence – countries inside of the technological frontier grow at a rate less than
the technological frontier.
Reading: Article 96 from the reading list
20
Distribution of World GDP in 2009 (IMF, $)
21
Distribution of World GDP in 2009 (IMF, $)
Top 10
Median
Bottom 10
Qatar
88,559
Ecuador
7,776
Togo
858
Luxembourg
81,383
China
7,519
Malawi
827
Singapore
56,522
Albania
7,453
Sierra Leone
807
Norway
52,013
El Salvador
7,430
Niger
755
Brunei
48,892
Tonga
7,275
Cent. Afric. Repub.
745
UAE
48,821
Guyana
6,964
Eritrea
681
U.S.
47,284
Namibia
6,953
Zimbabwe
434
Hong Kong
45,736
Algeria
6,950
Burundi
411
Switzerland
41,663
Turkmenistan
6,785
Liberia
392
Netherlands
40,765
Ukraine
6,712
Congo
328
22
Some Data: Distribution of World GDP in 2000
From Barro, 2003 – includes 147 countries. Horizontal axis is a log scale.
All data are in 1995 U.S. dollars.
23
Some Data: Distribution of World GDP in 1960
From Barro, 2003 – includes 113 countries. Horizontal axis is a log scale.
All data are in 1995 U.S. dollars.
24
Growth Rate of GDP Per Capita: 1960 - 2000
From Barro, 2003 – includes 111 countries.
25
Relative Growth Rate of GDP Per Capita: 1960 - 1988
U.S. is anchored at 1 in both years. Countries above the line have made gains relative to U.S.
26
Convergence of Income Across U.S. States: 1940 - 1980
Historical Trends in Convergence
Unadjusted 1940-1960
1
MS
.8
ARAL
ND
SD
OK
KY
NC
GA NM
TN
LA
SC
KS
NE
TX
.6
WV
UT
MOCO
IA
MNWI
ID
VA AZ
IN
WY
FL
NHOR
VT MT
ME
WA
OH
PA MI
IL
.4
MD
CA
NV
MA NJ NY
CT
RI
.2
DE
2000
4000
6000
8000
Per Capita Income 1940
Fitted values
10000
12000
gr_ipc_40_60
27
Convergence of Income Across U.S. States: 1980 - 2000
Recent Trends in Convergence
Unadjusted 1980-2000
.5
MA
NH
CT
NC GA
NJ
.4
VT
SCNDSD TN
ME
AL
KY
MS
MO
IN
.3
AR
UTID
WV
.2
RI
NE
NM
IA
AZ
MN
VA
PA
FL
TX
MI
WI
OH
KSOR
NY
CO
WAIL
DE
CA
LA
MT
MD
NV
OK
.1
WY
15000
20000
Per Capita Income 1980
Fitted values
25000
gr_ipc_80_00
28
The Importance of Economic Growth
Baseline:
Y/person in U.S. grows roughly by 2%/year (real).
Assume a constant growth rate of 2% per year (real) for next 30 years.
After 30 years, U.S. Y/person will be 81% higher than today.
Scenario 1: Major recession today
Suppose U.S. Y/person contracts 3% this year and next and then grows at 2% for
next 28 years.
After 30 years, U.S. Y/person will be 64% higher than today.
29
The Importance of Economic Growth
Scenario 2:
Major recession today and we fight it using tax and spending
policy with little detriment to future growth
Suppose U.S. Y/person grows at -1% this year, 0% next and then grows at 1.9% for
next 28 years.
After 30 years, U.S. Y/person will be 68% higher than today.
Take Away:
Y/person in the future is HIGHER relative to doing nothing!
68% > 64%
30
The Importance of Economic Growth
Scenario 3:
Major recession today and we fight it using tax and spending
policy with BIG detriment to future growth
Suppose U.S. Y/person grows at -1% this year, 0% next and then grows at 1.7% for
next 28 years.
After 30 years, U.S. Y/person will be 59% higher than today.
Take Away:
Y/person in the future is LOWER relative to doing nothing!
59% < 64%
Conclusion:
Fighting recessions today may have affects on future growth.
Benefits of fighting recession depends on whether the policies
used to prevent the recession affect future growth!
31
Bonus Section
New Research Project:
“The Allocation of Talent and Economic Growth”
(Trying to Shed Light on the Black Box of TFP Growth)
Measuring TFP (A)
The way TFP (A) is usually measured is via a statistical decomposition (referred
to as the “Solow Residual”).
Remember our assumed production function:
•
Y = AK.3N.7
Math Note: We are going to transform the production function to make it a
little easier to work with (you should get comfortable with this) by taking
the logs:
ln(Y) = ln(A) + α0ln(K) + α1ln(N) (where α0 = 1 – α1 ≈ 0.3)
(1)
•
Given that we measure Y, K and N in the data, we can estimate (1) using
standard regression techniques.
•
ln(A) is the constant from the regression. This is our standard TFP
measure.
33
Measuring TFP
Because A (TFP) is a catch-all term for anything that affects production, the
assumed production function does not impose any structure on how to measure
the components of TFP.
Economists are very good at measuring the extent to which TFP changes over
time within a country.
It is much harder to measure “why” TFP has changed over time.
Economists try to measure this by using detailed firm-level and household-level
data to measure production and wages.
34
Our Project
Question 1:
How much of the observed TFP growth in the U.S. since 1960 is due to better
labor market outcomes (including human capital formation) for blacks and
women?
o
A better allocation of resources leads to higher economic
growth!
o
and blacks
There have been HUGE changes in the allocation of women
in the labor market since 1960.
Question 2:
How much of the convergence of the U.S. south to the U.S. north is due to a
35
decline in discrimination of the south?
Occupational Sorting Over Time: An Overview
•
Fraction of group (white men, white women, black men, black women) aged
25-55 working in the following occupations:
Executives, Mgmt, Architects, Engineers, Math/Computer Science,
Natural Scientists, Doctors, and Lawyers.
1960
White Men
White Women
Black Men
Black Women
Data:
2006-2008
21.2%
23.5%
3.0 (7.3)
17.4 (21.0)
2.8
14.6
1.0 (2.1)
13.0 (15.2)
U.S. Census and American Community Survey
Occupational Sorting Over Time: An Overview
•
Where were the other groups working in 1960?
•
53% of working white women worked in Nursing, Teaching, Sales,
Secretarial and Office Assistances, and Food Prep/Service.
o
•
55% of working black men worked as Freight/Stock Handlers, Motor
Vehicle Operators, Machine Operators, Janitorial Services, and Personal
Services.
o
•
The comparable number for white men was 14% (mostly sales)
The comparable number for white men was 19%
47% of working black women worked in Household Services, Personal
Services, and Food Prep/Services.
o
The comparable number for white men was 2%
Wage Gaps Over Time: An Overview
•
Log difference in annual earnings of full time workers, conditional on
experience, hours and occupation controls (relative to White Men)
1960
1980
2008
White Women
-0.56
-0.47
-0.26
Black Men
-0.37
-0.21
-0.16
Black Women
-0.82
-0.47
-0.31
Findings
Macro Implications:
o
15% − 20% of total wage growth in the U.S. between 1960 and 2008 was due
to declining frictions for white women, black women, and black men. (Shines
some light into the black box of TFP growth)
o
Other interesting results:
- Wage growth in the 1970s and the 2000s would have been negative
absent the labor market improvements for blacks and women.
- About 40% of the convergence of the south to the northeast between
1960 and 1980 is due to declining labor market frictions.
- Not much remaining room for growth from this mechanism.
Results/Counterfactuals: Model 1
Counterfactual 1: 1960 δ’s
Counterfactual 2: 2008 δ’s
190
190
180
180
170
-15%
160
170
160
150
150
140
140
130
130
120
120
110
110
100
100
1960
1970
1980
1990
Keep Deltas at 1960 Levels
2000 2006-8
Base Model
+9
1960
1970
1980
1990
Set Deltas at 2008 Levels
2000 2006-8
Base Model
•
Base Model Prediction:
•
Increase explained by changing δ’s: 12.2 percentage points (chained weighted, avg.)
•
Percent of growth explained by changing δ’s:
76.6% income increase (1.2 percent/year)
~20%
Relationship Between Change in Y/N (N = # of Men Aged 25 - 55)
and Change in Racial Wage Gap For Those Same Men
Years: 1960-1980
Growth in Y/N 1960-1980
1.600
1.500
1.400
1.300
y = 0.5513x + 1.2029
R² = 0.4683
1.200
1.100
Each obs. is a U.S. State. The states with the biggest decline in racial wage
gaps grew the fastest during that period (in terms of Y/N)
1.000
-0.100
0.000
0.100
0.200
0.300
0.400
0.500
Decline in Black White Wage Gap 1960-1980
41
Sub-Section B
The Labor Market
Labor Market: Firm Profit Decisions
• In a competitive market, a firm can sell as much Y as it wants at the going
price p, and can hire as much N as it wants at the going wage w.
• Facing w and p, a profit maximizing firm will hire N to the point were MPN =
w/p (the benefit from an additional worker (in terms of additional output) must
equal the cost which they are paid). <<This is straight from micro>>
• With Cobb-Douglas: MPN = .7 Y/N = .7 A (K/N).3
• If firms maximize profits: w/p = .7 Y/N = .7 A (K/N).3
• If MPN > w/p then the firm can increase profits by increasing N.
• If MPN < w/p then the firm can increase profits by decreasing N.
Reading: Notes 4 from the supplemental notes
43
The Labor Demand Curve
real wage
w/p *
MPN = Nd
N*
N
44
Notes on the Labor Demand Curve
• Nd slopes downward (Nd = MPN = .7 A * (K/N).3)
• Nd rises with A and K (assumed complementarity across inputs)
• Assumption: Y is not Fixed! Firms optimally choose N, K, Y and (to some
extent) A to maximize profits.
• Caveat: Who says that there is a demand for more Y?
– Need to look at the demand side of economy (introduced last -discussed in depth
throughout the course).
45
The Other 1/2 of the Labor Market: Labor Supply
• Labor Supply (Ns) Results from Individual Optimization Decisions
• Households compare benefits of working (additional lifetime resources) with
cost of working (forgone leisure)
• Factors Affecting Labor Supply
–
–
–
–
–
–
The Real Wage (w/p)
The Household’s Present Value of Lifetime Resources (PVLR)
The Marginal Tax Rate on Labor Income (tn)
The Marginal Tax Rate on Consumption (tc)
Value of Leisure (reservation wage) - non- ‘work’ status (VL)
The Working Age Population (pop)
46
The Labor Supply Curve
Ns(PVLR, tc, tn, pop, VL)
w/p
N
47
Labor Supply Notes (Most Derived From Scratch in Lecture)
•
In terms of ‘wages and earnings’, there is both an income and substitution effect - we
will look at them separately – BUT in the real world, they often occur jointly!!!!
•
The Real Wage - HOLDING PVLR fixed: A higher w/p encourages individuals to
substitute away from leisure and toward work (leisure becomes more expensive). This
is a substitution effect. <<This is why the labor supply curve slopes upwards!!>>
– Estimating this substitution effect is difficult since PVLR is not easily held constant.
Estimates range from 0 - 2% (For a 1% increase in after-tax w/p holding PVLR fixed, labor
supply either increases by 0% or 2%). Very Wide Range – little consensus.
•
PVLR = initial wealth + present discounted value of earnings
– A higher PVLR induces individuals to work less (lower Ns) for a given after-tax wage,
allowing them to enjoy more leisure (If leisure is preferred to work – as I get richer, I can
afford to work less).
– PVLR is net of taxes and non-work governmental transfers and inclusive of all other
transfers.
48
Labor Supply Notes
• Marginal tax rate on labor income - Should have same substitution effect as the
before tax real wage. Studies of the 1986 U.S. Tax Reform found that only
high-earning married women worked more in response to lower marginal
income tax rates.
• Marginal tax rate on consumption - see above
• Value of Leisure - If leisure/no-work becomes more/less attractive, households
will less/more (reservation wage). (Welfare programs, child care, etc.).
• Working Age Population: Usually defined as 16-64. (Includes changes in
Labor Force Participation Rates)
49
Recap on Labor Supply
• Substitution Effect:
– For a given PVLR, a higher after tax wage increases NS.
(This is why Labor Supply Curve Slopes Upward)
• Income Effect
– For a given after-tax wage, higher PVLR decreases Ns.
• Evidence:
– Weak Consensus is that, with equal (%) increase in PVLR and the after-tax wage,
Ns falls (income effect dominates).
50
Temporary Increase in A
Ns(PVLR, tc, tn, pop, VL)
w/p
w/p *
N d(A,K)
N*
N
51
Permanent Increase in A
Ns(PVLR, tc, tn, pop, VL)
w/p
w/p *
N d(A,K)
N*
N
52
Can Technological Progress Destroy jobs?
Facts:
A, N, w/p are trending up over time.
N/pop is trending down (except in U.S. since 1980).
Higher A countries have higher w/p and lower N/pop.
Implications:
Adjusting for pop, higher A goes with lower N.
Higher A reduces Nd and destroys jobs? - NO!
Labor Demand Increases.
Higher A increases PVLR and reduces Ns - The Effect on Labor Supply
is to fall.
53
Permanent Increase in Population
Ns(PVLR, tc, tn, pop, VL)
w/p
w/p *
N d(A,K)
N*
N
54
Population and Jobs
More People = More Jobs
1990 Employment (000s)
1000000
100000
10000
1000
100
100
1000
10000
100000
1000000
1990 Working-Age Population (000s)
55
Temporary Increase in Taxes (tc or tn)
Ns(PVLR, tc, tn, pop, VL)
w/p
w/p *
N d(A,K)
N*
N
56
Permanent Increase in Taxes (tc or tn)
Ns(PVLR, tc, tn, pop, VL)
w/p
w/p *
N d(A,K)
N*
N
57
Labor Market Equilibrium (in long run!)
•
We define Long Run Equilibrium in macroeconomics as occurring when the labor
market clears.
•
By definition, long run macro equilibrium exists when N = N*.
•
At N*, labor demand = labor supply. So, by definition, all workers who want a job
(the suppliers) are able to find a firm looking for a worker (the demanders).
•
•
•
Implies that cyclical unemployment = zero at N*.
Long run equilibrium is characterized by zero cyclical unemployment!
It is an equilibrium in that there is no incentive for real wages to change at N*
•
Real wages (w/p) has two components: nominal wages (w) and the price
level (p).
•
Note:
•
Y* is the long run equilibrium level of output (output where labor market is in
equilibrium)
Y* (by definition) = A K.3(N*).7
58
Our First Aggregate Supply Curve….
•
Suppose prices (p) increase. What happens in the labor market?
•
•
•
In terms of equilibrium, nothing happens!
Increasing prices have no effect on labor demand (A and K do not change).
Increasing prices have no effect on labor supply (taxes, population, etc. do
not change).
•
You may ask “Doesn’t PVLR change when prices increase???” No!
•
•
•
As long as nominal wages adjust, real wages will be unchanged when p
increases.
The % change in prices will be match exactly by the % change in
nominal wages – real wages will not change (so PVLR will not change).
No effect on labor supply.
•
Key: Because real wages will not change, changes in prices will have NO
effect on the labor market (i.e., it will have no effect on N*).
•
Conclusion: Changing prices will have NO effect on Y* (since N* is
constant).
59
Our First Aggregate Supply Curve……
LRAS – Long Run Aggregate Supply Curve
p
Y*
Y
•
If labor market clears, changes in prices will lead to equal changes in nominal wages.
As a result, there will be no change in N* and hence, no change in Y*.
•
Leads to a vertical LRAS curve. Prices do not affect production in the long run! 60
What Shifts Y*? (the LRAS)
•
Anything that affects the labor market will affect Y*!
•
If N* increases, Y* will shift to the right.
•
If N* decreases, Y* will shift to the left.
•
Summary: Y* will shift right if:
–
–
–
–
–
A increases
K increases
population increases
labor income taxes fall (and income effect is small relative to substitution effect)
labor income taxes rise (and income effect is large relative to substitution effect)
Note:
The long run aggregate supply curve (LRAS) is NOT the labor supply curve.
We have lots of different markets in this class. There will be lots of different
supply and demand curves. You need to keep track of them!
61
Things to Remember!
•
The demand side of the economy is NOT important for determining Y*!
–
All we need to know is A, K and N and we know Y*!
–
The demand side of the economy is not important for economic growth!
–
Key: If I ever ask you about what determines Y* (i.e., output/income/expenditure in the
long run), you should think about A, K and the labor market.
•
•
As a rule, K will be fixed unless I tell you otherwise (for simplicity, you will
see why soon).
Why do we care about the demand side of the economy?
–
–
–
In the long run, prices will be determined by demand.
Also, LRAS is dependent on labor market being in equilibrium. In the short run, labor
market need not be in equilibrium.
Demand will determine output in the SHORT RUN!
62
Summary….
•
In the long run – when labor markets clear.
–
Supply side of economy (labor market, K, A, other inputs like oil) determines
output.
–
Demand side of economy (C+I+G+NX) will determine prices.
•
In the short run – when labor markets do not clear:
–
Demand and Supply jointly determine prices and output (think of the simple
examples I gave graphically in the lecture for topic 1).
–
Three outstanding issues (we will get to them soon):
•
•
•
When is the labor market NOT in equilibrium?
What does the supply curve look like when labor market doesn’t clear?
What determines demand?
63
When are Labor Markets in Disequilibrium?
•
Labor market is in disequilibrium when labor demand is not equal to labor supply.
•
Any time labor demand = labor supply, there is no cyclical unemployment (by
definition)!
•
Nominal wages do not adjust to clear the labor market
– We refer to this as ‘sticky’ wages.
– Because of wage contracts (and uncertainty), nominal wages do not always adjust
immediately.
– Need a model for short-run disequilibrium --- we will do that in Topic 6.
64
Cyclical Unemployment in Labor Markets
•
When do we get cyclical unemployment in our models?
•
Cyclical unemployment occurs when there are no jobs available (labor demand) for
those with the skills and the desire to work (labor supply) at current wages.
•
Cyclical unemployment occurs only in disequilibrium! (when desired labor demand <
desired labor supply - at given wages)
Ns
w’/p’
a
b
Unemployment
N(1)
N(0)
Nd
65
What Have We Learned So Far?
•
There are microeconomic fundamentals to the supply side of the economy –
– Capital accumulation, Labor and TFP are important for production AND Growth!!!
•
Some countries grow faster than others because they have rapid growth in TFP or K/N.
•
Only growth in TFP can lead to sustained growth in Y/N
•
How Labor Markets Work - The Role of Taxes, Technological Progress, Capital
Accumulation, And Demographics on Wages and Employment.
•
Demand is not important for determining long run output (i.e., income, standard of
livings, etc.). Supply (production) is the only thing that determines output in the long
run!
66
Manufacturing Busts, Housing Booms, and
the U.S. Labor Market During the 2000s
Kerwin Kofi Charles
Erik Hurst
Matthew J. Notowidigdo
University of Chicago
Harris School of Public Policy
And NBER
University of Chicago
Booth School of Business
and NBER
University of Chicago
Booth School of Business
and NBER
December 2012
Goal of Paper
 Try to explain why employment rate changed within the U.S. during
the 2000s (both prior to and during the recession)
 Focus on two phenomena that hit the economy.
o
o
Massive decline in manufacturing employment
Housing boom and bust
 Assess how those phenomena affected employment rates (and other
labor market outcomes).
 Run counterfactuals shutting off the labor market effects of each of the
phenomenon. Our focus is on manufacturing decline.
 Look at the effects of these factors on human capital attainment.
What I Hope To Convey
1.
Structural shifts are having real effects on the U.S. economy during the
2000s.
o
o
o
2.
About 40% of increase in non-employment during 2000s can be
attributed to the decline in manufacturing.
Most of this effect occurred along the “out of the labor force” margin
and not the “unemployment” margin.
Manufacturing plus housing explain about 35% of increase during the
recession.
Labor market was weaker in the 2000-2007 period than we thought.
o
o
o
Housing boom “masked” deterioration of U.S. labor market.
2000-2007 period marked by secular decline in one sector and a
temporary boom in another sector.
Implication: 2007 may not be a good benchmark to evaluate cyclical
changes in economic variables of interest.
What I Hope To Convey
3.
The net effect of housing booms/busts on labor markets was small over
the entire decade.
o
The bust reduced employment but the boom raised employed
4.
Housing boom deterred college attainment during 2000-2007 period.
5.
At least some of the increase in non-employment during the recession
is NOT do to “cyclical forces”.
Medium-Run/Long-Run Increase in Non-Employment?
 Labor market adjustments occur in the medium/long-run:
o
o
Workers could choose to acquire skills which could increase market
wage.
Workers could choose to move to different labor markets.
 Adjustments take time (hence more than a short-run/cyclical story).
 Our force is different from traditional mismatch stories.
o
For us, people are just moving up and down labor supply curve in
response to labor demand shocks (market wage < reservation wage).
 Our results suggest that temporary government policies to stimulate
labor demand will NOT have lasting effects on employment.
o
Only implies to the 30-40% of non-employment increase we identify.
Intuition of the Model: Labor Supply and Labor Demand
Labor Supply
Wages
(W/P)1
(W/P)2
Labor Demand
N2
N1
N
Empirical model
• Changes in Labor Market Outcomes at Local Level (Lk )
Lk  f (DkM , DkH , DkO ,  k )
(1)
(2)
(3)
(4)
Definitions:
(1)
(2)
(3)
(4)
Effect of Manufacturing Labor Demand Change (through all channels)
Effect of “Housing Related” Labor Demand Change
Effect of “Other” Labor Demand Change (not proxied by first two)
Effect of Labor Supply Change
Note:
k denotes a local labor market (e.g., MSA)
Lk could be employment rate, wages, employment in a sector, etc.
What We Estimate
Lk   0  1 DkM   2 PkH   X k  DkO   k   k
(1)
(2)
(3)
error term
What is term (1)?
o
Predicted change in manufacturing employment within MSA
o
Prediction is based upon initial industry mix in the MSA (3-digit
manufacturing) ( ski ,t )
o
Interact that share with the change in employment in that 3 digit
manufacturing industry at the national level. ( mti,t  j )
o
Formally,
DkM   ski ,t mti,t  j
i
Predicted vs. Actual Change in
Manufacturing
What We Estimate
Lk   0  1 DkM   2 PkH   X k  DkO   k   k
(1)
(2)
(3)
error term
What is term (2)?
o
Actual change in house prices within the MSA during period
o
House prices are determined by lots of factors.
o
Note: We purge the house price measure of the predicted
manufacturing change.
o
What are house prices capturing?
-
(via
Other local labor market shocks.
Effect of national housing demand shocks on labor markets
construction or “wealth effect”)
House Price Movements Determined
By Housing Demand Shocks
(Positive relationship between prices and quantities)
Data/Timing For Main Results
• 2000 Census and 2005-2007 and 2009-2010 ACS
o
o
o
Most of our analysis comes using Census/ACS data.
All of our analysis starts in 2000 (as a result)
Focus on individuals aged 21-55.
• FHFA metro house price indexes
• Base estimation: 2000 – 2007 period
o
o
o
Start in 2000 because of data limitations.
Want to focus on pre-recessionary period to get estimated responses.
Interesting to focus on the boom period (highlights masking).
• Examine Other Time Periods (2007-2010 ; 2000-2010)
Estimates from the Empirical Model:
Some Graphical Results
Change in non-employment rate for non-college men, 2000-2007
Increase in
Non-employment
Worse Manufacturing Shock
Change in non-employment rate for non-college men, 2000-2007
Change in average wage for non-college men, 2000-2007
Change in average wage for non-college men, 2000-2007
Change in non-employment rate for non-college men, 2000-2010
Change in non-employment rate for non-college men, 2000-2010
Other Results
 Find sizeable effects of manufacturing decline on employment of noncollege women.
o
o
No effect of housing boom on construction.
Sizeable effect of housing boom on non-construction employment.
 Smaller effects of housing boom and manufacturing decline on
employment of college men and women.
 Manufacturing shock resulted in some out-migration of individuals.
o
A one-standard deviation manufacturing shock reduced population by
about 3%.
 Results hold instrumenting for housing price changes.
 The extent of the masking occurs both within and across individuals.
Counterfactuals
Estimated Effect of Manufacturing Decline on Non-Employment
0.080
0.070
0.060
0.050
0.040
0.030
0.020
0.010
0.000
-0.010
-0.020
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.080
0.070
~42%
Explained
0.060
0.050
0.040
0.030
0.020
0.010
0.000
-0.010
-0.020
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.080
0.070
0.060
0.050
0.040
0.030
Manufacturing Decline
0.020
0.010
0.000
-0.010
Housing Cycle (Construction and Other)
-0.020
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.080
0.070
Data
0.060
0.050
0.040
0.030
Manufacturing
0.020
0.010
Housing + Manufacturing
0.000
-0.010
-0.020
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.080
0.070
Data
0.060
0.050
34% During
Recession
0.040
0.030
Manufacturing
0.020
0.010
Housing + Manufacturing
0.000
-0.010
-0.020
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Education
Propensity to Have At Least
One Year of College (Age: 1829)
Did Housing Boom Delay College Attendance?
 Use same local labor market design to answer this question.
 The answer is YES!
 Places that had large housing booms had a large reduction in the propensity
to attend at least one year of college.
o
o
Nearly all the action was on two year colleges (community colleges,
technical schools, trade schools, etc.).
Found effects for both men and women.
 During the bust, this trend reversed (but, not completely).
 Estimates can explain about 80% of the time series change.
Other Results
Other Results
• Counterfactual analysis for wages for less-skilled men implies “missing”
3.3% decline, coming primarily from lack of downward wage adjustment
during bust period.
• Decomposing non-employment results into unemployment and nonparticipation.
o
Bartik instrument primarily affects non-participation
o
Suggests much of the medium run forces we are identifying are on
non-participation.
o
Rethink earlier work on sector shifts on labor markets (Lilien (1982),
Abraham and Katz (1986)). All such tests were on unemployment –
not non-employment!
• Other boom/bust cycle: 1980s housing boom
– Preliminary results indicate broadly similar results