Economic Fluctuations and Growth Research Meeting

Chang-Tai Hsieh and Erik Hurst, University of Chicago and NBER, and Charles Jones and Peter Klenow, Stanford University and NBER

The Allocation of Talent and U.S. Economic Growth

Over the last 50 years, there has been a remarkable convergence in the occupational distribution between white men and women and blacks. Hsieh, Hurst, Jones, and Klenow measure the macroeconomic consequences of this convergence through the prism of a Roy model of occupational choice, where women and blacks face frictions in labor markets and in the accumulation of human capital. They find that the changing frictions implied by the observed convergence in occupational choice can explain 15 to 20 percent of aggregate wage growth during the last fifty years.

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Fatih Guvenen, University of Minnesota and NBER; Serdar Ozkan, Federal Reserve Board; and Jae Song, Social Security Administration

The Nature of Countercyclical Income Risk (NBER Working Paper No. 18035)

Guvenen, Ozkan, and Song study the cyclical nature of individual income risk using a confidential dataset from the U.S. Social Security Administration which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010. The authors use these data to decompose individual income growth during recessions into "between-group" and "within-group" components. In terms of within-group shocks. in contrast to past researchers they do not find the variance of idiosyncratic income shocks to be counter-cyclical. Instead, the left-skewness of shocks is strongly counter-cyclical. During recessions, the upper end of the shock distribution collapses — large upward income movements become less likely -- while the bottom end expands -- that is, large drops in income become more likely. Thus, although the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions. In order to study between-group differences, they then group individuals based on several observable characteristics at the time a recession hits. One of these characteristics—the average income of an individual at the beginning of a business cycle episode—proves to be an especially good predictor of fortunes during a recession: prime-age workers entering a recession with high average earnings suffer substantially less than those who enter with low average earnings (which is not the case during expansions). Finally, the authors find that the cyclical nature of income risk is dramatically different for the top 1 percent than for all other individuals—even relative to those in the top 2 to 5 percent.

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Loukas Karabarbounis and Brent Neiman, University of Chicago and NBER

Declining Labor Shares and the Global Rise of Corporate Savings (NBER Working Paper No. 18154)

The stability of the labor share is a key foundation in macroeconomic models. Karabarbounis and Neiman document, however, that the global labor share has declined significantly over the last 30 years. This decline was associated with a significant increase in corporate savings, generally the largest component of national savings. The authors relate the labor share to corporate savings both empirically and theoretically using a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and that corporate savings affect macroeconomic allocations. The authors argue that it is important to study the labor share and corporate savings jointly, and they offer a unified explanation for their trends. A global decline in the cost of capital beginning around 1980 induced firms to shift away from labor and toward capital, financed in part with an increase in corporate savings.

Stephanie Schmitt-Grohe and Martin Uribe, Columbia University and NBER

Prudential Policy for Peggers (NBER Working Paper No. 18031)

Schmitt-Grohe and Uribe show that in a small open economy with downward nominal wage rigidity pegging the nominal exchange rate creates a pecuniary externality. The externality causes unemployment, overborrowing, and depressed consumption. Ramsey-optimal capital controls are prudential, in the sense that they tax capital inflows in good times and subsidize external borrowing in bad times. Under plausible calibrations, this type of macroprudential policy is shown to lower the average unemployment rate by 10 percentage points, to reduce average external debt by 10 to 50 percent, and to increase welfare by 2 to 5 percent of consumption per period.

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Eric Swanson and John Williams, Federal Reserve Bank of San Francisco

Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

The zero lower bound on nominal interest rates has constrained the Federal Reserve's setting of the federal funds rate since December 2008. According to many macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, standard macroeconomic theory also implies that private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably more relevant for the economy, and it is unclear to what extent the zero bound has constrained those yields. Swanson and Williams propose a novel approach to measure the effects of the zero lower bound on interest rates of any maturity. They compare the sensitivity of interest rates of various maturities to macroeconomic news during periods when short-term interest rates were very low to that sensitivity during normal times. They find that yields on Treasury securities with a year or more to maturity were surprisingly responsive to news throughout 2008–10, suggesting that monetary and fiscal policy were likely to have been about as effective as usual during this period. Since mid-2011, the zero lower bound has been a greater constraint. They offer two explanations for these findings: first, until recently, market participants expected the zero lower bound to constrain the funds rate for only a few quarters, minimizing the constraint's effects. Second, the Fed's unconventional policy actions may have helped offset the effects of the zero bound on medium- and longer-term rates.

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Alisdair McKay, Boston University, and Ricardo Reis, Columbia University and NBER

The Role of Automatic Stabilizers in the U.S. Business Cycle

Most countries have automatic rules in their tax-and-transfer systems that are intended partly to stabilize economic fluctuations. McKay and Reis measure how effective they are at lowering the volatility of U.S. economic activity. They identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the U.S. data. The model is used to compare the volatility of output in the data with counterfactuals where some, or all, of the stabilizers are shut down. The first finding here is that proportional taxes, like sales, property, and corporate income taxes, contribute little to stabilization. The second finding is that a progressive personal income tax can be effective at stabilizing fluctuations but at the same time leads to significantly lower average output. The third finding is that safety-net transfers lower the volatility of output with little cost in terms of average output, but they significantly raise the variance of aggregate consumption. Overall, the tuthors estimate that if the automatic stabilizers were scaled back in size by 0.6 percent of GDP, U.S. output would be about 7 percent more volatile.