new ideas about the long-lasting collapse of employment
TRANSCRIPT
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New Ideas about the
Long-Lasting Collapse of
Employment after the Financial
Crisis
Robert E. HallHoover Institution and Department of Economics
Stanford University
Woytinsky Lecture, University of Michigan
November 13, 2013
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Collision of three forces
A decline in output demand—an event without seriousconsequences in a normal economy
The zero lower bound on the nominal interest rate
Low and stable inflation, so that the implied bound on thereal interest rate is constraining
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The Financial Wedge
The difference between the rate of return to capital and thereal interest rate
ft =1
qt
[αytkt
+ (1 − δ)qt+1
]− 1 − rt
On the same conceptual footing as the investment wedge inChari-Kehoe-McGrattan, stated as an interest spread
Includes taxes and risk premium
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The Financial Wedge
0
2
4
6
8
10
12
14
16
2009 2012 2015 2018 2021
Percen
t per year
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The Ratio of Consumption to
Disposable Income
0.85
0.86
0.87
0.88
0.89
0.90
0.91
0.92
0.93
0.94
2006 2007 2008 2009 2010 2011 2012 2013
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Real Household Liabilities
80
85
90
95
100
105
110
2006 2007 2008 2009 2010 2011 2012 2013
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Burden of Deleveraging as a
Percent of Consumption
‐5
0
5
10nt of con
sumption
‐15
‐10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Perce
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Google searches for “withdrawal
penalty”
0
10
20
30
40
50
60
2005 2006 2007 2008 2009 2010 2011 2012 2013
Inde
x value
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In Equilibrium, the Real Interest
Rate is at the Level that Equates
Output Demand to Supply
‐0.025
‐0.020
‐0.015
‐0.010
‐0.005
0.000
0.005
0.010
0.015
0.020
0.025
0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08
Real interest ra
te
Output
Supply Demand
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Excess Supply of Output when
the ZLB Binds
‐0.025
‐0.020
‐0.015
‐0.010
‐0.005
0.000
0.005
0.010
0.015
0.020
0.025
0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08
Real interest ra
te
Output
Supply Demand
Excess supplyof output
Interest rate bounded above equilibrium level
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Real and nominal interest rates
Differ by the rate of inflation
Friedman: inflation depends on slack and an inertial termrelating to expectations
Sargent: inflation depends on the context
Central banks are firmly on the Friedman side, as expressedin the New Keynesian Calvo model
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Recent inflation
Strongly anchored in the 1 to 3 percent per year range
Stock-Watson Jackson Hole paper 2010: no support forFriedman
Inflation falls a bit as the economy contracts but does notcontinue to fall despite several years of slack
This behavior contrasts to the Great Depression, whenextreme deflation occurred
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Two Measures of U.S. Inflation
‐3
‐2
‐1
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012 2013
Total CPI
PCE core
Target
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U.S. Wage Inflation
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2006 2007 2008 2009 2010 2011 2012 2013
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Clashing theories of
unemployment
Most models of the ZLB take employment as determinedby product demand and unemployment as a residual
The reigning theory (DMP) links unemployment to theproduct market only in certain specific ways and does notsupport the idea that unemployment is just a residual
Recent work goes beyond the residual theory and integratessome version of DMP in a complete GE model
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ZLB Analysis with Shifts in Both
Demand and Supply
‐0.025
‐0.020
‐0.015
‐0.010
‐0.005
0.000
0.005
0.010
0.015
0.020
0.025
0.90 0.95 1.00 1.05 1.10
Real interest ra
te= minus infla
tion
Output
Supply
Demand
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DMP model
Focuses on the job-creation decision of the employer
When an employer adds a worker, the employer gains thepresent value of the difference between the worker’smarginal contribution to revenue (the marginal revenueproduct of labor) and the worker’s pay
This present value is the job value
To reach the point where this gain occurs, the employerexpends recruiting effort. The net benefit to the employeris the job value less the cost of recruiting a worker. Withfree entry to hiring, employers push recruiting effort to thepoint where the net benefit is zero. Thus the job valuecontrols the amount of recruiting effort
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Job value and unemployment
Positive relation between recruiting effort and the speedwith which job-seekers find jobs
When employers are making high effort—posting manyvacancies and advertising their existence—job-seekers findjobs quickly
Unemployment is then low
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Models of fluctuations in job
value and thus in unemployment
Walsh: In the New Keynesian model, the marginal revenueproduct of labor falls in recessions, which lowers the jobvalue
Mortensen: Sticky prices result in depressed prices forintermediate products, and the job value falls at firmsmaking those products
Gertler-Sala-Trigari: Sticky wages result in lower job valuewhen the marginal product of labor falls
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Most recent suggestions
Hall: In times of high risk premiums, when the stockmarket is low, the same risk premiums result in lowdiscounted values of the future flow of value from a newlyhired worker
Hagedorn, Karahan, Manovskii, and Mitman: Higher UIbenefits raise workers’ outside option in wage bargainingand lower the job value
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Job Value from JOLTS Compared
to Wilshire Stock-Market Index
‐
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0
200
400
600
800
1000
1200
1400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Job value(right scale)
Stock market(right scale)
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Wage channel
HKMM find that the wage channel raised unemploymentby 3.1 percentage points in 2010
Compare adjacent counties in different states—same localconditions but different UI durations
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Amplification through UI
extensions
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0 0.2 0.4 0.6 0.8 1 1.2
Une
mploymen
t rate
Duration of UI benefits
Small adverse shift condtional on unemployment
Large increase in unemployment induced through extension of UI benefits
UI policy Unemploy‐ment response
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Evaluation of HKMM
Strong endogeneity of UI duration because of triggers anddiscretionary extensions plainly motivated by highunemployment
Some of the counties have population centers hundreds ofmiles apart
Questionable data on unemployment, but results for wages,vacancies, and employment are supportive
Detailed evaluation on my website
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Duration of average spell of UI
coverage, months
0
2
4
6
8
10
12
1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
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Index of real unemployment
benefits per month
0.0
0.5
1.0
1.5
2.0
2.5
1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
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The job value is back to normal
but unemployment is 7.3 percent
I Declining matching efficiency lowers job-finding rateand raises unemployment
I In particular, more generous UI benefits may cutsearch effort and reduce matching efficiency (moralhazard)
I Declining turnover lowers unemployment
I Higher dispersion across labor markets raises averageunemployment
I Lower labor-force participation may lowerunemployment
I It takes time to work off a stock of high-duration, lowre-employment rate unemployed
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Analysis of matching efficiency
“Measuring Matching Efficiency with HeterogeneousJobseekers” with Sam Schulhofer-Wohl
Based on CPS adjusted transition rates among 6 categoriesof unemployment, 2 categories of employment, andout-of-labor-force
Directly related to shifts of the Beveridge curve: Lowermatching efficiency implies outward shift of curve
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Tightness
Tt =VtHt
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Aggregate tightness
0.0
0.2
0.4
0.6
0.8
1.0va
ca
ncie
s/h
ire
s
2001 2003 2005 2007 2009 2011
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Matching efficiency
fi,t = γi,tTt
γi,t =fi,tTt
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Overall matching efficiency
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2001 2003 2005 2007 2009 2011
fixed component weights
fixed distribution of observables
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Counterfactual unemployment
rate with pre-recession tightness
0.00
0.02
0.04
0.06
0.08
0.10
2007 2008 2009 2010 2011 2012
simulated baseline
counterfactual33
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Moral-hazard effect of UI
benefits
Farber-Valletta is the most recent paper, confirming smalleffect of less than 0.5 percentage points
They look at how rapidly job-seekers find work and leavethe labor force, given unemployment and employmentgrowth in the local market
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Coefficient of variation of
unemployment rate across 9
regions
0.00
0.05
0.10
0.15
0.20
0.25
0.30
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
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Coefficient of variation of
unemployment rate across 29
occupations
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Two measures of turnover rate
0
2
4
6
8
10h
ire
s (
mill
ion
s)
2001 2003 2005 2007 2009 2011
Current Population Survey
Job Openings and Labor Turnover Survey
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Two measures of the labor-force
participation rate
61
62
63
64
65
66
67
68
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Standard participation rate
Extended participation rateAdding those who want a job, have searched for work during the prior 12 months, and were available to take a job during the reference week, but had not looked for work in the past 4 weeks.
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Conclusions
The crisis depressed the job value substantially and theDMP model can be integrated into a GE modelconvincingly; there is no clash
The drop in job value resulted from higher discounts andother factors triggered by the crisis; UI extensions a factorbut probably not very large
With the job value back to normal, unemployment remainsat 7.3 percent primarily because of the overhang oflong-duration unemployment and secondarily because ofdeclining match efficiency, including the moral hazardeffects of UI
The remaining effects of the crisis operate through thecollapse of labor-force participation
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Further readingReferences
Farber, Henry S. and Robert G. Valletta, “Do Extended Unemployment Benefits Lengthen
Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market,” Work-
ing Paper 19048, National Bureau of Economic Research May 2013.
Gertler, Mark and Antonella Trigari, “Unemployment Fluctuations with Staggered Nash
Wage Bargaining,” The Journal of Political Economy, 2009, 117 (1), 38–86.
, Luca Sala, and Antonella Trigari, “An Estimated Monetary DSGE Model with Un-
employment and Staggered Nominal Wage Bargaining,” Journal of Money, Credit and
Banking, 2008, 40 (8), 1713–1764.
Hagedorn, Marcus, Fatih Karahan, Iourii Manovskii, and Kurt Mitman, “Unemployment
Benefits and Unemployment in the Great Recession: The Role of Macro Effects,” Oc-
tober 2013. National Bureau of Economic Research Working Paper 19499.
Hall, Robert E., “High Discounts and High Unemployment,” June 2013. Hoover Institution,
Stanford University.
, “Some Observations on Hagedorn, Karahan, Manovskii, and Mitman, “Unemploy-
ment Benefits and Unemployment in the Great Recession: The Role of Macro Effects”,”
November 2013. Hoover Institution, Stanford University.
and Sam Schulhofer-Wohl, “Measuring Matching Effciency with Heterogeneous Job-
seekers,” November 2013.
Mortensen, Dale T., “Comments on Hall’s Clashing Theories of Unemployment,” July 2011.
Department of Economics, Northwestern University.
Stock, James H. and Mark W. Watson, “Modeling Inflation After the Crisis,” Working
Paper 16488, National Bureau of Economic Research October 2010.
Walsh, Carl E., “Labor Market Search and Monetary Shocks,” in S. Altug, J. Chadha, and
C. Nolan, eds., Elements of Dynamic Macroeconomic Analysis, Cambridge University
Press, 2003, pp. 451–486.
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