Micro Data For Macro Models Fall 2012 Topic 1: Labor Market in Great Recession

Micro Data For Macro Models

Fall 2012

Topic 1: Labor Market in Great Recession

Course Pre-Amble

1998 – 2000 Cohort That Are Tenured at Top Schools (with some omissions)

Marianne Bertrand (Chicago) Ananth Seshadri (Wisconsin)

Esther Duflo (MIT) Amil Petrin (Minnesota)

Mike Greenstone (MIT) Muhamet Yildiz (MIT)

Emmanuel Saez (Berkeley) Marco Battaglini (Princeton)

Jonathan Levin (Stanford) Xavier Gabaix (NYU)

Sendhil Mullainathan (Harvard) Monika Piazzesi (Stanford)

Chang-Tai Hseih (Chicago) Ricardo Reis (Columbia)

Erik Hurst (Chicago) Dirk Krueger (Penn)

Enrico Moretti (Berkely) Martin Schneider (Stanford)

Luigi Pistaferri (Stanford) Annette Vissing-Jorgensen (Northwestern)

David Autor (MIT) Mark Duggan (Wharton)

Mark Aguiar (Princeton) Fabrizio Perri (Minnesota)

Marc Melitz (Harvard) Alessandra Fogli (Minnesota)

Victor Chevnozhakov (MIT) Wouter Dessein (Columbia GSB)

Ted Miguel (Berkeley) ~ 900 people got a Ph.D. from top 15

Markus Bruennermeier (Princeton) departments during this time period

David Lee (Princeton) ~ 40- 50 (~5%) of people got tenured at top

15 departments

1998 – 2000 Cohort That Are Tenured at Top Schools (with some omissions)

Marianne Bertrand (Chicago) Ananth Seshadri (Wisconsin)

Esther Duflo (MIT) Amil Petrin (Minnesota)

Mike Greenstone (MIT) Muhamet Yildiz (MIT)

Emmanuel Saez (Berkeley) Marco Battaglini (Princeton)

Jonathan Levin (Stanford) Xavier Gabaix (NYU)

Sendhil Mullainathan (Harvard) Monika Piazzesi (Stanford)

Chang-Tai Hseih (Chicago) Ricardo Reis (Columbia)

Erik Hurst (Chicago) Dirk Krueger (Penn)

Enrico Moretti (Berkely) Martin Schneider (Stanford)

Luigi Pistaferri (Stanford) Annette Vissing-Jorgensen (Northwestern)

David Autor (MIT) Mark Duggan (Wharton)

Mark Aguiar (Princeton) Fabrizio Perri (Minnesota)

Marc Melitz (Harvard) Ed Vytlacil (NYU)

Victor Chevnozhakov (MIT) Wouter Dessein (Columbia GSB)

Ted Miguel (Berkeley) ~ 900 people got a Ph.D. from top 15

Markus Bruennermeier (Princeton) departments during this time period

David Lee (Princeton) ~ 40- 50 (~5%) of people got tenured at top

15 departments

Publishing?

• The median Ph.D. from a top 20 department never publishes anything in a peer reviewed journal

• The median peer reviewed article has less than 15 citations.

• See Dan Hamermesh’s web site for:

“Young Economist’s Guide to Professional Etiquette”

https://webspace.utexas.edu/hamermes/www/JEP92.pdf

https://webspace.utexas.edu/hamermes/www/JEP92.pdf

The Good News

• The creation of research is a skill just like inverting a matrix, solving DSGE models, computing standard errors, etc.

• The more you work on it, the better you will become.

• Read the early work of those recently tenured at top schools. Every single one of you could have written the same papers!

It is not only our technical prowess that distinguishes us throughout our careers, it is our ability to innovate and/or to come up with good questions.

Those who have impact on the profession due so because of their ideas.

What Skill Are Ph.D. Students Most Deficient?

• Having the ability to identify interesting research questions

• The confusion of theoretical or empirical fire power as being an “end” as opposed to a “means”.

• Not having the ability to explain why anyone would care about their research.

Goal of This Class

• Get you to start thinking about writing your dissertation

• Familiarize you with many data sets that are used by macro economists (and others) to be used as part of your dissertation.

• Expose you to literatures within macroeconomics that have strong empirical components.

• Help you turn good research ideas into good research papers.

• Teach you how to communicate your ideas to others.

Some Housekeeping….

• T.A.: Jonathan (with set up an email list for class participants including auditors)

• Lots of work – hopefully all of it useful

o Reading

o Homeworks

o Virtual Paper

• Slides/Course Info

• Co-Taught with Steve Davis: Timing

Very Important

• If you are seeking take the prelim in the Macro Sequence (this course plus the remaining courses by Lars and Veronica), you must:

1) Complete a full version of your virtual paper in order to pass the portion of the prelim related to our part of the course.

2) We will not offer questions on the prelim (although the faculty who teach the other parts of the sequence - Lars and Veronica – will still write prelim questions).

3) You have to notify Steve and Erik by end of April if you are planning to take the applied macro prelim. We will give you feedback about our expectations for your paper.

My Portion of the Course

Topic 1: Labor Market in Current Recession

Topic 2: Consumption Inequality

Topic 3: Lifecycle Consumption

Topic 4: Home Production

Topic 5: Occupational Choice

Topic 6: Understanding Small Businesses

Steve’s Portion of the Class

See Steve’s reading list…..

Where Do Research Question Come From

A few words from Erik and Steve…..

Topic 1:

Labor Markets in the Recent Recession

Part A:

Conceptual framework for changes in employment

Why Does Employment Change?

Wages(W)

Employment(N)

Labor Demand (ND)

• Labor Demand results from firm optimization – is a function of things like productivity, comparative advantage, trade, policy, etc.

A Look at the Labor Market: Labor Demand

Why Does Employment Change?

Wages(W)

Employment(N)

Labor Supply (NS)(Holding Lifetime Income

Fixed)

A Look at the Labor Market: Labor Supply

• Labor Supply is the result of household optimization - is a function of government policies (taxes and transfers), household wealth, immigration, etc.

Where Does Non-employment Come From?

Wages(W)

Employment(N)

NS

A Look at the Labor Market: Labor Market Equilibrium

ND

W0*

N0*

Non-employment Theory 1: Great Vacation?

Wages(W)

Employment(N)

NS

ND

W0*

N0*

W1*

N1*

0

1


Wages(W)

Employment(N)

NS

ND

W0*

N0*

W1*

N1*

0

1

• Firms desire less labor. Some workers choose not to work at lower wages.• Workers transition to non-employment through unemployment.


Wages(W)

Employment(N)

NS

ND

W0*

N0*

W1*

N1*

0

1

• Decline in labor demand could be permanent (structural change in economy).• Decline in labor demand could be temporary (recession – temporary decline).


Wages(W)

Employment(N)

NS

ND

W0*

N0*

W1*

N1*

0

1

• Potential policy response if temporary - Shift labor demand back to the right.

Non-employment Theory 2: Sticky Wages

Wages(W)

Employment(N)

NS

ND

W0*

N0*N2

• Same labor demand shock, but wages are prevented from adjusting downward.

01

Non-employment Theory 2: Stick Wages

Wages(W)

Employment(N)

NS

ND

W0*

N0*N2

• Same labor demand shock, but wages are prevented from adjusting downward.• “Cyclical” unemployment could occur.

unemployment

Non-employment Theory 2: Stick Wages

Wages(W)

Employment(N)

NS

ND

W0*

N0*N2

Policy response: Try to shift the labor demand curve back to the right.Was the negative labor demand shift temporary?

Non-employment Theory 3: Policy and Labor Supply

Wages(W)

Employment(N)

NS

ND

W0*

N0*

• Some policies may result in a reduction of labor supply (extend unemploymentbenefits and people have less incentive to find a job).

0

1

Non-employment Theory 4: Mismatch Unemployment

• Harder to illustrate graphically.

• Need some individual and sectorial heterogeneity in the model

Individuals with different skills/jobs with different skill requirementsIndividuals with different sectorial experience/jobs in different sectorsSpatial differences in people in jobs

• Adjustment costs may prevent people from easily switching sectors.

• If a negative shock hits one sector (low skilled, housing, Nevada), it may take time for individuals to adjust to the other sectors (high skilled, nursing, or Texas).

• Generic policies designed to reduce unemployment may not be that effective if the unemployment is structural.

Non-employment Theory 5: Search Theory

• Harder

Important Questions that Should Be Answered

• How much of the unemployment is due to cyclical/temporary forces?

o Implies that there may be room for potential policy interventions.

o Still need to understand source of shock (balance sheet effects, firm access to credit, uncertainty, TFP declines, etc.)

• How much is due to policy induced effects on labor supply?

o Causes a trade off between different types of policy goals?

• How much is due to “structural” forces (mismatch, sector declines)?

o Traditional recessionary policies are likely to be relatively ineffective.

Part B: Nonemployment in Current Recession

Some Facts About The Recent Labor Market

• “The Labor Market In The Great Recession”

Mike Elsby, Bart Hobijn, and Aysegul Sahin

• Compares the labor market during the recent recession to the labor market during all other previous post war recessions.

• Conclusions:

(1) From a wide range of labor market outcomes, the recent recession was the deepest recession in post war period.

(2) Early on, the nature of labor adjustment in the recent recession displayed a notable resemblance to that of other severe

recessions.

(3) During the latter part of recession (and recovery), the path of adjustment exhibited important departures from other deep recessions.

2008Q12008Q2

2008Q3

2008Q4

2009Q1

2009Q22009Q3

2009Q42010Q12010Q22010Q32010Q4

-6

-4

-2

0

2

4

6

-10 -8 -6 -4 -2 0 2 4 6 8

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, and Congressional Budget OfficeOutput gap

Unemployment gap

No recessionRecessions

Figure 3. Okun’s Law, 1949-2010 Q4

Elsby/Hobijn/Sahin/Valletta 9/16/2011

Labor Market In the Great Recession: An Update 33

Revisions led to partial reversal Okun’s Law

2011Q2

-4

-3

-2

-1

0

1

2

3

4

5

6

-10 -8 -6 -4 -2 0 2 4 6

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Congressional Budget Office, FRBSF staff

Based on CBO potential output and NAIRU estimates (1949Q1-now)

Okun's Law

Output gap

Unemployment gap

2007 Recessionand after



Recent drop in unemployment through participation

62

63

64

65

66

67

68

0

2

4

6

8

10

12

1990 1995 2000 2005 2010Source: Bureau of Labor Statistics

Monthly observations; seasonally adjustedUnemployment and Labor Force Participation rates

Percent Percent

Unemployment rate

Labor force participation rate

2

4

6

8

10

12

1990 1993 1996 1999 2002 2005 2008 2011

2

4

6

8

10

12

Unemployment Rate by Gender

Source: Bureau of Labor Statistics

Women

Men

Unemployment Rate Unemployment RateSeasonally Adjusted

Oct

200

9

2.7

1.1

0.1

0.15

0.2

0.25

0.3

1990 1994 1998 2002 2006 2010

0.1

0.2

0.3

0.4

Unemployment to Non-Participation by Gender


Men

Percent Men

Seasonally Adjusted

Percent Women

Women

0.1

0.2

0.3

0.4

1990 1994 1998 2002 2006 2010

0.1

0.2

0.3

0.4

Unemployment to Employment by Gender


Men

PercentSeasonally Adjusted

Percent

Women

0

0.01

0.02

0.03

1990 1994 1998 2002 2006 2010

0

0.01

0.02

0.03

Employment to Unemployment by Gender


Men


Percent

Women

0

0.01

0.02

0.03

0.04

0.05

1990 1994 1998 2002 2006 2010

0

0.01

0.02

0.03

0.04

0.05

Nonparticipation to Unemployment by Gender


Men


Percent

Women



Change in Unemployment RatesTable 1: Change in Unemployment Rates (ppt)

Recession Recovery

Change in Unemployment Rate 5.5 -0.9Gender

Male 6.5 -1.6Female 4.3 -0.2

Age16-24 8.8 -1.625-54 5.4 -0.955+ 4.0 -0.3

EducationLess than High Scool 8.3 -0.6High School 6.5 -1.0Some College 5.3 -0.9College or Higher 2.9 -0.4

RaceWhite 5.2 -1.1Black 7.5 0.3Hispanic 7.2 -1.1

Notes: The recession refers to 2007Q2 to 2009Q4 and the recovery 2009Q4 to 2011Q2

The Unemployment Rate By Skills: All (20-45)

Education2007

UnempRate

2011Unemp

Rate

Change in

Rate

Share of

Pop.

Share Weighted

Change

Percent of Total

Unemp Rate

Explained

High School or Less

7.1% 15.2% 8.2% 41% 3.3% ~65%

Some College 4.2% 8.9% 4.7% 30% 1.5% ~25%

College or More

1.9% 4.5% 2.6% 29% 0.7% ~10%

All 4.6% 9.9% 5.3%

The Unemployment Rate By Skills: All (20-45)

Education2007

UnempRate

2011Unemp

Rate

Change in

Rate

Share of

Pop.

Share Weighted

Change

Percent of Total

Unemp Rate

Explained

High School or Less

7.1% 15.2% 8.2% 41% 3.3% ~65%

Some College 4.2% 8.9% 4.7% 30% 1.5% ~25%

College or More

1.9% 4.5% 2.6% 29% 0.7% ~10%

All 4.6% 9.9% 5.3%

Jobs By Educational Attainment

Unemployment Duration



Historically Low Outflows Even After Recession

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

20%

40%

60%

80%

100%

120%

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008Source: Bureau of Labor Statistics and authors' calculations

Monthly hazard based on Shimer (2005); 3-month moving averagesFlow hazard rates into and out of unemployment

Outflow hazard Inflow hazard

Outflow hazard, f(t)

Inflow hazard, s(t)



Pick-up in Outflows to Non-participation

0

5

10

15

20

25

30

35

40

1967 1972 1977 1982 1987 1992 1997 2002 2007Source: Shimer (2007), based on Ritter data provided by Hoyt Bleakley, Bureau of Labor Statistics, authors' calculations

Seasonally adjusted; 3-month moving averageOutflow rates out of unemployment by destination

Percent of unemployed

To Employment

To Non-participation



Outflow Rates by Duration and Destination

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24+

Source: Current Population Survey and authors' calculations

Average July 2010 - June 2011Monthly outflow rates out of unemployment

Duration (months)

Percent

Total

to employment

to out of the labor force



Very High Inflows from Non-participation

0

0.5

1

1.5

2

2.5

1967 1972 1977 1982 1987 1992 1997 2002 2007Source: Shimer (2007), based on Ritter data provided by Hoyt Bleakley, Bureau of Labor Statistics, authors' calculations

Seasonally adjusted; 3-month moving averageInflow rates into unemployment by origin

Percent of labor force

From Employment

From Non-participation



Evidence of increased frictions

Jun-11

1%

2%

3%

4%

5%

2% 3% 4% 5% 6% 7% 8% 9% 10% 11%

Source: JOLTS, CPS, and authors' calculations

Monthly observations; pre-2007-recession fitActual and fitted Beveridge Curve

Unemployment rate

Job openings rate

before 2007 recession

since 2007 recession

Fitted

Gap: 2.6%




Jun-11

1%

2%

3%

4%

5%

2% 3% 4% 5% 6% 7% 8% 9% 10% 11%

Source: JOLTS, CPS, and authors' calculations

Monthly observations; pre-2007-recession fitFitted and "New" Beveridge Curve

Unemployment rate

Job openings rate

before 2007 recession

since 2007 recession

Fitted "New" BC

Shimer’s Web Page 52




Broadbased decline in finding rates

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Bureau of Labor Statistics and authors' calculations

12-m moving averages of monthly dataUnemployment Outflow Hazards by Industry

Monthly outflow hazard

Total

Construction

Durable GoodsInformation

Financial

Part C: Regional Variation in Nonemployment Rates

Mian and Sufi (2012)

Regional Variation in Nonemployment Rate Changes

• American Community Survey (2005-7 pooled vs. 2009-10 pooled).• Focus men with less than a 4-yr college degree, 21-55 – collapse data to MSA

Distribution of Changes in Nonemployment Across MSAs.

10th Percentile 0.00525th Percentile 0.02750th Percentile 0.06375th Percentile 0.07190th Percentile 0.10095th Percentile 0.111

Other Notables

Naples, FL 0.132 Phoenix, AZ 0.086 Los Angeles, CA 0.044Reno, NV 0.107 Las Vegas, NV 0.077 Austin, TX 0.032Orlando, FL 0.093 Chicago, IL 0.055 New Orleans, LA

0.006Detroit, MI 0.089 Boston, MA 0.051

Mian and Sufi (2012) (First slide of their talk)

• The decline in aggregate demand, driven by the household balance sheet channel, is responsible for 65% of the jobs lost from 2007 to 2009

• We are confident this represents a separate channel from the uncertainty channel or the construction-related structural employment channel

• We provide suggestive evidence on the frictions that would translate demand shocks into employment losses

The Shock

.6.7

.8.9

1

Ho

use

pric

es(n

orm

aliz

ed to

1 in

200

6)

2005 2006 2007 2008 2009

House prices

.4.6

.81

Aut

o sa

les

(nor

mal

ized

to 1

in 2

006)

2005 2006 2007 2008 2009

Auto sales.7

.8.9

11.

1

Oth

er d

ura

ble

s(n

orm

aliz

ed to

1 in

200

6)

2005 2006 2007 2008 2009

Other durables

.91

1.1

1.2

1.3

Gro

cerie

s(n

orm

aliz

ed to

1 in

200

6)

2005 2006 2007 2008 2009

Groceries

High leverage counties, 2006Low leverage counties, 2006

The Effect on Employment: First Pass(Figure 2)

-.2

-.1

0.1

Co

unty

Em

plo

yme

nt G

row

th 0

7Q

1-0

9Q

1

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Motivating Example:Auto Retail versus Auto Manufacturing

(Figure 3)

-.4

-.2

0.2

.4A

uto

Re

tail

Em

plo

yme

nt G

row

th 0

7Q1

-09Q

1

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Auto Retail

-2-1

01

Aut

o M

anuf

actu

ring

Em

plo

ymen

t G

row

th 0

7Q

1-09

Q1

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Auto Manufacturing

Employment Growth: Non-Tradable and Tradable Industries(Figure 4)

-.2

-.1

0.1

.2

Non

-Tra

dabl

e E

mpl

oym

ent

Gro

wth

07Q

1-0

9Q1

(exc

lude

s co

nstr

uctio

n)

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Non-tradable (excluding construction)

-.6

-.4

-.2

0.2

Tra

dabl

e E

mpl

oym

ent

Gro

wth

07Q

1-0

9Q1

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Tradable

Employment Growth: Non-Tradable and Tradable Industries:Herfindahl-Based Definition

(Figure 5)

-.2

-.1

0.1

.2

Non

-Tra

dabl

e S

ecto

r E

mp

loym

ent

Gro

wth

07

Q1-

09Q

1(b

ase

d on

low

ge

ogra

phic

al c

once

ntra

tion)

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Non-Tradable

-.5

0.5

Tra

dabl

e S

ecto

r E

mp

loym

ent

Gro

wth

07

Q1-

09Q

1(b

ase

d on

hig

h g

eogr

aphi

cal c

onc

entr

atio

n)

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Tradable

Conclusion-.

2-.

10

.1.2

Non

-Tra

dabl

e E

mpl

oym

ent

Gro

wth

07Q

1-0

9Q1

(exc

lude

s co

nstr

uctio

n)

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Non-tradable (excluding construction)

-.6

-.4

-.2

0.2

Tra

dabl

e E

mpl

oym

ent

Gro

wth

07Q

1-0

9Q1

.5 1 1.5 2 2.5 3 3.5 4Debt to Income 2006

Tradable

Household balance sheet channel explains 65% of jobs lost

Part D: Structural Changes in

U.S. Economy During 2000s

Charles, Hurst, and Notowidigdo (2012)See attached second set of slides…

Documents

Micro Data For Macro Models Fall 2012 Topic 1: Labor Market in Great Recession