Unemployment (Fears), Precautionary Savings, and Aggregate Demand

Transcription

1 Unemployment (Fears), Precautionary Savings, and Aggregate Demand Wouter J. Den Haan (LSE/CEPR/CFM) Pontus Rendahl (University of Cambridge/CEPR/CFM) Markus Riegler (University of Bonn/CFM) June 19, 2016

2 What we do Show that the interaction between can 1 One friction in financial markets: incomplete risk sharing 2 Two frictions in labor markets: sticky nominal wages: dw/dp < 1 matching give rise to "aggregate demand" like propagation from supply shocks lead to novel policy implication regarding unemployment insurance (UI)

3 Interaction of two frictions key Complete risk sharing = Sticky nominal wages dampen effect shocks Flexible nominal wages = Incomplete risk sharing dampens effect shocks Both shocks magnify effect shocks

4 Key components behind these results Aggregate risk UI policy implications different without aggregate risk Asset price volatility Portfolio rebalancing towards liquid/unproductive asset during recession Nonlinearities induced by standard matching framework

5 Four cases 1 Complete markets and flexible wages 2 Complete markets and sticky wages 3 Incomplete markets and flexible wages 4 Benchmark:Incomplete markets and sticky wages

6 Case 1: flexible wages & complete markets usual matching stuff: productivity = expected future productivity = job creation = employment rate = unemployment rate = expected duration unemployment

7 Case 2: Sticky nominal wages & complete markets productivity = Upward pressure on prices = downward pressure on real wages = nominal wage rigidity dampens shocks!

8 Case 3: Flexible nominal wages & incomplete markets productivity = investment in job creation = unemployment = idiosyncratic risk = precautionary savings = reduction in job creation is smaller = incomplete markets dampens shocks

9 Case 4: Sticky nominal wages & incomplete markets Incomplete markets: Precautionary savings when unemp = precautionary demand for money = downward pressure on P = W/P (sticky W) = job creation investment by more not by less! = unemployment rate = precautionary savings = etc. = deflationary spiral Risk for unemployed = countercyclical W/P = volatile asset prices

10 Main results 1 Incomplete markets together with sticky wages amplify shocks, but on their own repress shocks 2 Increase in unemployment insurance from 50% to 55% = everybody better off not true in economy without aggregate risk

11 Just a little bit of empirical motivation

12 Euro Area A: Price level (*) B: Price level (*) and nominal wage (+)

13 Euro Area 1.15 B: Price level (*) and nominal wage (+) C: Price level (*) and nominal unit labor cost (o)

14 Model: Key ingredients 1 Heterogeneous households and incomplete markets 2 Nominal wages do not respond 1-for-1 with P 3 Search frictions in the labor market 4 # jobs = # firms = # shares

15 Existing firms One-worker firms Profits are given by Key parameter is ω P 1 D t = P t exp (z t ) W t ( zt ) ( ) ωz ωp Pt W t = ω 0 z P z P Aactive firms do not make decisions

16 Individual households one-worker households employed workers earn nominal wage (1 τ t ) W t unemployed earn µ (1 τ t ) W t & search for jobs idiosyncratic risk exogenous job loss probability, δ lower chance of getting a job in a recession agents can save/invest in unproductive asset: money, M i,t productive asset: equity, q i,t 0 (i.e., firm ownership/jobs)

17 Individual households max E t β j j=0 i,t+j 1 + χ 1 γ c1 γ ) 1 ζ P t+j 1 1 ζ ( Mi,t+1+j with respect to P t c i,t + J t (q i,t+1 (1 δ) q i,t ) + M i,t+1 = (1 τ t ) W t e i,t + µ (1 τ t ) W t (1 e i,t ) + D t q i,t + M i,t and q i,t+1 0

18 First-order conditions J t P t = βe t c γ i,t [ (ci,t+1 c i,t ) γ ( Dt+1 + (1 δ) J ) ] t+1 P t+1 P t+1 [ ] Pt = βe t c γ P i,t+1 + χ t+1 ( ) ζ Mi,t Marked departure from literature: Individual MRS is used in both Euler equations Inequality constraints ignored here P t

19 Equity market equilibrium h }{{} t + ((1 δ) q i q (e i, q i, M i ; s t )) df i A }{{} t (e i, q i, M i ) Equity creation Equity sold = (q (e i, q i, M i ; s t ) (1 δ) q i ) df i A + }{{} t (e i, q i, M i ), with Equity bought A = {i : q(e i, q i, M i ; s t ) (1 δ)q i 0}, A + = {i : q(e i, q i, M i ; s t ) (1 δ)q i 0}, "go to equity supply derivation"

20 Employment q t = i A+ + q (e i, q i, M i ; s t ) df t (e i, q i, M i ) i A q (e i, q i, M i ; s t ) df t (e i, q i, M i ) = (1 δ) q t 1 + h t

21 Money market equilibrium Equilibrium (M i M (e i, q i, M i ; s t )) df i B }{{} t (e i, q i, M i ) = Money sold (M (e i, q i, M i ; s t ) M i ) df i B + }{{} t (e i, q i, M i ), Money bought Money supply, M, is constant in the benchmark economy.

22 Government τ t q t W t = (1 q t ) µ (1 τ t ) W t τ t = (1 q t ) µ q t + µ (1 q t )

23 Calibration ω P : range of values W t = ω 0 ( zt z ) ( ) ωz ωp Pt z P P One-year post-displacement consumption drop is 34% (Kolsrud, Landais, Nilsson, & Spinnewijn 2015; Sweden) Expected unemployment duration 3.57 quarters

24 MODEL PROPERTIES

25 Money holdings Money holdings upon displacement Cond. on expansion Cond. on recession Unemployment duration (quarters)

26 Money demand Real cash on hand Intro Empirical motivation Model Model properties Business Cycles UI Amount invested in liquid asset Employed in expansion Unemployed in expansion Employed in recession Unemployed in recession

27 BUSINESS CYCLES

28 Type of experiment considered productivity z t Representative-agent version: P t = dw/dp = nominal-wage stickyness dampens shocks

29 Log deviation Log deviation Log deviation Log deviation Ppt. deviation Log deviation IRFs with sticky nominal wages 0-3 #10 Productivity 0.2 Employment Incompl. markets Compl. markets Output 6-3 #10 Real wage Asset prices 0.02 Price level Time (quarters) Time (quarters)

30 Log deviation Log deviation Log deviation Log deviation Ppt. deviation Log deviation IRFs with flexible nominal wages #10 Productivity Employment Incompl. markets Compl. markets Output 0-3 #10 Real wage Asset prices 0.02 Price level Time (quarters) Time (quarters)

31 UNEMPLOYMENT INSURANCE

32 Unemployment Insurance Two unemployment insurance (UI) experiments 1 Compare economies with different replacement rates 2 Unexpectedly increase replacement rate and take into account transition Two ways to deal with effect on wages 1 wage rule not affected 2 wage rule is adjusted to keep same implied Nash bargaining weights

33 Unemployment insurance Mechanism emphasized in the literature Replacement rate = 1 Agents better insured = savings = employment 2 Through bargaining wage = employment This also happens in our model too, but...

34 Mean employment rate and higher UI... there is a strong countervailing effect arising from aggregate uncertainty: Replacement rate = 1 Asset prices less volatile = demand equity = employment 2 Employment is concave in equity prices, J = E [employment] when SD [J]

35 UI and employment 0.91 ω P =0.7, µ does not affect wages Employment level ω P =1, µ does not affect wages

36 Switch to alternative UI policy 1 Replacement rate increases from 0.5 to Switch is unexpected 3 Switch is permanent 4 Agents take transition into account

37 Average welfare effect of change in UI 1.5 ω P =0.7, µ affects wages ω P =1, µ affects wages

38 Who likes/dislikes higher UI? 1.5 µ=0.55, ω 0 unchanged 1.5 µ=0.55, ω 0 increases 1 1 Welfare gain EE UU UE EU Real cash on hand Real cash on hand

39 Concluding comments With incomplete markets and sticky nominal wages, a decline in productivity sets off a self-reinforcing aggregate demand effect This happens despite the fact that both incomplete markets as well as sticky nominal wages in isolation repress propagation. One of the core components of this mechanism is the missing market for unemployment insurance. A rise in UI generosity can therefore increase average employment and raise welfare for all agents even the asset-rich employed

40 Creation of new jobs/firms/equity number of new firms created: vacancy yield: h t = ψv η t u1 η t h t v t = ψ ( ) η 1 vt u t

41 Supply of new equity Matching function zero-profit condition = ( ) ψ J η/(1 η) t h t = ψ u t κ P t

42 Creation of new jobs/firms/equity zero-profit condition = vacancies as a function of J t /P t : κ = ψ ( vt ) η 1 J t u t P t supply of new equity (job/firm creation): "back to main" ( ) ψ J η/(1 η) t h t = ψ u t κ P t

43 Unemployment duration Cond. on expansion Cond. on recession Frequency Duration of unemployment spell (quarters)

44 Equity holdings upon displacement Cond. on expansion Cond. on recession Equity holdings Unemployment duration (quarters)

45 Portfolio choice: fraction in liquid asset share of money in portfolio employed in boom unemployed in boom employed in recession unemployed in recession real cash on hand

46 Technical challenges Even rep-agent version not trivial to solve accurately non-linearity matching function matters suffi ciently volatile employment = volatile surplus volatile equity prices "go to accuracy graph rep-agent model" Adding moderate aggregate uncertainty to model is not a small change substantial changes in means volatile surplus and asset prices multiplicity

47 Log employment level nd order perturbation th order projections method "back to main"

48 Increase in UI & transition dynamics Increase in UI first period of recession No change in wage rule = equity less risky = average employment less deflationary spiral = recession less deep = employment Change in wage rule = the same as above + profits = average employment

49 Switch to higher level of unemployment benefits 0.91 Employment µ=0.5 µ=0.55 µ=0.55, ω 0 increases Time (quarters)