New Ideas about the Long-Lasting Collapse of Employment after the Financial Crisis Robert E. Hall Hoover Institution and Department of Economics Stanford University Woytinsky Lecture, University of Michigan November 13, 2013 1
Collision of three forces A decline in output demand an event without serious consequences in a normal economy The zero lower bound on the nominal interest rate Low and stable inflation, so that the implied bound on the real interest rate is constraining 2
The Financial Wedge The difference between the rate of return to capital and the real interest rate f t = 1 [ α y ] t + (1 δ)q t+1 1 r t q t k t On the same conceptual footing as the investment wedge in Chari-Kehoe-McGrattan, stated as an interest spread Includes taxes and risk premium 3
The Financial Wedge 16 14 12 Percent per year 10 8 6 4 2 0 2009 2012 2015 2018 2021 4
The Ratio of Consumption to Disposable Income 0.94 0.93 0.92 0.91 0.90 0.89 0.88 0.87 0.86 0.85 2006 2007 2008 2009 2010 2011 2012 2013 5
Real Household Liabilities 110 105 100 95 90 85 80 2006 2007 2008 2009 2010 2011 2012 2013 6
Burden of Deleveraging as a Percent of Consumption 10 5 nt of consumption Perce 0 5 10 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 7
Google searches for withdrawal penalty 60 50 40 Index value 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 8
In Equilibrium, the Real Interest Rate is at the Level that Equates Output Demand to Supply 0.025 0.020 0.015 0.010 Real interest rate 0.005 0.000 0.005 0.010 0.015 0.020 Supply Demand 0.025 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 Output 9
Excess Supply of Output when the ZLB Binds 0.025 0.020 0.015 Excess supply of output Real interest rate 0.010 0.005 0.000 0.005 0.010 Interest rate bounded above equilibrium level 0.015 0.020 Supply Demand 0.025 0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 Output 10
Real and nominal interest rates Differ by the rate of inflation Friedman: inflation depends on slack and an inertial term relating to expectations Sargent: inflation depends on the context Central banks are firmly on the Friedman side, as expressed in the New Keynesian Calvo model 11
Recent inflation Strongly anchored in the 1 to 3 percent per year range Stock-Watson Jackson Hole paper 2010: no support for Friedman Inflation falls a bit as the economy contracts but does not continue to fall despite several years of slack This behavior contrasts to the Great Depression, when extreme deflation occurred 12
Two Measures of U.S. Inflation 6 5 4 3 2 1 0 1 2 Total CPI PCE core Target 3 2006 2007 2008 2009 2010 2011 2012 2013 13
U.S. Wage Inflation 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011 2012 2013 14
Clashing theories of unemployment Most models of the ZLB take employment as determined by product demand and unemployment as a residual The reigning theory (DMP) links unemployment to the product market only in certain specific ways and does not support the idea that unemployment is just a residual Recent work goes beyond the residual theory and integrates some version of DMP in a complete GE model 15
ZLB Analysis with Shifts in Both Demand and Supply 0.025 Supply 0.020 Real interest rate= minus inflation 0.015 0.010 0.005 0.000 0.005 0.010 0.015 0.020 Demand 0.025 0.90 0.95 1.00 1.05 1.10 Output 16
DMP model Focuses on the job-creation decision of the employer When an employer adds a worker, the employer gains the present value of the difference between the worker s marginal contribution to revenue (the marginal revenue product of labor) and the worker s pay This present value is the job value To reach the point where this gain occurs, the employer expends recruiting effort. The net benefit to the employer is the job value less the cost of recruiting a worker. With free entry to hiring, employers push recruiting effort to the point where the net benefit is zero. Thus the job value controls the amount of recruiting effort 17
Job value and unemployment Positive relation between recruiting effort and the speed with which job-seekers find jobs When employers are making high effort posting many vacancies and advertising their existence job-seekers find jobs quickly Unemployment is then low 18
Models of fluctuations in job value and thus in unemployment Walsh: In the New Keynesian model, the marginal revenue product of labor falls in recessions, which lowers the job value Mortensen: Sticky prices result in depressed prices for intermediate products, and the job value falls at firms making those products Gertler-Sala-Trigari: Sticky wages result in lower job value when the marginal product of labor falls 19
Most recent suggestions Hall: In times of high risk premiums, when the stock market is low, the same risk premiums result in low discounted values of the future flow of value from a newly hired worker Hagedorn, Karahan, Manovskii, and Mitman: Higher UI benefits raise workers outside option in wage bargaining and lower the job value 20
Job Value from JOLTS Compared to Wilshire Stock-Market Index 1400 18,000 1200 16,000 14,000 1000 12,000 800 10,000 600 400 Job value (right scale) 8,000 6,000 200 Stock market (right scale) 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 21
Wage channel HKMM find that the wage channel raised unemployment by 3.1 percentage points in 2010 Compare adjacent counties in different states same local conditions but different UI durations 22
Amplification through UI extensions 0.12 0.10 UI policy Unemployment response Unemployment rate 0.08 0.06 0.04 0.02 Large increase in unemployment induced through extension of UI benefits Small adverse shift condtional on unemployment 0.00 Duration of UI benefits 0 0.2 0.4 0.6 0.8 1 1.2 23
Evaluation of HKMM Strong endogeneity of UI duration because of triggers and discretionary extensions plainly motivated by high unemployment Some of the counties have population centers hundreds of miles apart Questionable data on unemployment, but results for wages, vacancies, and employment are supportive Detailed evaluation on my website 24
Duration of average spell of UI coverage, months 12 10 8 6 4 2 0 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 25
Index of real unemployment benefits per month 2.5 2.0 1.5 1.0 0.5 0.0 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 26
The job value is back to normal but unemployment is 7.3 percent Declining matching efficiency lowers job-finding rate and raises unemployment In particular, more generous UI benefits may cut search effort and reduce matching efficiency (moral hazard) Declining turnover lowers unemployment Higher dispersion across labor markets raises average unemployment Lower labor-force participation may lower unemployment It takes time to work off a stock of high-duration, low re-employment rate unemployed 27
Analysis of matching efficiency Measuring Matching Efficiency with Heterogeneous Jobseekers with Sam Schulhofer-Wohl Based on CPS adjusted transition rates among 6 categories of unemployment, 2 categories of employment, and out-of-labor-force Directly related to shifts of the Beveridge curve: Lower matching efficiency implies outward shift of curve 28
Tightness T t = V t H t 29
Aggregate tightness 1.0 0.8 vacancies/hires 0.6 0.4 0.2 0.0 2001 2003 2005 2007 2009 2011 30
Matching efficiency f i,t = γ i,t T t γ i,t = f i,t T t 31
Overall matching efficiency 1.75 1.50 1.25 1.00 0.75 0.50 0.25 fixed component weights fixed distribution of observables 0.00 2001 2003 2005 2007 2009 2011 32
Counterfactual unemployment rate with pre-recession tightness 0.10 0.08 0.06 0.04 0.02 0.00 2007 2008 2009 2010 2011 2012 simulated baseline counterfactual 33
Moral-hazard effect of UI benefits Farber-Valletta is the most recent paper, confirming small effect of less than 0.5 percentage points They look at how rapidly job-seekers find work and leave the labor force, given unemployment and employment growth in the local market 34
Coefficient of variation of unemployment rate across 9 regions 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 35
Coefficient of variation of unemployment rate across 29 occupations 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 36
Two measures of turnover rate 10 8 hires (millions) 6 4 2 0 2001 2003 2005 2007 2009 2011 Current Population Survey Job Openings and Labor Turnover Survey 37
Two measures of the labor-force participation rate 68 67 66 65 Standard participation rate 64 63 62 Extended participation rate Adding 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. 61 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 38
Conclusions The crisis depressed the job value substantially and the DMP model can be integrated into a GE model convincingly; there is no clash The drop in job value resulted from higher discounts and other factors triggered by the crisis; UI extensions a factor but probably not very large With the job value back to normal, unemployment remains at 7.3 percent primarily because of the overhang of long-duration unemployment and secondarily because of declining match efficiency, including the moral hazard effects of UI The remaining effects of the crisis operate through the collapse of labor-force participation 39
References Further reading Farber, Henry S. and Robert G. Valletta, Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market, Working 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 Unemployment 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, October 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, Unemployment 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 Jobseekers, 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. 40