Micro Data For Macro Models

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

2. Course Pre-Amble

3. 1998 – 2000 Cohort That Are Tenured at Top Schools (with some omissions)

4. 1998 – 2000 Cohort That Are Tenured at Top Schools (with some omissions)

5. 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

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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

12. Steve’s Portion of the Class See Steve’s reading list…..

13. Where Do Research Question Come From A few words from Erik and Steve…..

14. Topic 1:Labor Markets in the Recent Recession

15. Part A: Conceptual framework for changes in employment

16. A Look at the Labor Market: Labor Demand Wages (W) Why Does Employment Change? Labor Demand (ND) Employment (N) • Labor Demand results from firm optimization– is a function of things like • productivity, comparative advantage, trade, policy, etc.

17. A Look at the Labor Market: Labor Supply Labor Supply (NS) (Holding Lifetime Income Fixed) Wages (W) Why Does Employment Change? Employment (N) • Labor Supply is the result of household optimization- is a function of government • policies (taxes and transfers), household wealth, immigration, etc.

18. A Look at the Labor Market: Labor Market Equilibrium NS Wages (W) Where Does Non-employment Come From? W0* ND N0* Employment (N)

19. NS Wages (W) Non-employment Theory 1: Great Vacation? 0 W0* 1 W1* ND N0* N1* Employment (N)

20. NS Wages (W) Non-employment Theory 1: Great Vacation? 0 W0* 1 W1* ND N0* N1* Employment (N) • Firms desire less labor. Some workers choose not to work at lower wages. • Workers transition to non-employment through unemployment.

21. NS Wages (W) Non-employment Theory 1: Great Vacation? 0 W0* 1 W1* ND N0* N1* Employment (N) • Decline in labor demand could be permanent (structural change in economy). • Decline in labor demand could be temporary (recession – temporary decline).

22. NS Wages (W) Non-employment Theory 1: Great Vacation? 0 W0* 1 W1* ND N0* N1* Employment (N) • Potential policy response if temporary - Shift labor demand back to the right.

23. NS Wages (W) Non-employment Theory 2: Sticky Wages 1 0 W0* ND N2 N0* Employment (N) • Same labor demand shock, but wages are prevented from adjusting downward.

24. NS Wages (W) Non-employment Theory 2: Stick Wages unemployment W0* ND N2 N0* Employment (N) • Same labor demand shock, but wages are prevented from adjusting downward. • “Cyclical” unemployment could occur.

25. NS Wages (W) Non-employment Theory 2: Stick Wages W0* ND N2 N0* Employment (N) Policy response: Try to shift the labor demand curve back to the right. Was the negative labor demand shift temporary?

26. NS Wages (W) Non-employment Theory 3: Policy and Labor Supply 1 W0* 0 ND N0* Employment (N) • Some policies may result in a reduction of labor supply (extend unemployment • benefits and people have less incentive to find a job).

27. 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 requirements Individuals with different sectorial experience/jobs in different sectors Spatial 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.

28. Non-employment Theory 5: Search Theory Harder

29. 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.

30. Part B: Nonemployment in Current Recession

31. “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. Some Facts About The Recent Labor Market

32. Figure 3. Okun’s Law, 1949-2010 Q4

33. Revisions led to partial reversal Okun’s Law Labor Market In the Great Recession: An Update

35. Recent drop in unemployment through participation Labor Market In the Great Recession: An Update

36. Unemployment Rate by Gender Subtitle Text Seasonally Adjusted Unemployment Rate Unemployment Rate 2.7 1.1 Men Women Oct 2009 X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

37. Unemployment to Non-Participation by Gender Subtitle Text Seasonally Adjusted Percent Women Percent Men Women Men X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

38. Unemployment to Employment by Gender Subtitle Text Seasonally Adjusted Percent Percent Men Women X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

39. Employment to Unemployment by Gender Subtitle Text Seasonally Adjusted Percent Percent Men Women X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

40. Nonparticipation to Unemployment by Gender Subtitle Text Seasonally Adjusted Percent Percent Men Women X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

41. Change in Unemployment Rates Labor Market In the Great Recession: An Update

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

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

44. Jobs By Educational Attainment

45. Unemployment Duration

46. Historically Low Outflows Even After Recession Labor Market In the Great Recession: An Update

47. Pick-up in Outflows to Non-participation Labor Market In the Great Recession: An Update

48. Outflow Rates by Duration and Destination Labor Market In the Great Recession: An Update

49. Very High Inflows from Non-participation Labor Market In the Great Recession: An Update

50. Evidence of increased frictions Labor Market In the Great Recession: An Update