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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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December 1, 2022

Labor Supply, Wages, and Inequality Conference: Day 2 Overview

The second day of the Atlanta Fed Center for Human Capital Studies's recent conference on labor supply, wages, and inequality switched the focus from labor supply to wage setting. The day was kicked off by Christina Patterson, who presented her paper "National Wage Setting Adobe PDF file formatOff-site link," coauthored by Jonathon Hazell and Heather Sarsons. This research explores how large, multi-establishment firms, which are increasingly dominating local labor markets, set wages across space. Benchmark models suggest that firms would vary wages across space because of local differences in productivity, cost of living, and competition, resulting in variation across regions.

The authors use data from the job market analytics firm Burning Glass Technologies about posted job-level wages for online vacancies between 2010 and 2019, along with a survey of human resource managers and executives, self-reported wages from payscale.comOff-site link (a compensation data site), and firm employment visa application data. Their findings suggest that a large minority of firms set wages nationally and adopt pay structures that do not differ geographically. The two most important reasons given by firms is management simplicity and the importance of nominal comparisons to workers.

The national wage setting is associated with 3 to 5 percent lower profits for firms, but evidence suggests that national wage setting reduces earnings inequality without negatively affecting employment. However, this reduced inequality holds primarily for low-wage regions. National wage setting is also associated with increased regional wage rigidity.

The second paper of the day, "Industries, Mega Firms, and Increasing InequalityOff-site link," presented by John Haltiwanger and coauthored by Henry R. Hyatt and James R. Spletzer, provided a broader lens through which we can view earnings inequality, which has drastically increased over the past decades. The existing empirical studies have shown that most of this inequality increase came from the rising differences in earnings between firms. Using comprehensive matched employer-employee data from the Longitudinal Employer-Household DynamicsOff-site link database at the US Census Bureau, the authors show that the rising between-firms earnings dispersion is almost entirely accounted for by the increasing earnings dispersion between industries.

Increasing dispersion among industries operates at the two tails of the income distribution and is almost entirely accounted for by just 30 four-digit NAICS industries (as defined by the Census Bureau's classification system) The employment share of low-paying industries—such as restaurants and other eating places as well as general merchandise and grocery stores—has increased substantially, while real, inflation-adjusted wages in those industries fell. As a result, the left tail of the income distribution has fallen farther behind. On the other hand, the employment share of high-pay industries—such as software publishers, computer system design, information services, and management of companies—increased and was accompanied by large growth in those industries' average pay, leading to even higher relative income of the right tail of the income distribution.

Underlying these changes are worker-industry sorting and segregation patterns. Over time, workers with less education are more likely to end up working in low-paying industries, while more educated workers are more likely to cluster in the high-paying industries. These results suggest important changes have occurred in how lowest- and highest-paying firms restructure and organize themselves. These trends are also likely to be a by-product of recent technological innovations, led largely by firms and workers in industries with high pay. Though these innovations led to hefty rewards for high-skill workers, they also facilitated the scalability and expansion of mega-firms at the bottom of low-pay service industries. During the pandemic, workers in these low-pay industries have seen significant wage gains, but it remains to be seen if these recent changes will affect future inequality.

The day's third paper, "The Distributional Impact of the Minimum Wage in the Short and Long Run Adobe PDF file formatOff-site link," was presented by Elena Pastorina and coauthored by Erik Hurst, Patrick Kehoe, and Thomas Winberry. Their research continues the focus on wages by developing a framework to explore the impact of a $15 minimum wage, which would be a substantial increase in the current minimum wage and would be binding for 40 percent of workers without a college degree. The framework incorporates a large degree of worker heterogeneity within education groups, monopsony power (or considerable employer hegemony) in the labor markets, and putty-clay frictions (that allow for differing short- and long-run impacts of changes in the minimum wage).

Their results suggest that increases in the minimum wage are beneficial in the short run as they increase the welfare of the target group—low-income, noncollege workers making close to the initial minimum wage—with no large employment effects. However, the authors find that in the long run, firms will reoptimize their capital investment to better fit the changed relative prices of capital and labor. Thus, this group's employment, income, and welfare will eventually decline.

The authors go on to show that the Earned Income Tax Credit (EITC), which is based on income and number of children, is more effective in improving the welfare of low-wage workers than merely increasing the minimum wage. However, they find that combining a modest increase in the minimum wage with the EITC improves welfare more than either program does alone.

The fourth and final paper of the second day of the conference was "Labor Market Fluidity and Human Capital AccumulationOff-site link," by Niklas Engbom. Using panel data for 23 countries, Engbom finds a large degree of heterogeneity in labor market fluidity—specifically, job-to-job mobility across countries. He finds that mobility in highly fluid markets is about 2.5 times higher than in countries with low fluidity, and that higher fluidity is associated with higher real wage growth over a person's lifetime.

Engbom also documents that on-the-job training is more prevalent in countries that exhibit high fluidity and proposes a mechanism to explain the positive correlation among fluidity, wages, and training in which workers in highly fluid markets are able to accumulate more on-the-job skills and have higher productivity, resulting in higher wages.

The amount of labor market fluidity can also change over time, and Engbom notes that fluidity in the United States—while higher than many other countries—has declined significantly during the last 40 years. Engbom connects this secular decline to the flattening of worker lifetime wage profiles and estimates that reduced fluidity accounts for about half of this flattening.

One implication of this line of research is that there are potentially significant benefits to reducing barriers to job creation and allowing greater worker reallocation across jobs. Lower labor market fluidity reduces wage growth and human capital accumulation because it becomes harder for people to find jobs that fully utilize their skills, and it also discourages human capital accumulation.

That paper concluded the Atlanta Fed Center for Human Capital Studies's conference on labor supply, wages, and inequality. Next year's conference is already in the planning stages, so stay tuned for details.

November 30, 2022

Labor Supply, Wages, and Inequality Conference: Day 1 Overview

The Atlanta Fed's Center for Human Capital Studies held its annual employment conference in person this year. The conference, held October 13–14, was organized by Melinda Pitts, the center director, and two center advisers, Richard RogersonOff-site link of Princeton University and Robert ShimerOff-site link of the University of Chicago. The conference's title was "Labor Supply, Wages, and Inequality," and the agenda and links to the eight papers presented can be found here. This Policy Hub: Macroblog post summarizes the four papers presented on day one of the conference. The next post will look at the four papers presented on the second day.

Raphael Bostic, president and CEO of the Atlanta Fed, opened the conference. His welcoming remarks addressed policy makers' desire to understand the changing labor market, mentioning the work done by researchers at the Atlanta Fed and encouraging the economists in the room to continue doing policy-relevant research to better inform decision makers. His welcome was followed by the first session, which featured two papers related to how the COVID-19 pandemic altered individuals' labor-supply decisions.

The first paper presented was "Has the Willingness to Work Fallen during the Covid Pandemic? Adobe PDF file format," by R. Jason Faberman, Andreas I. Mueller, and Ayșegül Șahin, and presented by Faberman. The answer to the question their title poses is "yes": desired hours fell dramatically during the pandemic and have not recovered to prepandemic levels. Using data from the US Census Bureau's Current Population Survey and the New York Fed's Survey of Consumer Expectations, the authors find that the decline was most pronounced among those with less than a college education, those whose current or most recent jobs posed more significant COVID exposure risk, and those not working or working only part-time.

An important implication of the results reported in this paper is that while the unemployment rate is again near historic lows, the labor market might be even tighter than the unemployment rate is making it appear. In other words, by adding together the desired hours of those working and not working, the potential labor supply has fallen farther than either the unemployment rate or the labor force participation rate, compared to prepandemic levels. As a result, the difficulty employers are having finding workers, or getting workers to work more hours, might not ease any time soon.

Another broader consideration is whether this decline in desired hours is a temporary blip or a fundamental shift in preferences. The latter would hold implications on several fronts: for potential growth in an economy fueled by labor; for the way policymakers might define full employment, when employment of those "wanting" work leaves a significant amount of labor resources on the sideline; and for discussion of what incentives might be brought to bear on reversing the shift in preferences. This paper joins a growing body of literature showing that the impact of this pandemic on individual behavior has been dramatic and unprecedented. Additionally, the decline in desired hours of work could prove to have lasting and profound implications for future economic growth.

Adam Blandin followed with the presentation of his paper, "Work from Home Before and After the COVID-19 Outbreak Adobe PDF file formatOff-site link," coauthored with Alexander Bick and Karel Mertens. The authors designed the Real-Time Population Survey, a national labor market survey of adults aged 18–64 that ran from April 2020 through June 2021. The authors find that the share of the US population working from home (WFH) increased from 14 percent just before the pandemic to 40 percent early in the pandemic and still represented 25 percent of all employment as of June 2021. Working with custom survey questions and a structural model, the authors attempt to determine how much of the shift to WFH was a short-term substitution to an inferior form of production driven by the exigencies of the pandemic, as opposed to firms making a one-time investment to learn how to produce with remote workers. Specific survey questions found that more than 60 percent of workers who transitioned to WFH believed they could have always done their job remotely but were required to come in by their employer. Employing a structural model with endogenous wages (that is, wages based on a number of discrete factors) based, in part, on WFH status; a COVID-period in-person production penalty; and a one-time switching cost to remote work, the authors attribute much of the shift in work location to firms adopting remote work production. Combined with survey responses, the model suggests that remote work will persist long after COVID has waned.

The second session of the first day continued the theme of labor supply but shifted away from pandemic-specific research. Eric French presented "Labor Supply and the Pension-Contribution Link Adobe PDF file formatOff-site link," coauthored with Attila S. Lindner, Cormac O'Dea, and Tom A. Zawisza. Public pensions in the United States and many other are unfunded, pay-as-you go systems with benefits determined by a formula based on earnings history. Many governments have considered proposals to reform this formula, but a key concern is whether workers would respond to changes in their future pension benefits by adjusting their labor supply. To answer this question, the authors examined a change in the Polish pension system that altered the benefit for workers younger than 50 on January 1, 1999, with neither changes in benefits for older workers nor changes in the other plan characteristics. The original formula based benefits on the highest 10 years of salary growth, and the new system took into account every year of earnings.

Using a regression discontinuity design (RDD) and all tax returns linked to the Polish population registry, the authors estimate labor supply responses occurring between 2000 and 2002. This empirical design identifies the effects of the policy change by comparing individuals who were born only a few days apart and who face a very similar labor market and economic environment but are assigned to different pension plans. They found that the net return to work fell by an additional 5.2 percent in high-growth regions relative to low-growth regions. At the same time, the RDD allowed them to estimate that employment declines between regions differed by 2.29 percent. Taken together, these figures imply that the employment elasticity with respect to work incentives is 0.44.

This elasticity is in the range of estimates we typically see in the literature. However, one novel aspect of this paper lies in the fact that the research observes labor supply changes in response to changes in benefits to be received many years in the future, whereas most of the literature estimates the labor-supply response to the contemporaneous return to work. These results provide constructive evidence that individuals' labor supply responds in a forward-looking way to incentives in the pension formula, suggesting that tightening the link between contributions and benefits has the potential to alleviate labor supply distortions caused by payroll taxes.

Rather than focusing on how workers respond to external policy changes, the final paper of the day explored how an individual's risk preference and (over)confidence alter their job search behavior and labor market outcomes. Laura Pilossoph presented the last paper of the day, "Gender Differences in Job Search and the Earnings Gap: Evidence from the Field and Lab Adobe PDF file formatOff-site link," coauthored with Patricia Corté, Jessica Pan, Ernesto Reuben, and Basit Zafar.

The authors collected data on the employment search behavior of recent (2012–19) bachelor's graduates from the Questrom School of Business at Boston University. They collected data on the standard demographics involved in job search outcomes, including timing of acceptance and both accepted and rejected offers, job search expectations, and measures of risk. They found that, on average, women accepted jobs earlier in the search process than men did, the initial accepted salary was higher for men than for women, and the willingness to accept risk is higher for males. The authors then developed a job search model that incorporated gender differences in the levels of risk aversion and overoptimism about prospective job offers. The model predicts that if women are more risk-averse than men, then they will have lower reservation wages (the lowest wage at which someone would accept a given job) and search earlier. Likewise, if men are overconfident, then they will have a higher reservation wage. In other words, the decline in the reservation wage and increased job finding are derived from female risk aversion and male learning (that is, updating expectations about job offers) or having less optimism. Controlling for the measures of risk and overconfidence reduced the gender gap in wages by 37 percent.

The findings from the field were replicated in a specially designed laboratory experiment that featured sequential job search. The lab experiment yielded very similar results, with the gender gap in wages reduced by 30 percent when accounting for risk preferences and overconfidence. The results from both analyses suggest that risk preferences place a significant role in the gender differential.

In tomorrow's post, we'll summarize the papers presented on day two of the conference.

November 7, 2022

Do Freeway Lids Spur Development in Cities? Evidence from Dallas

The Federal Highway Act of 1956 connected Americas cities like never before, but the system of roads also divided and isolated existing city neighborhoods. As a result, people lost neighbors and local businesses and found themselves cut off from other parts of the cityOff-site link. Moreover, exposure to air and noise pollution increased, and some residents simply left the city altogether.

The recently passed Inflation Reduction Act included $3 billion in neighborhood access and equity grantsOff-site link, expanding on $1 billion in funding for the Reconnecting Communities PilotOff-site link grants (part of the 2021 infrastructure bill Adobe PDF file formatOff-site link). These funds are intended to remediate some of the ill effects of urban freeways, and the grants could fund freeway removal or other mitigation strategies. The most ambitious projects, however, are likely to put "lids" composed of parks and surface streets over sections of existing freeways. Atlanta currently has three proposed lidding projects that are likely to compete for this funding: a park over Highway 400Off-site link in Buckhead, a park over the connectorOff-site link (I-75/I-85) in Midtown between North Avenue and 10th Street, and a separate proposalOff-site link over the connector between downtown and Midtown around Peachtree Street.

Capping a freeway with a park and surface streets could play a significant part in ameliorating the unpleasantness of an urban freeway. However, these lidding projects are expensive to construct and maintain and don't completely eliminate air and noise pollution from freeways. Whether such projects are fiscally sustainable largely depends on their ability to attract new investment and residents to the city.

One of the more celebrated recent lidding projects is Klyde Warren ParkOff-site link, a five-acre park spanning three city blocks of freeway in downtown Dallas. The park was partly funded with an assessment on proximate land and, at least anecdotally, attracted considerable investmentOff-site link to that area of Dallas. Like Atlanta, Dallas is a growing, low-density, largely auto-dependent Sunbelt city. If a freeway lid could attract new investment and residents to the city core, then such projects might have broader impact.

One challenge to evaluating any place-based project or subsidy is identifying the appropriate treatment area. Although a new park might attract investment or raise property values for immediately adjacent land, do such parks benefit the city as a whole? Or do they just redirect normal, market-driven development to a different location?

To look at whether the construction around Klyde Warren Park represented development beyond what might otherwise have happened, I looked at SupplyTrackOff-site link data on new construction for six years before and after construction on the park began, both in Dallas and in a control group of six cities. I selected large southern cities not directly on the coast: Fort Worth, San Antonio, Austin, Houston, Nashville, and Atlanta. Looking before and after completion of the Dallas freeway lid and across cities, we can ask if the pace of new construction in Dallas increased relative to the control group. This is, effectively, a simple difference-in-difference estimate of the treatment effect of the freeway lid on Dallas. The table below summarizes the evidence on new construction.

Relative to its peers, Dallas experienced faster office and multifamily construction growth after lid construction began in 2012. Dallas added 1.3 million square feet of office space, a rate that is 50 percent faster than what occurred in the six prior years. Multifamily housing (apartments and condominiums in buildings with 5 or more units) grew even faster. Dallas added nearly 5,300 individual multifamily units after starting the lid, more than twice as many units as the six years before. I should note, though, that this period spans the housing market collapse of 2008. However, most large southern cities were doing well after 2012 as their economies slowly recovered from the Great Recession and developers took advantage of low interest rates. Still, compared to the control group cities, Dallas appeared to outperform. If we subtract the percentage growth in office and multifamily space from that of other large southern cities—either just in Texas or pooling all seven cities together—the growth in Dallas still looks exceptional. Compared to other Texas cities, Dallas office space grew 18 percent faster and multifamily grew 42 percent faster. In percentage growth terms Dallas's performance looks even better when we include Atlanta and Nashville in the control group, suggesting that whatever immediate growth that happened around the park did not simply divert growth from elsewhere in the city.

I also looked at the annual growth relative to 2012 for each city's hotels and retail space. Hotel room growth was weaker in Dallas than in peer cities, suggesting that new hotels built near the park might have come at the expense of other locations in the city and did not represent a net addition to supply. Perhaps parks are simply a more attractive amenity to residents than tourists, or maybe—given the relatively brief exposure—tourists were more indifferent to freeway noise and pollution ex ante. Retail growth never recovered after the Great Recession, but it didn't look particularly worse in Dallas than for the control group of cities.

Of course, none of this evidence is definitive. Cities are complex, and numerous idiosyncratic factors affect a city's labor demand, attractiveness to workers, or their capacity to supply new houses and offices. Still, when looking at investment activity, Dallas's growth in multifamily and housing and office construction is at least consistent with the idea that building the Klyde Warren Park lid over the freeway in downtown Dallas made the city a more attractive place to live and work.

October 21, 2022

Viewing the Wage Growth Tracker through the Lens of Wage Levels

One of the most popular features of the Atlanta Fed's Wage Growth Tracker is its depiction of median year-over-year wage growth of four different wage levels (wage quartiles). Unfortunately, the sample size of each quartile for a month is quite small, and thus the median wage growth for each quartile is noisy. For that reason, the Tracker shows changes by wage quartile only as a 12-month moving average. However, although the averaging smooths out a lot of the month-to-month noise in the series, it also means that the series have a substantial lag in showing wage growth changes across quartiles.

Instead, I have produced a cut of the wage growth data by wage level that can show a three-month moving average, which gives a better near-term picture of wage growth trends. The restriction, however, is that rather than using four wage groups, I put the average wage-level data (that is, the average of a person's reported wage in the current month and their reported wage a year earlier) into two groups: those whose average wage is above the median and those whose average wage is below the median. Essentially, I split the distribution of average wages in half.

Chart 1 plots the resulting three-month moving average of the two groups' median wage growth.

As you can see, median wage growth has been elevated since 2020 for workers across the wage distribution. But for workers in the bottom half of the wage distribution, median growth has been especially high during the last year. High wage growth for lower-paid workers aligns with numerous anecdotal reports suggesting that worker shortages since the pandemic have been especially acute in industries that pay below-average wages, such as leisure and hospitality.

Chart 1 allows another interesting observation: in the years leading up to the pandemic, the median wage growth of those in the lower half of the wage distribution was typically a bit above those in the upper part of the distribution. This was a period when the labor market was also tight, although much less so than it is today. Chart 2, which shows the sum of employment and job openings relative to the size of the available labor force, makes clear the divergence in the degree of overall labor market tightness today versus prior to the pandemic.

By this measure, though the gap has narrowed a bit in recent months, labor demand remains well above its supply, and this gap has been putting upward pressure on wages across the spectrum.

The Wage Growth Tracker series for the two wage groups is available now in the downloadable spreadsheet here and will be updated with October data after the Current Population Survey micro data for October is released, which usually occurs about a week after the US Bureau of Labor Statistics issues its labor report.