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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 ," 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.com (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 Inequality," 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 Dynamics 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 ," 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 Accumulation," 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 Rogerson of Princeton University and Robert Shimer 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? ," 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 ," 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 ," 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 ," 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.
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.
October 20, 2022
The Atlanta Fed's Early Career Visitor Program Workshop: A Synopsis
On September 9, 2022, the Federal Reserve Bank of Atlanta hosted the Early Career Visitor Program Workshop, organized by Salome Baslandze, Simon Fuchs, Indrajit Mitra, and Veronika Penciakova. The purpose of the program is to offer early- and mid-career researchers the opportunity to spend several months visiting the department. The program, an innovative addition to the existing landscape of offerings across the Federal Reserve System, provides a unique opportunity for researchers in the early part of their careers to spend some time at a regional Reserve Bank, and for Atlanta Fed's Research Department to strengthen ties with new generations of policy-oriented economists. The program also supports our policy-making process by keeping us in touch with new theoretical, quantitative, and empirical methods in the profession. The workshop brought together participants in the Atlanta Fed's 2021 Early Career Visitor Program with an aim to foster active exchange and discussion among economists on a wide range of topics. Tao Zha from the Atlanta Fed opened the conference by welcoming the participants. He talked about our unprecedented times and the challenges policymakers face in light of high inflation, government debt, and ongoing macroeconomic shocks. He also discussed the importance of high-quality research in informing policymakers.
Yuhei Miyauchi from Boston University presented his in-progress research (coauthored with with Elisa Giannone, Nuno Paixão, Xinle Pang, and Yuta Suzuki) titled "Living in a Ghost Town: The Geography of Depopulation and Aging." This project explores the dynamics of aging and depopulation across different regions within a country and how this process affects welfare across regions and generations. Using spatially disaggregated data from Japan for the last 40 years, he documents that depopulation and aging have progressed more rapidly in less populous areas. This empirical pattern is primarily driven by the youths' net outmigration. Motivated by this evidence, the author develops a dynamic life-cycle spatial equilibrium model of migration decisions. The model matches the historical spatial population changes in Japan and projects future spatial patterns of depopulation and aging. A key take-away from this project is that abstracting from endogenous migration decisions over the life cycle and their effects on local economies substantially biases the projected spatial patterns of demographic changes and welfare.
Wookun Kim from Southern Methodist University presented his joint work with Changsu Ko and Hwanoong Lee, "Heterogeneous Local Employment Multipliers: Evidence from Relocations of Public Entities in South Korea." The authors exploit a variation in public-sector employment from an episode of the relocations of public-sector entities and estimate local employment multipliers. The estimated multiplier is positive and persistent over time: an introduction of one public sector employment increases the private sector employment by one unit, with employment growth in the services sector driving this increase in private sector employment. The authors document that the effect of public employment on private employment is highly localized. In addition to changes in private employment, the relocations of public-sector employees led to a positive net inflow of residents into the treated neighborhood. Examining the variation in the extent of public employment shock across different relocations, the paper identifies heterogeneous local employment multipliers and provides evidence that the extent of public sector shocks and different types of relocation shape this heterogeneity. Their results imply that local employment multipliers tend to be higher in areas with predetermined characteristics that allow faster and larger general equilibrium responses to take place after the public sector shock.
Maya Eden from Brandeis University presented her work titled "The Cross-Sectional Implications of the Social Discount Rate." In her research, Eden asks, how should policy discount future returns? The standard approach to this normative question is to ask how much society should care about future generations. The author establishes an alternative approach, based on the social desirability of age-based redistribution. The social discount rate is below the market interest rate only if it is desirable to increase the consumption of the young at the expense of the old. Along the balanced growth path, small deviations of the social discount rate from the market interest rate imply large welfare gains from redistributing consumption across age groups.
Boyoung Seo from Indiana University presented her work, "Racial Differences in Prices Paid for Same Goods," coauthored with Andrew Butters and Daniel Sacks. The authors document that Black non-Hispanic households pay 2.0 percent higher prices than white non-Hispanic households, and Hispanic households pay 0.8 percent higher prices for physically identical products. This difference suggests that conventional measures of racial income differences understate real racial income inequality. Differences in income, demographics, or education do not explain the racial price gap. Instead, it is entirely explained by three factors: Black non-Hispanic and Hispanic households buy smaller packages with higher unit prices, benefit less from coupons, and live in places where prices tend to be high. The place-based price differences appear driven not by supermarket presence but by differences in carrying and transportation costs.
Abdoulaye Ndiaye from New York University presented "Bonus Question: How Does Incentive Pay Affect Wage Rigidity?," a paper coauthored with Meghana Gaur, John Grigsby, and Jonathan Hazell. Wage rigidity occupies a central role in models of macroeconomic fluctuations. However, recent work shows that wage rigidity is not sustained in equilibrium with appropriately calibrated idiosyncratic shocks. Indeed, individual wages frequently adjust in response to both idiosyncratic and aggregate shocks in the data. Many of these fluctuations result from movements in nonbase compensation such as bonuses, which most existing models are ill-equipped to study. The authors study whether and how flexible incentive pay affects macroeconomic fluctuations. They develop a general model of dynamic contracting, in which firms offer contracts to workers to give them incentives to supply costly effort that is otherwise unobservable by the firm. In this class of models, the first-order response of firm value to exogenous shocks is summarized by the direct effect of the shock on firms' objective function and constraints—the envelope theorem, which examines the effects of changes in certain variables, would hold that the indirect effects of the shock on wage payments and effort are not value-relevant. The authors consider the implications of this result both theoretically and quantitatively for the two fields that most commonly rely on wage rigidity to generate macroeconomic fluctuations: labor search and New Keynesian business cycle theory.
Yu Xu from the University of Delaware presented his work, titled "Ambiguity and Unemployment Fluctuations" and coauthored with Indrajit Mitra. The authors analyze the consequences of ambiguity aversion in the Diamond-Mortensen-Pissarides (DMP) search and matching model. Their model features a cross-section of workers whose productivity is the sum of an aggregate component and a match-specific component. Firms are ambiguity averse towards match-specific productivity. The model delivers two insights. First, ambiguity aversion substantially amplifies unemployment rate volatility. Second, a part of the high value of leisure required by the canonical DMP model to generate realistic unemployment rate volatility can arise from fitting a model missing ambiguity aversion to data generated in an environment where agents are ambiguity averse.
The workshop organizers hope that participants found the diverse array of presentations thought provoking as they progress in their careers as researchers, and that the discussions contributed to their professional and intellectual development.
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