Macroblog

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.

By M. Melinda Pitts, research center director, Center for Human Capital Studies;

Julie L. Hotchkiss, a research economist and senior adviser;

Chris Cunningham, a research economist and associate adviser; and

Roozbeh Hosseini, a Visiting Scholar, all of the Atlanta Fed's Research Department

• November 30, 2022 in
  • Employment
  • Labor Markets
  • Productivity
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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 city. 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 grants, expanding on $1 billion in funding for the Reconnecting Communities Pilot grants (part of the 2021 infrastructure bill ). 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 400 in Buckhead, a park over the connector (I-75/I-85) in Midtown between North Avenue and 10th Street, and a separate proposal 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 Park, 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 investment 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 SupplyTrack 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.

By Chris Cunningham, a research economist and associate adviser in the Research Department at the Atlanta Fed

• November 7, 2022 in
  • macroeconomics
  • Real Estate
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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.

By John Robertson, a senior policy adviser in the Atlanta Fed's Research Department

• October 21, 2022 in
  • Employment
  • Labor Markets
  • Wage Growth
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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.

By Salome Baslandze, research economist and assistant adviser;

Simon Fuchs, research economist and assistant adviser;

Indrajit Mitra, financial economist and assistant adviser; and

Veronika Penciakova, research economist and assistant adviser, all in the Research Department at the Atlanta Fed

• October 20, 2022 in
  • Economic Growth and Development
  • Employment
  • Monetary Policy
  • Pricing
  • Wage Growth
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