1. Lecture 4: Time Series and Business Cycle Patterns in Labor Supply

2. Part A: Time Series Patterns in Labor Supply, Some Facts

18. Part B: Time Series Patterns in Labor Supply, Some Explanations

19. Trends in The Natural Rate In Unemployment Did labor market conditions improve during the 1980s and 1990s? -Unemployment rates fell substantially Related concept: Do income or substitution effects dominate with respect to labor supply decisions? Must reads: Murphy, Topel, and Juhn “Current Unemployment, Historically Contemplated” (Brookings Papers on Economic Activity, 2002(1)).

20. Real Wages Over Time

24. Juhn, Murphy, Topel: Evolution of Wage Inequality

25. Trends in Unemployment and Nonemployment

26. Breakdown of the Non-Participators: Rising Disability

27. Rising Disability Among the Persistently Unemployed

28. Autor and Duggan (QJE 2003) For a detailed analysis of the intersection of the role of disability and labor supply, see Autor and Duggan’s: “The Rise in the Disability Rolls and the Decline in Unemployment” Show that during recessions, the disability margin is much more relevant now than it was during the 1980s (the benefits to the disabled are now more comparable to unemployment benefits than before).

29. Autor and Duggan

30. More Juhn, Murphy, Topel

31. Increase in Long Term Non-employment Duration

32. Increase in Long Term Unemployment Duration

33. Real Wages Over Time

34. Unemployment Trends Throughout the Wage Distribution

35. Nonparticipation Trends Throughout the Wage Distribution

36. Non-employment Trends Throughout the Wage Distribution

37. Income or Substitution Effects?

38. Income of Substitution Effect

39. Conclusions Decline in unemployment rate may not represent accurately the trends in labor market performance. Large decline in participation rates for men. Non employment has declined much less than unemployment. The decline is much more pronounced for low wage men. Does it tell us substitution effects are important? What about changes in transfers?

40. Part C: A Recent Story – Elsby and Shapiro (AER, 2011) Why Does Trend Growth Affect Equilibrium Employment? A New Explanation of an Old Puzzle (Note: I am using some of Elsby’s slides)

41. Existing Explanations Juhn, Murphy, and Topel (1991, 2002) suggest decline in demand for low-skilled labor in 1970s and 1980s. Autor & Duggan (2003), Bound & Waidmann (1992) suggest increase in generosity of disability insurance accounts for declines in employment rates among older men (45+).

42. Our Contribution We emphasize the role of wage growth in reducing work incentives through 2 channels: a)Reductions in the returns to experience among low-skilled workers; and b)Reductions in the rate of aggregate wage growth that accompanied the productivity slowdown.

43. Preview of Findings Given observed trends in wage growth we find that the model can account for: a)Most of the long run rise in nonemployment among high school dropouts. b)One half of the rise in economy-wide nonemployment. c)The observed age structure of these effects.

44. The Basic Idea Consider the following simple problem: Infinitely lived worker Once-and-for-all decision at start of working life between: a)Working forever; and b)Not working forever. What is the optimal labor supply policy?

45. The Decision to Work Work Forever Accumulate experience, x Payoff: Not Work Forever Do not accumulate x Payoff: Present value:

46. The Reservation Wage It follows that the worker will choose to work if: where:

47. Steady State Employment Imagine an economy populated by workers facing different wages, and different payoffs from nonemployment, Then, aggregate employment is given by: where Ω = c.d.f. of ω/β & ρ = replacement rate (b i /w i ).

48. Implications of Simple Model 1.[Well understood.] Increases in ρ, the replacement rate, reduce L *. 2.In the long run, it must be that g b = g w. Otherwise, ρ = b(t)/w(0,t) → 0 or ∞, and L * → 0 or 1 in the limit. Thus,

49. Implications of Simple Model 3.Increases in the return to experience g x reduce α and raise aggregate employment. –g x > 0 drives reservation wage below payoff from nonemployment. –Future returns to work  forgo current earnings. –Increases in g x reduce res. wages still further. –Effect will be powerful since r – g w likely small.

50. Implications of Simple Model 4.Increases in aggregate wage growth g w reduce α and raise aggregate employment, IFF g x > 0. –Increases in g w have a greater impact on PV of earnings for those in work—they compound the return to experience. –N.B. this effect is absent if g x = 0 ! Relates to Blanchard’s neutrality critique: when g x = 0, g w is neutral w.r.t. employment.

51. A More General Model Simple model introduced before, while intuitive, is very stylized in a number of ways: Once-and-for-all labor supply decision. Linear return to experience. Infinite lifetimes. To get a sense of the quantitative implications of the model, we now relax these restrictions.

52. Summary of Qualitative Predictions a)Increases in the return to experience stimulate employment. b)If there is a positive return to experience, increases in aggregate wage growth also stimulate employment. c)These effects are strongest among low- skilled who are marginal to employment decision.

53. Evidence We now present evidence on these two forms of wage growth for the US: Changes in the return to experience among low-skilled; Changes in aggregate wage growth.

54. Changes in the Return to Experience Data from 1960–00 Censuses and 2001–07 ACS Earnings: Annual wages and salary. Education: dropouts (9-11 yrs), high school, some college, college+. Experience: Age – education – 6. Sample:Full-time, full-year non- immigrant white males.

58. Sensitivity 1.Actual vs. Synthetic Cohorts –Similar picture.Similar picture 2.Potential vs. Actual Experience –Effects likely to be small.Effects likely to be small 3.Selection –Hard to generate flattening profile.Hard to generate flattening profile 4.Relation to Existing Literature –Similar picture using different data/methods.Similar picture using different data/methods

59. Cohort Earnings Profiles: A Similar Pattern

60. Summary This paper (hopefully) has: Provided an analytical framework in which the labor supply effects of wage growth can be understood. Documented the substantial decline in the returns to experience among low-skilled workers. Demonstrated that the employment effects of reduced returns to experience and aggregate wage growth are potentially substantial.

61. Erik’s Comments Do not allow b i to differ by group oValue of leisure oTransfer policy Conduct all analysis using pre-tax dollars oDo not allow for changes in Tax policy Assumes changes in wage profile are known ex-ante oIs that realistic?

62. Part D: Some Work in Progress

63. Aguiar, Hurst, and Karabarbounis (in progress) Calibrate preference parameters for labor supply (and potentially home production and leisure production function parameters) given: oObserved hours/participation for different skill groups oObserved home production time for different skill groups oObserved wages for different groups oObserved prices of home production, leisure, and other goods oObserved taxes and transfers for different groups Goal: oTo match both the time series and cross sectional trends Focus on a group where disability is much less of a concern.

67. Part E: Unemployment in Current Recession

68. Some Facts About The Recent Labor Market “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.

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

70. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 70 Revisions led to partial reversal Okun’s Law

72. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 72 Recent drop in unemployment through participation

73. Unemployment Rate by Gender Source: Bureau of Labor Statistics Women Men Unemployment Rate Seasonally Adjusted Oct 2009 2.7 1.1

74. Unemployment to Non-Participation by Gender Source: Bureau of Labor Statistics Men Percent Men Seasonally Adjusted Percent Women Women

75. Unemployment to Employment by Gender Source: Bureau of Labor Statistics Men Percent Seasonally Adjusted Percent Women

76. Employment to Unemployment by Gender Source: Bureau of Labor Statistics Men Percent Seasonally Adjusted Percent Women

77. Nonparticipation to Unemployment by Gender Source: Bureau of Labor Statistics Men Percent Seasonally Adjusted Percent Women

78. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 78 Change in Unemployment Rates

79. The Unemployment Rate By Skills: All (20-45) Education 2007 Unemp Rate 2011 Unemp Rate Change in Rate Share of Pop. Share Weighted Change Percent of Total Unemp Rate Explained High School or Less 7.1%15.2%8.2%41%3.3%~65% Some College4.2%8.9%4.7%30%1.5%~25% College or More 1.9%4.5%2.6%29%0.7%~10% All4.6%9.9%5.3%

80. The Unemployment Rate By Skills: All (20-45) Education 2007 Unemp Rate 2011 Unemp Rate Change in Rate Share of Pop. Share Weighted Change Percent of Total Unemp Rate Explained High School or Less 7.1%15.2%8.2%41%3.3%~65% Some College4.2%8.9%4.7%30%1.5%~25% College or More 1.9%4.5%2.6%29%0.7%~10% All4.6%9.9%5.3%

81. The Non Participation Rate By Skills: All Education 2007 Non-Emp Rate 2011 Non-Emp Rate Change in Rate Share of Pop. Share Weighted Change Percent of Total Non-Emp Rate Explained High School or Less 22.1%24.1%2.0%41%0.8%~50% Some College19.0%21.8%2.8%31%0.9%~50% College or More 12.1%12.2%0.129%0% All18.4%19.9%1.5%

82. The Non Participation Rate By Skills: All Education 2007 Non-Emp Rate 2011 Non-Emp Rate Change in Rate Share of Pop. Share Weighted Change Percent of Total Non-Emp Rate Explained High School or Less 22.1%24.1%2.0%41%0.8%~50% Some College19.0%21.8%2.8%31%0.9%~50% College or More 12.1%12.2%0.129%0% All18.4%19.9%1.5%

83. The Non Employment Rate By Skills: All Education 2007 Non-Emp Rate 2011 Non-Emp Rate Change in Rate Share of Pop. Share Weighted Change Percent of Total Non-Emp Rate Explained High School or Less 27.6%35.7%8.1%41%3.3%~60% Some College22.4%28.7%6.3%31%2.0%~30% College or More 13.7%16.1%3.4%29%1.0%~10% All22.2%27.7%5.5%

84. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 84 Long-term Unemployment Still High

85. Unemployment Duration

86. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 86 Historically Low Outflows Even After Recession

87. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 87 Pick-up in Outflows to Non-participation

88. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 88 Outflow Rates by Duration and Destination

89. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 89 Very High Inflows from Non-participation

90. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 90 Evidence of increased frictions

91. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 91 Evidence of increased frictions

92. Elsby/Hobijn/Sahin/Valle tta 9/16/2011 Labor Market In the Great Recession: An Update 92 Broadbased decline in finding rates

93. Part F: Long Run Trends And Current Recession Interactions

94. Where Are Potential Long Term Unemployment Forces Coming From 1.Economic boom from the late 1990s through the mid 2000s o Housing boom o Credit boom 2.Persistent decline in manufacturing over last 30 years. Note:These two forces could have important interactions.

95. Background: Male Labor Force Participation Rate (All)

96. Share of “Prime Age” Men Working in Manufacturing

97. Rise of China: Autor et al. (2011)

98. Share of Prime Age Men Out of the Labor Force

99. Share of Prime Age Lower Educated Men Working in Manufacturing

100. Share of Prime Age Lower Educated Men Out of the Labor Force

101. Some More Conclusions Manufacturing has been steadily declining over past few decades. The decline has been felt most by lower educated men. The decline has been associated with an exit of lower educated men from the labor force.

102. House Price Growth

104. Share of Prime Age Men Working in Construction

105. Share of Prime Age Low Educated Men Working in Construction

106. Interaction Between the Construction and Manufacturing: Low Educated Men

107. Construction Share of Lower Educated Men Relative To High Skill Men

109. Out of Labor Force of Low Skill Men Relative to High Skill Men

110. Wages of Lower Educated Men

112. Labor Market Break Down of Younger Low Educated (<= 12)Men Labor Market Status199720072010 Out of Labor Force10.712.513.9 Unemployed7.36.616.0 Construction13.618.813.1 Manufacturing15.511.08.8 Other52.151.148.2 Incarceration Rate about 5% in 2010.

113. Labor Market Break Down of Younger High Educated (>= 16) Men Labor Market Status199720072010 Out of Labor Force4.25.05.6 Unemployed1.91.64.7 Construction1.92.41.5 Manufacturing2.11.91.7 Other89.989.186.8

114. A Potential Hypothesis About Current Unemployment The decline of manufacturing would have gradually caused an exodus of low skilled men from the labor market. Decline in manufacturing puts downward pressure on wages of low skilled men. During previous two decades, such forces was associated with an exodus of low skilled men out of the labor force. During the past decade, the housing (construction) boom may have delayed the inevitable (giving low skill men another employment option) As construction returns to “normal” and manufacturing has disappeared, what will low skill men do? May transition through unemployment before exiting the labor force.