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  3. 2024
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  5. Macroeconomic Implications of Labor Supply and Reallocation in Heterogeneous Agent Economies
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Macroeconomic Implications of Labor Supply and Reallocation in Heterogeneous Agent Economies

Paper Session

Saturday, Jan. 6, 2024 2:30 PM - 4:30 PM (CST)

Grand Hyatt, Republic B
Hosted By: American Economic Association
  • Chair: David Wiczer, Federal Reserve Bank of Atlanta

Monetary Policy and Wage Inequality: the Labour Mobility Channel

Ester Faia
,
Goethe University Frankfurt and CEPR
David Wiczer
,
Federal Reserve Bank of Atlanta
Ekaterina Shabalina
,
Goethe University Frankfurt

Abstract

In times of rising inequality and widespread resignation, we study the distributional conse- quences of monetary policy through labour mobility. We estimate the impact of monetary policy shocks with CPS data and quantile regressions on local projection specifications. We find that contractionary policy reduces wage inequality by disproportionally increasing the separation for bottom earners, by increasing the wages of bottom earners that remain in the market and by lowering those of top earners. This speaks of a selection effect through reallocation. Next, we build a monetary model with uninsurable risk, agents heterogeneous in income risk, talents and wealth and in which participation and occupational allocation decisions take place through a period-by-period discrete choice optimization on value func- tions across occupations. The key novel transmission runs through the dependence of the transition probabilities on wealth and income. Their decline, following a tightening, increases separation and reduces re-employment probabilities, more so for bottom earners. Their exit results in a rise of wages for the bottom earners that remain in the market. This, coupled with the fact that model-based regressions replicate the empirical counterparts, confirm the selection through reallocation through the lens of the model.

Labor Market Power, Tax Progressivity and Inequality

David Berger
,
Duke University
Kyle Herkenhoff
,
University of Minnesota
Simon Mongey
,
University of Chicago
Negin Mousavi
,
Ernst and Young

Abstract

This paper studies the implication of imperfect competition (monopsony) in the labor market for optimal labor income taxes. The question is studied in an incomplete markets Aiygari (1994) economy with idiosyncratic risk, borrowing constraints and labor supply (as in Macurdy, 1981). The novel feature is that jobs are differentiated from the perspective of each worker, and firms set wages (as in Card et al, 2020) in concentrated markets (as in Berger et al, 2022). In this setting, we establish how higher tax progressivity reduces household Marshallian labor supply elasticities on the hours margin, and in terms of workers’ elasticity of substitution across firms. Firms internalize both, setting lower wages, and demanding less labor. This is most pronounced at the most productive firms, which endogenously hire the most productive workers, and hence workers’ marginal tax rates are higher. A consequence is that optimal tax progressivity is lower. This incurs additional inequality and provides workers with less insurance, but mitigates the negative labor market power effects.

Labor Market Shocks and Monetary Policy

Serdar Birinci
,
Federal Reserve Bank of St. Louis
Fatih Karahan
,
Amazon
Yusuf Mercan
,
University of Melbourne
Kurt See
,
Bank of Canada

Abstract

We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of job mobility dynamics on inflation and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that inflation would have been around 0.25 percentage points higher between 2016 and 2019 if the EE rate increased commensurately with the decline in unemployment. We then decompose the channels through which fluctuations in EE transitions affect inflation. We show that an increase in the EE rate leads to an increase in the real marginal cost, but this direct effect is partially mitigated by the equilibrium decline in market tightness that exerts downward pressure on the marginal cost. Finally, we show that responding to fluctuations in EE rate explicitly when conducting monetary policy substantially reduces the welfare loss due to the fluctuations in unemployment and output and yields heterogeneous welfare gains across subpopulations.
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • J2 - Demand and Supply of Labor