Category: Economics
What are the actual dangers of advanced AI?
That is the focus of my latest Bloomberg column, 2x the normal length. I cannot cover all the points, but here is one excerpt:
The larger theme is becoming evident: AI will radically disrupt power relations in society.
AI may severely limit, for instance, the status and earnings of the so-called “wordcel” class. It will displace many jobs that deal with words and symbols, or make them less lucrative, or just make those who hold them less influential. Knowing how to write well won’t be as valuable a skill five years from now, because AI can improve the quality of just about any text. Being bilingual (or tri- or quadrilingual, for that matter) will also be less useful, and that too has been a marker of highly educated status. Even if AIs can’t write better books than human authors, readers may prefer to spend their time talking to AIs rather than reading.
It is worth pausing to note how profound and unprecedented this development would be. For centuries, the Western world has awarded higher status to what I will call ideas people — those who are good at developing, expressing and putting into practice new ways of thinking. The Scientific and Industrial revolutions greatly increased the reach and influence of ideas people.
AI may put that trend into reverse.
And on arms races:
If I were to ask AI to sum up my worries about AI — I am confident it would do it well, but to be clear this is all my own work! — it might sound something like this: When dynamic technologies interact with static institutions, conflict is inevitable, and AI makes social disruption for the wordcel class and a higher-stakes arms race are more likely.
That last is the biggest problem, but it is also the unavoidable result of a world order based on nation-states. It is a race that the Western democracies and their allies have to manage and win. That is true regardless of the new technology in question: Today it is AI, but future arms races could concern solar-powered space weapons, faster missiles and nuclear weapons, or some yet-to-be-invented way of wreaking havoc on this planet and beyond. Yes, the US may lose some of these races, which makes it all the more important that it win this one — so it can use AI technologies as a counterweight to its deficiencies elsewhere.
In closing I will note for the nth time that rationalist and EA philosophies — which tend to downgrade the import of travel and cultural learning — are poorly suited for reasoning about foreign policy and foreign affairs.
Surgery is Not FDA Regulated
What would happen if the FDA regulated pharmaceuticals much less than currently? I have pointed to one useful comparison, new uses of old drugs do not have to go through FDA required efficacy trials in the new use. In other words, new uses of old drugs are regulated for safety-only. Thus,
“off-label prescribing” provides a window on to what a world of safety-only FDA regulation would look like. Off-label prescribing surely results in errors and problems but overall physicians tell us that off-label prescribing is highly beneficial and critical to good medical care.
Maxwell Tabarrok points to another useful comparison, surgery. Surgery is not FDA regulated, despite having many of the same asymmetric information problems as pharmaceuticals. Some surgical procedures are surely ineffective and unsafe. Yet, once again, the FDA-absent surgery market appears beneficial overall and like other markets it improves over time with greater safety and more efficacy. For example,
In the US, the death rate from medical and surgical care complications declined by 39% from 1999 to 2009.
Would we be better off if every new surgical procedure had to go through FDA-required efficacy trials before it could be offered to consumers?
Neither of these comparison proves that a world with less FDA regulation would be a better world but both refute the stories of a world run amuck in the absence of the FDA. In essence, the reason is that the world contains many sources of approval, recommendation, certification and review beyond the FDA and these would grow in scope and stature absent the FDA.
See Maximum Progress for more.
Addendum: More excellent Tabarrok material: The Spice Must Flow: The Dutch-Portuguese War-Part 1.
The Contractual Origins of High-Rent Urban Blight
Have you ever wondered why empty storefronts in major cities stay empty for so long? There is a new and still in the works paper by Daniel Stackman and Erica Moszkowski, and it provides valuable information about one piece of the puzzle. Here is the abstract:
We document the rise of storefront vacancies in prime retail locations, a phenomenon we refer to as high-rent blight, in America’s largest and most expensive urban retail market: Manhattan. We identify a little-known contracting feature between retail landlord and their bankers that generates vacancies in the downstream market for retail space. Specifically, widespread covenants in commercial mortgage agreements impose rent floors for any new leases landlords may sign with tenants, short-circuiting the price mechanism in times of low demand for retail space. Quasi-experimental estimates suggest that binding rent floors imposed by mortgage covenants substantially reduce the probability of occupancy, and we show in counterfactual exercises that covenants may have increased vacancy rates by as much as 14% over the 2016 to 2020 period.
There are some earlier MR posts on this question, though I am not sure of the appropriate key words to find them…
Two Updates on the Value of Vaccines
1) From the recent annual meeting of the American Society of Tropical Medicine & Hygiene (abstract 6949) we learn that the R21/Matrix-M malaria vaccine maintained it’s efficacy over 4 seasons.
…Importantly, maintained high efficacy over four malaria seasons with only four doses is demonstrated, with no concerns to date of rebound in those who have not received repeated booster doses of the malaria vaccine. These data show that the R21/MM vaccine could significantly reducing malaria cases and deaths in children living in malaria endemic areas by inducing well maintained protective immunity.
This is excellent news and further supports my call for rapid, emergency distribution of malaria vaccines.
2) Glennerster, Kelly, McMahon, and Snyder estimate the value of a universal coronavirus vaccine. The COVID vaccines have been very valuable (see our Science paper) but each new variant of concern causes a spike in death rates. As new variants emerge, we modify the vaccines but that takes time and happens only after the death rate spikes. In addition, no one is thrilled with boosters. A universal coronavirus vaccine, and there are dozens in the works, could preclude the need to adjust vaccines on the fly and avoid or greatly ameliorate the death spikes. Based on reduced US mortality alone, Glennerster et al. estimate that a universal vaccine would be very valuable–so much so that an Advance Market Commitment on the order of $6-$10 billion would easily pass a cost-benefit test even if it had just say a 40% chance of accelerating a universal vaccine.
As I said repeatedly during COVID, billions<<Trillions.
When will the world have its first trillionaire?
Not anytime soon, as I argue in my Bloomberg column, here is one of the arguments:
The desire to diversify is another limiting force. Once you have a considerable sum of money, it makes sense to spread your assets widely. Gates, for example, sold a good deal of Microsoft stock early on, presumably with diversification as a motive. At the time it seemed like an obviously good idea. Yet today Gates would be much richer if he had held onto his Microsoft shares. By one estimate he would in fact be a trillionaire, but even that hypothetical required a very dramatic recent run-up in Microsoft shares.
No one gets to be a billionaire by fully diversifying, anyway. Rather, billionaires pour their hearts and souls into a small number of very particular enterprises, which then (might) earn very high rates of return. But throughout the course of one’s life, it doesn’t make sense to keep on holding so much risk. It is better to cash in and enjoy some safety, in turn limiting your chance to become a trillionaire.
As I do note in the piece, it is the Federal Reserve that will get us there eventually.
Rent Controls
Ryan Bourne has a good rundown on rent controls in Argentina. In 2020 Argentina introduced a relatively mild form of rent control; rent increases during tenancy were capped at a weighted average of inflation and wage growth, tenancy was a minimum of 3 years and it became very difficult to end a tenancy. In ordinary times, this might have had only mild negative effects but in a high inflation rate scenario everything was accelerated (and the controls got worse over time, most notably in 2023 rent increases were capped at the minimum of inflation and wage growth).
….The results of all this were predictable. Around the policy’s introduction, it’s estimated that 45% of landlords stopped renting to instead sell their properties, not least because most home sales were made in dollars [it was illegal to rent in dollars, AT]. A lot of landlords shifted to short-term rentals on AirBnB too. In 2019, Buenos Aires had 10,000 properties listed on AirBnB; now it’s over 29,500. There have thus been no end of stories about a rental housing crisis, with tenants unable to find rental accommodation, despite the Financial Times reporting late last year that energy use implies ‘one in seven homes’ in Buenos Aires, the capital, laid empty.
This supply crunch led to soaring rents. Bloomberg reported that rents jumped sharply after tenancy rent controls were announced, as landlords opted out of the market or front-loaded rent increases to protect against inflation. Having been falling in real terms through 2018 and 2019, and tracking inflation for most of the previous decade, rents in Buenos Aires grew at 1.7 times the pace of inflation in 2020, broadly tracked inflation in 2021 and 2022, and then accelerated much faster than inflation again in 2023 as the rate which rents could be increased within tenancies was tightened further to the lower of wage growth or inflation.
As a result, the average rent for a two bedroom apartment in Buenos Aires has surged from 18,000 pesos per month at the end of 2019 to 334,000 pesos today, far above the 210,000 pesos if prices had merely tracked broader inflation, as used to happen. This relative price hike obviously hurts the poor most, because they cannot easily afford deposits to buy homes, or more expensive shorter-term dollar rentals.
Controls on rents within tenancies also soured landlord-tenant relations, incentivising landlords to forgo expensive maintenance (thus allowing the value of the property to fall towards its regulated price or to encourage tenants to leave). Misallocation of properties was rife. Reports in Buenos Aires described friends having to share apartments further out of the city centre, meaning cramped conditions and longer commutes. Under such controls, people enjoying sub-market rents are incentivized to stay in properties ill-suited for them, while others must leave properties they can afford prematurely when rents adjust sharply before their wages rise.
Milei’s Decree 70/2023, translated as ‘Foundations for the Reconstruction of the Argentine Economy,’ eliminated rent controls, including allowing contracting in dollars. Even though it has been only a matter of months, early signs are very positive:
Already the reduced risks to landlords is leading a rebound in the rental supply. Broker Soledad Balayan has shown a 50% rise in notices for traditional rentals since the decree. A host of other sources, including the Argentine Real Estate Chamber, have confirmed large supply jumps. Perhaps unsurprisingly, reports show new rental prices falling, by between 20 and 30% so far.
Quick tour of Argentina’s fiscal deficit (from my email, anonymous author)
I won’t double indent, but this is not by me, though I agree with it:
“I agree with your read re Argentina’s history of fiscal stability. From this paper (unclear if the data is accurate), here is Argentina’s deficit from 1960 to 2016 or so:
[See Figure 3 here]
Notice 2003-2009 is the only time with a noticeable superavit (exports > imports, taxes > spending), which coincides with Kirchner. It happily coincided with booming soy prices and it was immediately followed by more public spending. Remember soy exports have their own special tax rate (retenciones + FX tax, ~double other exports). Here are soy prices (source):
[See Figure here]
Here is Carlos Pagni in 2009 covering the law that let the state spend as much as it pleased once again. This was only a few years after 2004, when the IMF had forced Argentina to pass Ley 25.917 constraining government spending and debt under GDP.
Also notice that the deficit continued after the hyperinflation of 1989-1990! Between the privatizations, Plan Bonex, and reduced social spending, Menem reduced inflation (and caused a recession for which he is resented to this day). Then Cavallo comes in with convertibilidad. This gets world bankers excited and the dollars start flowing back into Argentina but the fiscal deficit immediately resumes. That same Menem ran an ad campaign in 1999 partially based on infrastructure investments after his decade of deficit.
In other words, the Peronistas simply do not believe that too much spending leads to a crisis. They will always spend if allowed to. Argentina still lacks the institutions to prevent this.
Looking at the recent history of fiscal deficit, Milei can make two contributions:
Short-term: Cut spending before things explode. The Peronistas would’ve continued to print + spend, deepening the problems. Milei is already succeeding at this and will likely succeed while he remains in power. For example, he has cut some of the funding to the provinces, which will be forced to cut their spending. Some of them are already considering printing their own currency (paper bonds like the LECOP or Patacones from 2001).
Long-term: Prevent future spending. This is what the Libertarians promise: remove the people that spend us to the ground for good. We should measure “historical success” by this measure. This is why dollarization is attractive: it prevents the state from printing money to fund its deficit.
I have my hopes up but I don’t understand Argentinian institutions or history well enough to know if he can make progress on this. As a comparison, the Bank of England was founded in 1694 and became formally independent a few centuries later in 1997 (including an IMF intervention into fiscal spending as recent as 1976).”
Dose Optimization Trials Enable Fractional Dosing of Scarce Drugs
During the pandemic, when vaccines doses were scarce, I argued for fractional dosing to speed vaccination and maximize social benefits. But what dose? In my latest paper, just published in PNAS, with Phillip Boonstra and Garth Strohbehn, I look at optimal trial design when you want to quickly discover a fractional dose with good properties while not endangering patients in the trial.
[D]ose fractionation, rations the amount of a divisible scarce resource that is allocated to each individual recipient [3–6]. Fractionation is a utilitarian attempt to produce “the greatest good for the greatest number” by increasing the number of recipients who can gain access to a scarce resource by reducing the amount that each person receives, acknowledging that individuals who receive lower doses may be worse off than they would be had they received the “full” dose. If, for example, an effective intervention is so scarce that the vast majority of the population lacks access, then halving the dose in order to double the number of treated individuals can be socially valuable, provided the effectiveness of the treatment falls by less than half. For variable motivations, vaccine dose fractionation has previously been explored in diverse contexts, including Yellow Fever, tuberculosis, influenza, and, most recently, monkeypox [7–12]. Modeling studies strongly suggest that vaccine dose fractionation strategies, had they been implemented, would have meaningfully reduced COVID-19 infections and deaths [13], and perhaps limited the emergence of downstream SARS-CoV-2 variants [6].
…Confident employment of fractionation requires knowledge of a drug’s dose-response relationship [6, 13], but direct observation of both that relationship and MDSE, rather than pharmacokinetic modeling, appears necessary for regulatory and public health authorities to adopt fractionation [15, 16]. Oftentimes, however, early-phase trials of a drug develop only coarse and limited dose-response information, either intentionally or unintentionally. A speed-focused approach to drug development, which is common for at least two reasons, tends to preclude dose-response studies. The first reason is a strong financial incentive to be “first to market.” The majority of marketed cancer drugs, for example, have never been subjected to randomized, dose-ranging studies [17, 18]. The absence of dose optimization may raise patients’ risk. Further, in an industry sponsored study, there is a clear incentive to test the maximum tolerated dose (MTD) in order to observe a treatment effect, if one exists. The second reason, observed during the COVID-19 pandemic, is a focus on speed for public health. Due to ethical and logistical challenges, previously developed methods to estimate dose-response and MDSE have not routinely been pursued during COVID-19 [19]. The primary motivation of COVID-19 clinical trial infrastructure has been to identify any drug with any efficacy rather than maximize the benefits that can be generated from each individual drug [3, 18, 20, 21]. Conditional upon a therapy already having demonstrated efficacy, there is limited desire on the part of firms, funders, or participants to possibly be exposed to suboptimal dosages of an efficacious drug, even if the lower dose meaningfully reduced risk or extended benefits [16]. Taken together, then, post-marketing dose optimization is a commonly encountered, high-stakes problem–the best approach for which is unknown.
…With that motivation, we present in this manuscript the development an efficient trial design and treatment arm allocation strategy that quickly de-escalates the dose of a drug that is known to be efficacious to a dose that more efficiently expands societal benefits.
The basic idea is to begin near the known efficacious dose level and then deescalate dose levels but what is the best de-escalation strategy given that we want to quickly find an optimal dosage level but also don’t want to go so low that we endanger patients? Based on Bayesian trials under a variety of plausible conditions we conclude that the best strategy is Targeted Randomization (TR). At each stage, TR identifies the dose-level most likely to be optimal but randomizes the next subject(s) to either it or one of the two dose-levels immediately below it. The probability of randomization across three dose-levels explored in TR is proportional to the posterior probability that each is optimal. This strategy balances speed of optimization while reducing danger to patients.
Read the whole thing.
No, Covid spending wasn’t the only factor, but…
Barro, CPI rate correlation with covid spending in 37 countries pic.twitter.com/AD47gPTbYb
— 161phi (@161phi) January 21, 2024
A year or so ago I recall telling Bari Weiss in a podcast that the inflation was perhaps half real shocks, half an aggregate demand problem. Don’t let the revisionists talk you into the hardcore RBC view!
Will Milei succeed in Argentina?
I give him a 30-40% chance, which is perhaps generous because I am rooting for him. Bryan Caplan, who is more optimistic, offers some analysis and estimates that Milei needs to close a fiscal gap of about five percent of gdp.
I have two major worries. First, if Milei approaches fiscal success, the opposing parties will think long and hard about whether they wish to enable further success. Or will they instead prefer to see the Milei reforms crash and burn for fiscal reasons? I don’t think they know themselves, but the history of politics in Argentina does not give special reason to be super-optimistic here. You don’t have to believe the opposition will deliberately flush their country down the toilet, they just not might be convinced that further fiscal consolidation is needed, even if it is (surely they gotten this wrong a lot in the past).
Second, Argentina has not succeeded in obtaining fiscal stability in the past, not for a long time. I disagree with this passage of Bryan’s:
The monetary and fiscal stabilization is very likely to work. Argentina has faced far worse crises before: The hyperinflations of the 70s to the 90s multiplied prices 100 billion times. That’s like turning a billion dollars into a penny. Yet Argentinians ultimately overcame all these problems and more using the orthodox medicines of monetary restraint and fiscal responsibility. Since even politicians who ideologically opposed these treatments ultimately endured their short-run costs, it is a safe bet that a libertarian economics professor will do the same.
That is a misread of the history. One common tactic, for instance, is to do enough stabilization so that Argentina is “fiscally sound enough” at the peak of a commodity super-cycle. Most recently, that super-cycle has been China buying lots from Argentina (no such positive wave from China will be coming again, not anytime soon at least). When the positive real shocks subside, Argentina goes back into the fiscal hole.
In reality, past reforms never put the country on a sound fiscal footing, even if inflation rates were low for a while.
One scenario for now is that Argentina does enough so that it appears fiscally stable, and the recent discoveries of oil and gas — which will translate into government revenue — kick in to support a temporary status quo. But within ten years the whole thing falls apart again. Even if Milei wants to do more on the fiscal front to get past that point, it is not obvious that either voters or the legislature would support such further moves.
Those are two “pretty likely” scenarios in which Milei fails, and in neither case is it the fault of Milei. As I mentioned above, the chances of success remain below fifty percent.
Boosting fertility by subsidizing child-bearing for *young* women
From Vidya Mahambare:
Several countries have grappled with a longstanding dilemma – how to reverse the trend of falling fertility rates. In 2019, eighty-one countries had fertility rates below the population replacement threshold. The replacement fertility rate, estimated at 2.1 births per woman, represents the level required to sustain a stable population over the long run, assuming mortality and migration remain constant.
Is it now time, at least in some countries, to implement policies targeted at lowering the age at which women have their first child?
Perhaps, yes. Here is why.
While most countries in Europe, Northern America, Japan, Australia, New Zealand, and China have had low fertility rate for years, India, the most populous country, joined them in 2021. Countries such as Greece, Italy, Japan, and Spain have had very low fertility levels below 1.5 births per woman for decades. South Korea has the lowest fertility rate, with 0.8 births per woman.
Countries have tried several policies to raise the fertility rates, with only sporadic and local success. A commonly adopted measure is maternity leave, paid or unpaid, with job security. Other policies include subsidised childcare, child or family allowances, paid or unpaid paternity leave, flexible or part-time work hours for parents, and tax credits for dependent children.
These measures are appropriate, but miss one point.
The age at which a mother gives birth to her first child can impact her likelihood of having a second child. In several developed countries, the mean age of mothers at the birth of their first child has surpassed or is close to 30 years. Since 2000, many countries have seen the mean age at first birth increase by at least two years. Even in China, reports indicate that the age at which new mothers give birth to their first child now exceeds 30 years in Shanghai.
Until 2010, the largest number of new births in developed countries occurred among mothers aged 25 to 29. Presently, the highest number of first-time mothers falls within the 30-34 age group. Women can and do have successful deliveries in their late thirties and early forties. For many, it is a deliberate decision to start a family late.
The point however, is this – even if a woman desires to reconsider her choice of having a single child, there is less time and inclination to reverse the course if the first childbirth occurs after the mother reaches the age of 30.
Studies often report decreased happiness and life satisfaction during the early stages of parenthood, and younger parents may be unhappier. This is not the same as saying children don’t make parents happy. Parenthood by itself can have a substantial positive effect on life satisfaction but time and monetary cost offsets it. That is why the negative association between fertility and happiness is weaker in countries with higher public support for families.
As parents gain experience and adjust to the demands of parenthood, they may become more adept at managing stress and finding joy in parenthood. They may begin to recognise that loosening the intensive parenting norm relieves stress and raises happiness. Also, recently a study shows that the reported results about the trade-off between happiness and children require strong assumptions about how individuals report happiness and their beliefs about its distribution in society.
Rising female education and employment, women’s delayed entry into the labour market, high monetary and time cost of raising kids, and rising real estate prices have all played a role in declining fertility. In societies where marriage is culturally deemed essential for starting a family, the rising age at marriage and a declining marriage rate also contribute to a postponement in having the first child. For example, In South Korea, a country where only 2% of childbirth is outside marriage, the marriage rate has slid to a record low.
Countries need to contemplate whether they should promote more women having their first child in their twenties. Historically, several countries have had official policies to raise women’s age at marriage and the age at their first child. Is it time to shift gears?
Should countries that aim to boost fertility consider offering increased financial incentives or tax concessions for specific age brackets? Is it time for countries, including Canada and the United States of America, which currently have below-replacement level fertility and lack official policies to influence fertility levels, to initiate strategies aimed at reducing the average age of women with their first child?
Further, several countries facing fertility crises continue to subsidise family planning services directly through public programs or indirectly through non-governmental organisations. Indeed, the option for family planning should be accessible to all adults, but is there a necessity to offer public support for it in countries facing below-replacement-level fertility rates?
A word of caution. The above suggestions do not apply to all countries with fertility rates below the replacement level. An example is India, where the mother’s mean age at first birth is still less than 22 years, with the median age at first marriage less than 20 years in 2019-21 for women in 25-29 age cohort.
What may go wrong with a policy that aims to lower women’s age at first child? Could it be that women would still prefer to have only one child but at a younger age? Yes, that is possible, but that’s no different from today and, hence, not a worse outcome. Would women end up compromising their education and employment? Not really, if we are targeting the whole age group of twenties. Can couples afford to have children 2-3 years earlier than now? That’s tough to answer, but it may be feasible with childcare subsidies and workplace support.
To be clear, child support should be available for women of all ages. Exploring increased incremental support tailored to specific age groups might be worthwhile in a race to raise fertility rates.
GOAT podcast with Canadian
…the Curious Task podcast episode you recorded with Matt the other day is out now. Here are some links you could share if you would like:
Podbean: https://thecurioustask.podbean.com/e/ep-213-tyler-cowen-who-is-the-greatest-economist-of-all-time/
Apple Podcasts: https://podcasts.apple.com/ca/podcast/ep-213-tyler-cowen-who-is-the-greatest-economist-of-all-time/id1474563073?i=1000641959359
Spotify: https://open.spotify.com/episode/5kayibK4XZEnhykHunpk8U?si=qf9D6U_VSe2TYgxPtaZs3w
Matt Bufton of the (Canadian) Institute for Liberal Studies is interviewing. I was surprised not to be asked who is Canadian GOAT, maybe Robert Mundell is the obvious pick, followed by Harry Johnson and Harold Innis?
Get Out of Jail Cards, 2
“Courtesy cards,” are cards given out by the NYC police union (and presumably elsewhere) to friends and family who use them to get easy treatment if they are pulled over by a cop. I was stunned when I first wrote about these cards in 2018. I thought this was common only in tinpot dictatorships and flailing states. The cards even come in levels, gold, silver and bronze!
A retired police officer on Quora explains how the privilege is enforced:
The officer who is presented with one of these cards will normally tell the violator to be more careful, give the card back, and send them on their way.
…The other option is potentially more perilous. The enforcement officer can issue the ticket or make the arrest in spite of the courtesy card. This is called “writing over the card.” There is a chance that the officer who issued the card will understand why the enforcement officer did what he did, and nothing will come of it. However, it is equally possible that the enforcement officer’s zeal will not be appreciated, and the enforcement officer will come to work one day to find his locker has been moved to the parking lot and filled with dog excrement.
A NYTimes article discusses the case of Mathew Bianchi, a traffic cop who got sick of letting dangerous speeders go when they presented their cards.
By the time he pulled over the Mazda in November 2018, drivers were handing Bianchi these cards six or seven times a day. (!!!, AT)
…[He gives the ticket]…The month after he stopped the Mazda, a high-ranking police union official, Albert Acierno, got in touch. He told Bianchi that the cards were inviolable. He then delivered what Bianchi came to think of as the “brother speech,” saying that cops are brothers and must help each other out. That the cards were symbols of the bonds between the police and their extended family and friends.
Bianchi was starting to view the cards as a different kind of symbol: of the impunity that came with knowing someone on the force, as if New York’s rules didn’t apply to those with connections. Over the next four years, he learned about the unwritten rules that have come to hold sway in the Police Department.
Bianchi is reassigned, given shit jobs, isn’t promoted etc. Mayor Adams and police chief Chief Maddrey protect this utterly corrupt system.
A congestion theory of unemployment fluctuations
Yusuf Mercan, Benjamin Schoefer, and Petr Sedláček, newly published in American Economic Journal: Macroeconomics. I best liked this excerpt from p.2, noting that “DMP” refers to the Nobel-winning Diamond-Mortensen-Pissarides search model of unemployment:
This congestion mechanism improves the business cycle performance of the DMP model considerably. It raises the volatility of labor market tightness tenfold, to empirically realistic levels. It produces a realistic Beveridge curve despite countercyclical separations. On its own, it accounts for around 30–40 percent of US unemployment fluctuations and much of its persistence. In addition, the model accounts for a range of other business cycle patterns linked to unemployment: the excess procyclicality of wages of newly hired workers compared to average wages, the countercyclical labor wedge, large countercyclical earnings losses from displacement and from labor market entry, and the long-run insensitivity of unemployment to policies such as unemployment insurance.
And by their congestion mechanism the authors mean this:
…a constant returns to scale aggregate production function that exhibits diminishing returns to new hires, a feature we call congestion in hiring.
I find that assumption plausible. It remains the case that the DMP model is grossly underrepresented in on-line writings on economics, on Twitter, and in the blogosphere. It won three Nobel Prizes, yet it also suggests that the “simple” manipulation of spending or nominal values does not automatically restore higher levels of employment.
Here are less gated versions of the paper.
How sticky are wages in nominal terms?
There is a new paper on this topic, with what seems to be very good data:
This paper examines the relationship between downward nominal wage rigidity and employment outcomes using linked
employer-employee data. Wage rigidity prevents 27.1 percent of counterfactual wage cuts, with a standard deviation of 19.2 percent across establishments. An establishment with the sample-average level of wage rigidity is predicted to have a 3.3 percentage point higher layoff rate, a 7.4 percentage point lower quit rate, and a 2.0 percentage point lower hire rate. Estimating a structural model by indirect inference implies that the cost of a nominal wage cut is 33 percent of an average worker’s annual compensation.
That is by Gabriel Ehrlich and Joshua Montes, recently published in American Economic Journal: Macroeconomics. Here are less gated versions of the paper. I found this of particular interest:
Establishments in the construction supersector display the least wage rigidity, with an average of 8.8 percent of wage cuts prevented. Establishments in the public administration and finance supersectors display the most wage rigidity, with average levels of 39.3 and 41.7 percent of wage cuts prevented, respectively.
Of course employment in the construction sector is highly cyclical, and employment in public administration often is governed by tenure, not exactly what fits best into the standard story.