Year in Review: Summary of 2021 Institute Working Papers

In a year when record quit rates and job openings dominated headlines, it is fitting that half of the 11 additions to the Institute Working Paper series in 2021 focus on labor market themes, from sources of labor market concentration to the particular challenges faced by mothers with paid employment in year two of the COVID-19 pandemic. Other new working papers examine the implications of monetary policy for economic inequality, while a third set evaluates public policies in light of the distribution of economic outcomes across space in the United States.

How workers fare

As employment increasingly becomes concentrated at a small number of large firms, economists have sought to quantify the degree of concentration and its impact on workers. In “Labor Market Power,” David Berger, Kyle Herkenhoff,^* and Simon Mongey focus on local labor markets, as most workers do not look for jobs that would require them to move homes. They find that wages are 25 percent lower on average than they would be in a perfectly competitive economy due to the concentration of job opportunities at a small number of firms. And because of that wage markdown, the most productive firms turn out to be smaller than they would be if they paid workers their marginal product of labor. The implication for policymakers is to look for policies that induce firms to behave competitively even when they are large, thus capturing the efficiency benefits from labor market concentration without its costs to workers.

The benefits of having a choice about where to work is central to “Multinationals, Monopsony, and Local Development: Evidence from the United Fruit Company.” The United Fruit Company (UFCo) was one of the largest multinational firms of the 20th century, yet, a review of internal company documents by Esteban Méndez-Chacón and Diana Van Patten reveals the challenges UFCo faced in recruiting and retaining a workforce. To attract workers who had other employment options, UFCo recognized it needed to spend money on healthcare, education, and other amenities for workers and their families. These initiatives led to higher living standards for households living within the company’s land concession in Costa Rica than those outside it.

Of course, market concentration is just one among many forces that have affected employment and wages over the last 40 years. In “Changing Income Risk across the U.S. Skill Distribution: Evidence from a Generalized Kalman Filter,” J. Carter Braxton, Kyle Herkenhoff, Jonathan Rothbaum, and Lawrence Schmidt analyze earnings data since the 1980s to examine how earnings risk has changed over time and for whom. They find that while the risk of changes to paychecks day-to-day has declined slightly, the risk of a long-term income loss has increased, particularly for college-educated workers who work in occupations with high technology requirements. This high earnings risk results in people over-saving and has implications for job retraining and unemployment insurance policies.

Martti Kaila, Emily Nix, and Krista Riukula look at the impact of job loss from another angle to better understand how parental income affects their children’s economic outcomes into adulthood. In “Disparate Impacts of Job Loss by Parental Income and Implications for Intergenerational Mobility,” the economists track the employment and earnings of workers in Finland who lost their jobs during large layoff events. Workers with parents in the bottom 20 percent of the income distribution have lower earnings and lower employment levels for at least six years after the layoff than similar laid-off workers whose parents are in the top 20 percent of the income distribution. While the mechanisms causing this outcome are still under study, the economists show that it reduces intergenerational mobility.

While the previous papers focused on involuntary job loss, the challenges in securing child care during the COVID pandemic led some parents, particularly mothers, to leave active work status. To better understand which mothers were affected and why, Misty Heggeness and Palak Suri explore how mothers' decisions in different work environments compare to women without children and to fathers in “Telework, Childcare, and Mothers’ Labor Supply.” For on-site occupations, mothers with less than a college degree took leave more often than women without children, likely because they could not access or afford childcare. There were no differences between mothers and women without children with a college degree. For telework-compatible occupations, the situation switches: Mothers with a college degree were more likely than women without children to take leave or exit the labor force. For households with higher levels of education that likely have higher income, some mothers could afford to step back from paid work while they cared for children and supervised remote school. For mothers in households that were less-well-off, it was possible to keep working while their children stayed home, so they did—but likely with a large toll on their mental health.

Monetary policy and inequality

It is well accepted that workers’ experiences in the labor market vary across demographic groups, though the causes, extent, and consequences of that heterogeneity remain an important area of study. An emerging literature is now studying how experiences of inflation are likewise heterogeneous.

“Monetary policy and racial inequality” takes an empirical approach to assess how monetary policy affects the employment and wealth of Black and White households. Alina Bartscher, Mortiz Kuhn, Moritz Schularick, and Paul Wachtel find that accommodative monetary policy increases employment gains for Black households by about 0.2 percentage points more than for White households. However, because of stark differences in wealth portfolios between Black and White households, the increase in wealth of White households is equivalent to about 20 to 30 percent of annual income. In contrast, the increase for Black households is equivalent to 10 percent of annual income. Accommodative monetary policy, the authors conclude, thus narrows earnings inequality but widens wealth inequality.

A second paper, “Doves for the Rich, Hawks for the Poor? Distributional Consequences of Systematic Monetary Policy,” uses a macroeconomic model to infer households’ preferences for monetary policy. Importantly, the model by Nils Gornemann, Keith Kuester, and Makoto Nakajima incorporates numerous dimensions of household heterogeneity. For instance, households vary in their risk of unemployment, amount of wealth, and wealth portfolio. As a result, households could be affected differently by monetary policy. The model predicts that households with little wealth favor monetary policy that focuses on reducing unemployment, whereas wealthy or retired households value policy that prioritizes low, stable inflation.

Spatial economics and social policy

Economic outcomes vary not only across demographic groups but also across space within the U.S. This variation interacts with social policies that are tied to location, such as education and state-administered benefit programs.

In “Social Transfers and Spatial Distortions,” Mark Colas and Robert McDonough consider how variation in housing supply, wages, amenities, and social transfers across U.S. states affects where households choose to live. The benefits provided by many social programs, such as Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP), vary considerably by state. The money will go further in places with lower costs of living. And because many programs are means-tested, areas with higher wages might mean lower benefits. Putting this together, Colas and McDonough find that the current structure of TANF and SNAP leads to an increase in the number of individuals with less than a high school degree who live in low-income cities. Indexing benefit programs to average local wages and harmonizing benefits across states eliminates 85 percent of the deadweight loss of the current system.

While adults can choose where to live, children are born into neighborhoods—and where one is born exerts a considerable influence on economic outcomes later in life. Neighborhoods differ in school quality and other educational offerings, which affect children’s educational attainment and job market outcomes. In addition, many people don’t move out of the neighborhood where they grew up, either because it is expensive to do so or they don’t want to leave family. This provides another channel through which neighborhoods impact job market outcomes and the returns to education. In “Saving the American Dream? Education Policies in Spatial General Equilibrium,” Fabian Eckert and Tatjana Kleineberg use a spatial equilibrium framework that considers how these features interact with each other. They then use the framework to study the impact of equalizing school funding across neighborhoods. The biggest effect is an increase in the probability of attending college for children of parents whose highest education is a high school degree.

Death and taxes

The remaining papers of 2021 deal with two of life’s (only?) certainties: death and taxes.

In “Optimal Income Taxation: An Urban Economics Perspective,” Mark Huggett and Wenlan Luo seek to extend the model that economists have traditionally used to analyze optimal tax rates. This model incorporates the income distribution, how much people change their labor in response to taxes, and social preferences for redistribution. But this is a limited view of the economic landscape in the U.S., where large cities have higher average wages and higher average housing prices than small cities. A change in the tax rate might result in a change in housing prices. It might also cause households to migrate, which could affect wages if the reason city wages are higher is that people are more productive when they live in larger cities (“agglomeration effect”). Compared to the traditional model, Huggett and Luo find that optimal tax rates should be higher at all income levels. This results in a lower cost of housing, which improves welfare, while also prompting some households to move away from large cities.

Finally, Mariacristina De Nardi, Eric French, John Bailey Jones, and Rory McGee study people’s savings behavior in the last years of their lives. Understanding why people save in retirement helps predict how people will respond to economic change or policy reforms. In “Why Do Couples and Singles Save During Retirement?” the economists measure the extent to which medical expenses and bequest motives drive retirees' savings. They find that the savings of singles and couples look rather different: While singles save mostly to cover medical expenses, couples are also motivated by the desire to leave money to their surviving spouse and their heirs. These findings suggest which groups are most likely to respond to changes in public health insurance, such as Medicaid, and how the generosity of those programs affects retirees’ welfare.

Endnotes

* The names of the scholars affiliated with the Opportunity & Inclusive Growth Institute are bolded.