The Matching Multiplier and the Amplification of Recessions
Abstract: Recessions are thought to be larger than the shocks that cause them, and the incidence of recessions is unequally distributed across workers. This paper shows empirically that the unequal incidence of recessions is a core channel through which aggregate shocks are amplified. I show that the aggregate marginal propensity to consume (MPC) is larger when income shocks disproportionately hit high-MPC individuals, and I define the Matching Multiplier as the increase in the output multiplier originating from the matching of workers to jobs with different income elasticities - a greater matching multiplier translates into more powerful amplification in a range of business cycle models. Using administrative data from the United States, I document that the earnings of individuals with a higher marginal propensity to consume are more exposed to recessions. I show that this covariance between worker MPCs and the elasticity of their earnings to GDP is large enough to increase shock amplification by 40 percent over a benchmark in which all workers are equally exposed. Using local labor market variation, I validate this amplification mechanism by showing that areas with higher matching multipliers experience larger employment fluctuations over the business cycle. Lastly, I derive a generalization of the matching multiplier in an incomplete markets model and show numerically that this mechanism is quantitatively similar within this structural framework.
The Fall in the Labor Share and the Rise of Superstar Firms, with David Autor, David Dorn, Lawrence F. Katz and John Van Reenen, Revise and Resubmit at Quarterly Journal of Economics
(Non-technical Summary: Harvard Business Review; Press Coverage: The Atlantic, New York Times)
Abstract: The fall of labor's share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain. Existing empirical assessments of trends in labor's share typically have relied on industry or macro data, obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and international sources and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of “superstar firms.” If globalization or technological changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm value-added and sales. As the importance of superstar firms increases, the aggregate labor share will tend to fall. Our hypothesis offers several testable predictions: industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labor share; the fall in the labor share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labor share within firms; the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.
It's What You Know that Matters: Task-Based Networks and Industry-Specific Shocks
Abstract: While demand shocks typically occur at the industry level, workers are more closely tied to occupations and specific tasks, which are distributed across many industries. This paper explores how the distribution of tasks across industries affects labor market responses to shocks. I present a model in which task-level wages connect industries employing the same tasks, meaning that the distribution of tasks across industries insures some workers against shocks and alters their labor market experiences. Workers trained in more dispersed tasks (e.g. accountants) face less unemployment risk from industry-specific shocks than workers who do tasks that are concentrated in few industries (e.g. petroleum engineers). Using industry and regional data, I show empirical evidence that supports the model's predictions – industries that employ more specialized labor contract less in response to demand shocks than industries with less specialized labor.
The Forward Guidance Puzzle (with Marco Del Negro and Marc Giannoni)
Abstract: With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. This paper first empirically documents the impact of forward guidance announcements on a broad cross section of financial markets data and professional forecasts. We find that Federal Open Market Committee (FOMC) announcements containing forward guidance had heterogeneous effects depending on the other content of the statement. We show that once we control for these other elements, forward guidance had, on average, positive and meaningful effects on output and inflation expectations. Using this benchmark, we then show that standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the “forward guidance puzzle.” We explain why this is the case and show that incorporating a perpetual youth structure into the benchmark provides a possible resolution to the puzzle
Research in Progress
What's the Holdup? Productivity Bottlenecks and the Productivity Puzzle (with Daron Acemoglu and David Autor)
Abstract: Despite the rapid pace of innovation in information and communications technologies (ICT), measured aggregate U.S. productivity growth has been modest since the 1970s, particularly since the early 2000s. We explore whether the network structure of industry linkages can partly explain this productivity puzzle. If an industry's inputs are strongly complementary, large productivity gains in a subset of its intermediate input suppliers will not translate into commensurate productivity gains in the purchasing industry because lagging sectors will hold up progress. We propose to study the relevance of productivity bottlenecks in an extended input-output model that relates an industry's output to the distribution of its suppliers' productivity. Using data on input-output linkages within US manufacturing industries from 1977-2007, we find preliminary evidence in support of the bottleneck hypothesis. Industries benefit from the productivity growth of their suppliers, but the distribution of this growth matters, not just its mean. Downstream benefits are heavily attenuated if the dispersion in productivity growth among supplying sectors is high.
Shock Amplification Through Worker Heterogeneity and Regional Demand (with John Sturm and Joel Flynn)
Abstract: We study how household heterogeneity and regional and industrial linkages affect shock propagation in a model with short-run labor rationing. In our model, households differ in their income sensitivity to shocks affecting different firms and regions, in the magnitudes of their MPCs, and in the firms and regions where they spend their marginal dollars. Theoretically, we express the general equilibrium effect of partial equilibrium shocks using a generalized Keynesian multiplier, written in terms of sufficient statistics. We draw attention to a novel propagation mechanism: due to nonlinearities in the multiplier and heterogeneous MPCs across regions, regional inwardness increases shock amplification. Empirically, we take our multiplier to the data and find that the correlation between MPC and income sensitivity, the regionality of spending, and the interaction between the two all amplify shocks. These three terms make roughly equal contributions, and together, they increase shock propagation by 50%. Finally, we consider optimal fiscal policy, decomposing the effects of government expenditure and giving simple formulae for optimal transfers