FRBSF Economic Letter

2016-27 | September 12, 2016

Bubbles, Credit, and Their Consequences

Òscar Jordà, Moritz Schularick, and Alan M. Taylor

The collapse of an asset price bubble usually creates a great deal of economic disruption. But bubbles are hard to anticipate and costly to deflate. As a result, policymakers struggle to determine how they should respond, if at all. Evaluating the economic costs of past equity and real estate bubbles—with particular attention to how much credit grew during boom phases—can provide valuable insights for this debate. A recent study finds that equity bubbles are relatively benign. More danger comes from housing bubbles in which credit grows rapidly.

Working Papers
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Regional Consumption Responses and the Aggregate Fiscal Multiplier

2018-04 | With Dupor, Karabarbounis, and Mehkari | March 2018

abstract (+)
We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.
Measuring Heterogeneity in Job Finding Rates among the Non-Employed Using Labor Force Status Histories

2017-20 | With Lange | January 2018

abstract (+)
We construct a novel measure of the duration of joblessness using the labor force status histories in the four-month CPS panels. For those out of the labor force (OLF) and the unemployed, the job finding rate declines with the duration of joblessness. This duration measure dominates other existing measures in the CPS for predicting transitions from non-employment to employment. For those OLF, the variation in job finding rates explained by the duration of joblessness is five times larger than the variation explained by the self-reported desire to work or reasons for not searching. For the unemployed, the job finding rate declines with the self-reported duration of unemployment only to the extent that this variable correlates with the duration of joblessness. The two duration measures are not equivalent, and the discrepancy between them is not a classification error. Instead, the self-reports of unemployment durations refer to how long the respondent looked for work, often disregarding short-term jobs or including periods of employment while searching. Using our novel measure, we provide new estimates of the duration distribution of the unemployed and reexamine current approaches to misclassification error in the CPS.
Generalized Matching Functions and Resource Utilization Indices for the Labor Market

2017-05 | With Hornstein | February 2017

abstract (+)
In the U.S. labor market unemployed individuals that are actively looking for work are more than three times as likely to become employed as those individuals that are not actively looking for work and are considered to be out of the labor force (OLF). Yet, on average, every month twice as many people make the transition from OLF to employment than do from unemployment. Based on these observations we have argued in Hornstein, Kudlyak, and Lange (2014) for an alternative measure of resource utilization in the labor market, a non-employment index, which is more comprehensive than the standard unemployment rate. In this article we show how the NEI fits into recent extensions of the matching function which is a standard macroeconomic approach to model labor markets with frictions, how it affects estimates of the extent of labor market frictions, and how these frictions have changed in the Great Recession.
Intergenerational Linkages in Household Credit

2016-31 | With Ghent | December 2016

abstract (+)
We document novel, economically important correlations between children’s future credit risk scores, default, and homeownership status and their parents’ credit characteristics measured when the children are in their late teens. A one standard deviation higher parental credit risk score when the child is 19 is associated with a 24 percent reduction in the likelihood that the child goes bankrupt by age 29, a 36 percent lower likelihood of other serious default, a 35 point higher child credit score, and a 23 percent higher chance of the child becoming a homeowner. The linkages persist after controlling for parental income. The linkages are stronger in cities with lower intergenerational income mobility, implying that common factors might drive both. Existing measures of state-level educational policy have limited effects on the strength of the linkages. Evidence from a sample of siblings suggests that the linkages might be largely due to family fixed effects.
Estimating Matching Efficiency with Variable Search Effort

2016-24 | With Hornstein | December 2016

abstract (+)
We introduce a simple representation of endogenous search effort into the standard matching function with job-seeker heterogeneity. Using the estimated augmented matching function, we study the sources of changes in the average employment transition rate. In the standard matching function, the contribution of matching efficiency is decreasing in the matching function elasticity. In contrast, for our matching function with variable search effort and small matching elasticity, search effort is procyclical, accounting for most of the transition rate volatility; and the decline of the aggregate matching efficiency accounts for a small part of the decline in the transition rate after 2007. For a large matching elasticity, search effort is countercyclical, and large movements in matching efficiency compensate for that; and the decline in the matching efficiency accounts for a large part of the decline in the transition rate after 2007. The data on employment transition rates provide evidence for endogenous search effort but do not separately identify cyclicality of search effort and matching elasticity.
supplement (+)
wp2016-24_appendix.pdf – Supplemental Appendix
Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data

2016-20 | With Coibion, Gorodnichenko, and Mondragon | August 2016

abstract (+)
Using household-level debt data over 2000-2012 and local variation in inequality, we show that low-income households in high-inequality regions (zip-codes, counties, states) accumulated less debt (relative to their income) than low-income households in lower-inequality regions, contrary to the prevailing view. Furthermore, the price of credit is higher and access to credit is harder for low-income households in high-inequality versus low-inequality regions. Lower quantities combined with higher prices suggest that the debt accumulation pattern by household income across areas with different inequality is a result of credit supply rather than credit demand. We propose a lending model to illustrate the mechanism.
The Intensity of Job Search and Search Duration

2016-13 | With Faberman | July 2016

abstract (+)
We use panel data on individual applications to job openings on a job search website to study search intensity and search duration. Our data allow us to control for the composition of job seekers and changes in the number of available job openings over the duration of search. We find that (1) the number of applications sent by a job seeker declines over the duration of search, and (2) longer-duration job seekers send relatively more applications per week throughout their entire search. The latter finding contradicts the implications of standard labor search models. We argue that these models fail to capture an income effect in search effort that causes job seekers with the lowest returns to search to exert the highest effort. We present evidence in support of this idea.
supplement (+)
wp2016-13_appendix.pdf – Supplemental Appendix
Systematic Job Search: New Evidence from Individual Job Application Data (Revised September 2014)

FRB Richmond 12-03R | With Lkhagvasuren and Sysuyev | April 2012

abstract (+)
We use novel high-frequency panel data on individuals’ job applications from a job posting website to study how job seekers direct their applications over the course of a job search. We find that at the beginning of search there is sorting of applicants across vacancies by education. As the search continues, education becomes a weaker predictor of which job a job seeker applies for, and an average job seeker applies for jobs that are a first-week choice of less educated job seekers. The findings suggest that search is systematic, whereby a job seeker samples high-wage opportunities first and lower-wage opportunities later. The findings are consistent with the literature that documents declining reservation wages and provide evidence in favor of theories of job seekers’ learning.
The Cyclical Price of Labor When Wages Are Smoothed

FRB Richmond 10-13 | August 2010

abstract (+)
I conduct an empirical investigation of the cyclicality of the price of labor. Firms employ workers up to the point where workers’ marginal revenue product equals the price of labor. If the labor market is a spot market, then the price of labor is the wage. But often workers are contracted for more than one period. The price of labor captures both the wage at the time of hiring and the impact of labor market conditions at the time of hiring on future wages. The price of labor and not wage is allocational for employment. Because it is not directly observed in the data, I construct the price of labor based on the behavior of individual wages and turnover. I find that a one percentage point increase in unemployment generates more than a 4.5% decrease in the price of labor. This cyclicality is three times higher than the cyclicality of individual wages and also noticeably higher than the cyclicality of the wages of newly hired workers. I conclude that the price of labor is very procyclical.
A New Measure of Resource Utilization in the Labor Market

Manuscript | With Lange and Hornstein | April 2014

Published Articles (Refereed Journals and Volumes)
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Revisiting the Behavior of Small and Large Firms during the 2008 Financial Crisis

Journal of Economic Dynamics and Control 77(in progress), April 2017, 48-69 | With Sanchez

abstract (+)
Gertler and Gilchrist (1994) provide seminal evidence for the prevailing view that adverse shocks are propagated via credit constraints: small firms are affected more during tight credit periods than large firms. Under this view, the deep recession that followed the 2008 financial crisis is often interpreted as the propagation of the initial “credit shock.” Following Gertler and Gilchrist (1994)’s methodology, we study the behavior of small and large firms during episodes of credit disruption and extend the analysis to the 2008 financial crisis and NBER-dated recessions. We find that large firms’ short-term debt and sales contracted relatively more than those of small firms during the 2008 financial crisis and during most recessions since 1969. The results are robust to changes in the business cycle dating procedure. Using Compustat, we also find that during 2007–09 low financially dependent firms suffered more than high financially dependent firms. These results favor the view that a tightening of a financial or collateral constraint might not be a good representation of the 2007-09 crisis.
Hornstein-Kudlyak-Lange Non-Employment Index

Data update web page, Federal Reserve Bank of Richmond, November 2016 | With Hornstein and Lange

What Does Online Job Search Tell Us about the Labor Market?

FRB Chicago Economic Perspectives 40(1) , May 2016 | With Faberman

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This article finds that in 2011, online job search was much more prevalent and significantly more effective in helping job seekers gain employment than about a decade earlier. Moreover, it shows that online job search data generally capture the aggregate patterns of the U.S. labor market. The authors discuss the advantages and disadvantages of using these data for research, and summarize related studies.
What We Know About Real Wage Adjustment during the 2007-09 Recession and Its Aftermath

FRB Richmond Economic Quarterly 101(3), May 2016, 225-244

abstract (+)
Aggregate wage growth has remained flat during the 2007-09 recession and its aftermath while unemployment has exhibited substantial swings. Does the low real aggregate wage growth during the recovery indicate a weak labor market beyond what is measured by the official unemployment rate? Aggregate wage growth reflects actual changes of workers’ wages, changes in the composition of workers, and changes in the composition of jobs. Some of these changes are related to underlying structural trends in the economy while others constitute the economy’s response to the business cycle shocks and are more indicative of cyclical resource utilization in the labor market. Consequently, it is important to look beyond the aggregate statistics to understand the behavior of real wages and its relation to the health of the labor market. In this article, we review recent literature that studies the changes in the components of the aggregate wage over time and, specifically, after the 2007-09 recession.
The CARD Act and Young Borrowers: The Effects and the Affected

Journal of Money, Credit and Banking 48(7), 2016, 1495-1513 | With Debbaut and Ghent

abstract (+)
We study a new law that restricts credit to individuals under age 21. We first use a difference-in-difference approach to estimate the effect of the law on credit card availability. Following the passage of the law, individuals under age 21 are 8 percentage points (15 percent) less likely to have a credit card, have fewer cards, and, conditional on having a card at all, are 35 percent more likely to have a cosigned card. We then use data from before the passage of the law to identify the characteristics of those individuals most likely to be affected by the Act.
Aging and the Economy: The Japanese Experience

The Regional Economist, October 2015, 12-13 | With Reed and Canon

What We Know About Wage Adjustment during the 2007-09 Recession and Its Aftermath

FRB Richmond Economic Quarterly 101(3), Q3 2015, 225-244

abstract (+)
Aggregate wage growth has remained flat during the 2007-09 recession and its aftermath while unemployment has exhibited substantial swings. Does the low real aggregate wage growth during the recovery indicate a weak labor market beyond what is measured by the official unemployment rate? Aggregate wage growth reflects actual changes of workers’ wages, changes in the composition of workers, and changes in the composition of jobs. Some of these changes are related to underlying structural trends in the economy while others constitute the economy’s response to the business cycle shocks and are more indicative of cyclical resource utilization in the labor market. Consequently, it is important to look beyond the aggregate statistics to understand the behavior of real wages and its relation to the health of the labor market. In this article, we review recent literature that studies the changes in the components of the aggregate wage over time and, specifically, after the 2007-09 recession.
The Cyclicality of the User Cost of Labor

Journal of Monetary Economics 68, November 2014, 53-67

abstract (+)
The user cost of labor is the expected difference between the present discounted value of wages paid to a worker hired in the current period and that paid to a worker hired in the next period. Analogous to the price of any long-term asset, the user cost, not wage, is the relevant price for a firm that is considering adding a worker. I construct its counterpart in the data and estimate that it is substantially more procyclical than average wages or wages of newly hired workers. I demonstrate an application of the finding using the textbook search and matching model.
Productivity Insurance: The Role of Unemployment Benefits in a Multi-Sector Model

Journal of Economic Dynamics and Control 47, October 2014, 39-53 | With Fuller and Lkhagvasuren

abstract (+)
We construct a multi-sector search and matching model where the unemployed receives idiosyncratic productivity shocks that make working in certain sectors more productive than in the others. Agents must decide which sector to search in and face moving costs when leaving their current sector for another. In this environment, unemployment is associated with an additional risk: low future wages if mobility costs preclude search in the appropriate sector. This introduces a new role for unemployment benefits – productivity insurance while unemployed. For plausible parameterizations unemployment benefits increase per-worker productivity. In addition, the welfare-maximizing benefit level decreases as moving costs increase.
Flows To and From Working Part Time for Economic Reasons and the Labor Market Aggregates During and After the 2007-09 Recession

FRB Richmond Economic Quarterly 100(2), Q2 2014, 87-111 | With Canon, Luo, and Reed

abstract (+)
Using counterfactual exercises for the transition probabilities between full-time employment, part-time employment for economic reasons (PTER), part-time employment for noneconomic reasons (PTNER), unemployment, and out-of-the-labor-force similar to Shimer (2012), we find that, ceteris paribus, changes in the transition probabilities to and from PTER in the aftermath of the 2007-09 recession were mainly associated with changes in the composition of employment (full- versus part time, and PTER versus PTNER) instead of with changes in the distribution of individuals between employment and non-employment. Consequently, policymakers’ attention to PTER implies a broader definition of resource underutilization in the labor market than a simple extensive employment margin as captured by the standard unemployment rate. It brings attention to the intensive employment margin and the quality of employment. Since PTER workers’ share is highest in non-routine manual (typically, low-wage) occupations and given recent works on job polarization, it is a challenging task to disentangle cyclical versus structural factors behind an increased number of PTER workers after the 2007-09 recession.
Measuring Resource Utilization in the Labor Market

FRB Richmond Economic Quarterly 100(1), Q1 2014, 1-21 | With Hornstein and Lange

abstract (+)
In the U.S. labor market unemployed individuals that are actively looking for work are more than three times as likely to become employed as those individuals that are not actively looking for work and are considered to be out of the labor force (OLF). Yet, on average, every month twice as many people make the transition from OLF to employment than do from unemployment to employment. These observations on labor market transitions suggest that the standard unemployment rate and its extensions proposed by the Bureau of Labor Statistics are both too coarse and too narrow as measures of resource utilization in the labor market. These measures are too narrow since they exclude a large part of the population that is potentially employable, and they are too coarse since they assume the same labor force attachment for all nonemployed individuals. We construct a measure of resource utilization in the labor market, a nonemployment index, that is both comprehensive and accounts for differences in labor force attachment. Prior to 2007, the standard unemployment rate was highly correlated with our nonemployment index but, during the recession of 2007–09 and its aftermath, the standard unemployment rate overstated the extent of underutilization in the labor market.
A Cohort Model of Labor Force Participation

FRB Richmond Economic Quarterly 99(1), Q1 2013, 25-43

abstract (+)
We estimate a trend in the aggregate labor force participation rate using the age-gender and the birth cohort effects in the labor force participation rates of different demographic groups and the actual demographic composition of the population. We find that, in 2012, the aggregate labor force participation rate is close to its trend.
Housing Services Price Inflation

FRB Richmond Economic Quarterly 98(3), Q3 2012, 185-207

abstract (+)
We provide an explanation of how inflation of the price of housing services is measured by the Bureau of Labor Statistics and describe alternative approaches. We then describe the contribution of inflation of the price of housing services to inflation in the consumer price index during the Great Recession and its aftermath. Finally, we examine new data series that provide additional information about the rental market for housing services and use this information to evaluate the direction of the pressure on housing services price inflation.
Accounting for the Non-Employment of U.S. Men, 1968-2010

FRB Richmond Economic Quarterly 97(4), Q4 2011, 359-387 | With Lubik and Tompkins

abstract (+)
We conduct an accounting exercise of the changes in aggregate employment, unemployment, and out of labor force (OLF) among 25–64-year-old men from 1968–2010. We decompose the observed changes in these labor market outcomes into changes in the sociodemographic composition of the population and changes in the labor market outcomes of different sociodemographic groups. Using the results of the decomposition, we predict that the OLF-to-population ratio for men will increase to 16 percent in 2015, up from 14.7 percent in 2010.
Recourse and Residential Mortgage Default: Evidence from U.S. States

Review of Financial Studies 20 (9), September 2011, 3139-3186 | With Ghent

abstract (+)
We quantify the effect of recourse on default and find that recourse affects default by lowering the borrower’s sensitivity to negative equity. At the mean value of the default option for defaulted loans, borrowers are 30% more likely to default in non-recourse states. Furthermore, for homes appraised at $500,000 to $750,000, borrowers are twice as likely to default in non-recourse states. We also find that defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu, in states that allow deficiency judgments. We find no evidence that mortgage interest rates are lower in recourse states.
Are Wages Rigid Over the Business Cycle?

FRB Richmond Economic Quarterly 96(2), Q2 2010, 179-199

abstract (+)
Search models of the labor market suggest that a significant determinant of job creation decisions by firms is the expected value of the initial and future real wages that firms have to pay to workers in newly formed employment relationships. Until recently, the focus of the empirical literature has been on the cyclical behavior of the current wage, but not on the cyclical behavior of the expected present discounted value of future wages within a match. This article reviews the empirical literature on the cyclicality of real wages of workers in continuing employment relationships, wages of newly hired workers, and a measure of wages that takes into account future wages within employment relationships. The existing evidence suggests that the real wage most relevant for job creation decisions appears to be quite flexible over the business cycle. Thus, the wage data do not support the rigidity necessary to generate the empirical volatility of unemployment in the standard search and matching model.
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Other Works
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Labor Indicators: Some of Today’s Trends Pre-Date the Great Recession

The Regional Economist, January 2016, 5-9 | With Sánchez

abstract (+)
More than six years after the Great Recession reached its trough, policymakers and researchers are still debating whether a full-blown, robust recovery in the labor market is under way. Although the unemployment rate declined from 10 percent in October 2009 to 5 percent in October 2015, some policymakers and researchers are concerned that other labor statistics are lagging the levels typically expected in the mature stages of an economic expansion. For example, several point to the number of workers who report working part time but would like to work full time. This number has been declining more slowly than the level of unemployment. (See Figure 1.)
Why Are Women Leaving the Labor Force?

FRB Richmond Economic Brief 2015(11), November 2015 | With Canon and Fessenden

abstract (+)
The female labor force participation (LFP) rate has dropped steadily since 2000, especially among single women. At the same time, the percentage of single women has grown as a share of the female population, a trend that has increased the impact of the single women’s LFP rate on the aggregate women’s LFP rate. An analysis of data from the Current Population Survey shows that a growing percentage of single women who are not in the labor force are going to school. Meanwhile, an increasing share of married women list retirement as the reason for no longer participating in the labor force.
How Should the Fed Interpret Slow Wage Growth?

FRB Richmond Economic Brief 2015(02), February 2015 | With Lubik and Rhodes

abstract (+)
During the current recovery, policymakers have debated whether slow wage growth indicates labor market “slack” that is not adequately reflected in the unemployment rate alone. The relationship—or lack thereof—between the unemployment rate and wage growth has challenged macroeconomists for decades. Empirical studies using micro data find that individual wages are procyclical, but attempting to use aggregate measures of wage growth to determine the level of “slack” in the labor market would be highly difficult and potentially misleading.
Youth Labor Force Participation Continues To Fall, but It Might Be for a Good Reason

The Regional Economist , January 2015, 12-13 | With Canon and Liu

Is Involuntary Part-time Employment Different after the Great Recession?

The Regional Economist, July 2014, 12-13 | With Canon and Reed

Does the Unemployment Rate Really Overstate Labor Market Recovery?

FRB Richmond Economic Brief 2014(06), June 2014 | With Hornstein, Lange, and Sabik

abstract (+)
Unemployment rose dramatically during the 2007-09 recession, peaking at 10 percent in October 2009. It has fallen steadily since then, at times outpacing economists’ forecasts. In April, unemployment reached 6.3 percent, about two-thirds of the way back to its prerecession level. Such progress is often a sign of recovery, but some observers question whether the unemployment rate accurately measures resource utilization in the current labor market.
Not Everyone Who Joins the Ranks of the Employed Was “Unemployed”

The Regional Economist, January 2014, 12-13 | With Canon and Reed

How Risky Are Young Borrowers?

FRB Richmond Economic Brief 2013(12), December 2013 | With Debbaut, Ghent, and Romero

abstract (+)
Young borrowers are conventionally considered the most prone to making financial mistakes. This has spurred efforts to limit their access to credit, particularly via credit cards. Recent research suggests, however, that young borrowers are actually among the least likely to experience a serious credit card default. One reason why people obtain credit cards early in life may be to build a strong credit history.
“A Closer Look at the Decline in the Labor Force Participation Rate

The Regional Economist, October 2013, 10-11 | With Canon and Debbaut

Job Search Behavior: Lessons from Online Job Search

FRB Richmond Economic Brief 2013(04), April 2013 | With Romero

abstract (+)
While there is a large body of theoretical work about the job search process, there is relatively little empirical evidence about important aspects of workers’ search behavior. A new database of online job posting data sheds light on how workers search for jobs.
The Increased Role of Flows Between Nonparticipation and Unemployment During the Great Recession and Recovery

FRB Richmond Economic Brief 2012(06), June 2012 | With Price

abstract (+)
Labor market research often focuses on transition rates between employment and unemployment without analyzing the effects of transition rates into and out of the labor force. Current Population Survey data permit analysis of transition rates among all three labor force statuses. A study at the Richmond Fed examines the role of labor force participation in the dynamics of the aggregate unemployment rate across the four most recent recessions. This research finds an increased role for transition rates between nonparticipation and unemployment during the Great Recession and recovery.
The Responses of Small and Large Firms to Tight Credit Shocks: The Case of 2008 through the Lens of Gertler and Gilchrist (1994)

FRB Richmond Economic Brief 2010(10), October 2010 | With Price and Sanchez

abstract (+)
Do large firms and small firms behave differently when credit becomes more costly or harder to obtain? Past research has found that small firms are more likely to be credit-constrained and thus tend to be affected more negatively than large firms during such times. Recent findings from the 2007-2009 recession, however, raise questions about the roles of small and large firms during periods of tight credit.
Comparing Labor Markets across Recessions

FRB Richmond Economic Brief 2010(04), April 2010 | With Reilly and Slivinski

abstract (+)
Simply looking at unadjusted versions of traditional statistics may not be the best way to compare the state of the current economy to previous periods. When comparing recessions, it is important to account for demographic changes.
Deterring Default: Why Some State Laws Decrease the Probability of Mortgage Foreclosures

FRB Richmond Economic Brief 2009(09), September 2009 | With Ghent and Slivinski

abstract (+)
Many states give mortgage lenders strong legal means by which to pursue debt collection in the event of a mortgage default. In those states, probability of default is lower and the forms the default takes are often quite different from a costly conventional foreclosure.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Anita Todd. Permission to reprint must be obtained in writing.

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