Research
Product Market Regulation and Unemployment
1. Great Depressions
On the Real Origins of the Great Depression , with Albrecht Ritschl, LSE
Under Review at the Journal of Political Economy
Presentation Slides, November 2011
first version: August 2006
This paper examines the ability of real forces to account for the Great Depression and its precursor, the severe recession of 1920-21, as well as for the roaring 20's upswing. We introduce monopolistic competition and labor market search frictions into an otherwise standard neoclassical model. We allow for two bargaining frameworks: individual and collective, each corresponding to a steady-state of the model. A shift from individual to collective bargaining presents as a recession, with sharp declines in output and asset prices, accompanied by an increase in unemployment. Conversely, a shift back to individual bargaining presents as an expansion, with increases in output and asset prices and a decrease in unemployment. We document three important legal shifts in the ability of workers to freely form collective bargaining coalitions occuring in 1914, late 1921 and 1929/early 1930. In the calibrated model, a shift from the individual bargaining to the collective bargaining steady states leads to declines in output and firm values, and increases in unemployment and wages whose magnitudes are in line with those observed in the Great Depression.
Presentations: ESSIM 2007 (Izmir), SED 2007 (Prague), MMF Group 2007, AEA 2008 (New Orleans) & various seminars
The British Great Depression, with Albrecht Ritschl, HU Berlin
coming soon !!
2. Labor Force Participation
The Rise of the Dual Earner Household and the Cycle
first version: November 2010
this version: May 2011
This paper documents and seeks to account for a new set of stylized facts on the changing cyclicality of labor market variables. It is well known that increases in per capita hours, employment and participation levels from the 1970s onwards were primarily due to married women. Novelly, I document that the cyclicality of employment, hours, participation and the labor wedge also changed between the early postwar period (1948-1974) and the late postwar (1975 onwards). In particular, employment, hours and participation become more procyclical, and crucially, most of the change is due to women. At the same time, labor productivity goes from being procyclical to nearly acyclical, while the labor wedge goes from being acyclical to strongly countercyclical. I show that a calibrated model with an explicit household structure and fixed costs to working for second earners can account well for the data, both in levels and in second moments. The driving force behind the changes in both levels and cyclicality is a drop in the fixed costs to working for second earners due to a decline in family size. I present evidence from the demography and sociology literatures that declines in fertility from the early 1960s onwards were due almost exclusively to reductions in unplanned births, due to exogenous technological innovations in birth control and the legalization of abortion.
On the Cyclicality of Unemployment: Resurrecting the Participation Margin
Published in: Labour Economics, Volume 18, Issue 6, December 2011, pp. 822-36.
first version: May 2006
This paper considers a real business cycle model with search frictions in the labor market and labor supply which is elastic along the participation margin. Previous authors have found that such models generate counterfactually procyclical unemployment and a positively sloped Beveridge curve. This paper presents a calibrated model which succeeds at generating countercyclical unemployment and a negatively sloped Beveridge curve, despite the presence of a participation margin.
Presentations: Midwest Macro 2007 (Cleveland), NA Winter Meetings of Econometric Society 2008 (New Orleans), SED 2006 (Vancouver) & various seminars
3. Product Market Regulation and Unemployment
Product Market Deregulation and the US Employment Miracle, with Christian Haefke, IAE Vienna and IZA
Published in: Review of Economic Dynamics, Volume 12, Issue 3, June 2009, pp. 479-504
We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is integrating labor market search frictions and individual wage bargaining into a model with monopolistic competition in the goods market. Product market competition affects unemployment by two channels: the output expansion effect and a countervailing effect due to a hiring externality. Competition is then linked to barriers to entry. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980's and 1990's could be attributed to product market deregulation. Our quantitative analysis suggests that under individual bargaining, a decrease of less than four tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount.
Presentations: ASSA 2003 (Washington, D.C.), ESSIM 2003 (Vougliameni), SED 2003 (Paris) & various seminars
Product Market Regulation and Endogenous Union Formation, with Christian Haefke, IAE Vienna and Barcelona, IZA
this version: July 2006
We contribute to the growing literature which aims to link product market regulation and competition to labor market outcomes, in order to explain the divergent US and continental European labor market performance over the past two decades. The main contributions of this paper are twofold. First, we show that the choice of bargaining regime (individual or collective) is crucial for the impact of product market competition on unemployment rates. Under collective bargaining, unemployment is strongly increasing in monopoly power, while under individual bargaining unemployment rates are nearly invariant to the degree of competition in the product market. Since the choice of bargaining institution is so important, we endogenize it. We find that the bargaining regime which emerges endogenously depends crucially on the degree of monopoly power in the economy. When product market competition is low, collective bargaining is stable, while individual bargaining emerges as the stable institution when product market competition is high enough. In the calibrated model, moving from the US low regulation/individual bargaining economy to the EU high regulation/collective bargaining economy leads to a substantial increase in equilibrium unemployment rates from 5.5% to 8.9% in the model economy.
Presentations: Penn Search & Matching Workshop 2006, SED 2004 (Florence), ECB Labor Conference 2004 & various seminars
Product Market Regulation in the Presence of Unions: Quantitative Implications, with Christian Haefke, IAE Vienna and Barcelona, IZA and Gernot Doppelhofer, Cambridge University
4. Asset Markets
Why are Asset Returns More Volatile during Recessions?
During a recession, many macroeconomic variables display higher levels of volatility. This paper shows that introducing an AR(1)-ARCH(1) driving process into the canonical Lucas consumption CAPM framework can account for the empirically observed greater volatility of asset returns during recessions. In particular, agents' joint forecasting of levels and time-varying second moments transforms symmetric-volatility driving processess into asymmetric-volatility endogenous variables. Moreover, numerical examples show that the model can indeed account for the degree of cyclical variation in both bond and equity returns in US data. Finally, I argue that the underlying mechanism is not specific to financial markets, and has the potential to explain cyclical variation in the volatilities of a wide variety of macroeconomic variables.
