Research                     

                                       

   Working Papers   

 

We model unemployment allowing workers to differ by comparative advantage in market work. Workers with comparative advantage are identified by who works more hours when employed. This enables us to test the model by grouping workers based on their long-term wages and hours from panel data. The model captures the greater cyclicality of employment for workers with low comparative advantage. But the model fails to explain the magnitude of countercyclical separations for high-wage workers or the magnitude of procyclical findings for high-hours workers. As a result, it only captures the cyclicality of the extensive, employment margin for low-wage, low-hours workers.

 

 

Using firm-level total factor productivity (TFP) and employment data in the U.S. manufacturing sector constructed from Compustat for 1971-2000, we estimate the employment effect of technological progress. In contrast to an existing literature that finds a contractionary effect of technology, the firm-level technology shock creates more jobs. In addition, firm-level data reveal the propagation mechanism that aggregate data cannot. When we examine the relationship between the employment growth of firms and the aggregate TFP growth where the idiosyncratic component of firm-level TFP growth is diversified away, we find that employment responses are vastly different across firms. Even when productivity improves economy-wide so that many business firms expand, a large number of firms cut back on their employment in response to this change. Our analysis shows the difficulty of hypothesizing a representative firm’s behavior from aggregate responses.

 

 

We undertake a quantitative analysis of the dispersion of current accounts in an open economy version of incomplete insurance model, incorporating important market frictions in trade and financial flows. When calibrated to match the global dispersion of net foreign assets, the stochastic stationary equilibrium of the model with limited borrowing can account for about two-thirds of the global dispersion of current accounts. The easing of financial frictions can explain nearly all changes in the current account dispersion in the past four decades whereas the easing of trade frictions has almost no impact on the current account dispersion.

 

 

We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off--it cannot produce both realistic dispersion in wages across workers and realistic cyclical fluctuations in unemployment.

 

 

Capital deepening played an important role for the economic development in many countries, especially for the East Asian `Growth Miracles.' The accumulation of capital took place over a prolonged period. The fraction of output invested in capital increased gradually over time and then declined (i.e. hump-shaped). These characteristics of growth experience appear to be at odds with the neoclassical growth theory which predicts that investment boom occurs in the early stage of economic development and falls uniformly. We argue that the neoclassical growth model is still consistent with a hump-shape investment rate if one takes account that capital and skilled labor are complementary in production and that the supply of skilled labor increases only gradually over time. Based on the model calibrated to the observed population, TFP, employment, and skilled labor ratios in Korea for the last 40 years, we reproduces a hump-shape pattern of investment rate.

 

 

Published Papers

 

 

 

Accounting for observed fluctuations in aggregate employment, consumption, and real wage using optimality conditions of a representative household often requires preferences that are incompatible with economic priors (e.g., Mankiw, Rotemberg, and Summers 1985). This discrepancy between the equilibrium model and the aggregate data is often viewed as evidence of the failure of labor-market clearing. We argue that such a conclusion is premature. We construct a model economy where all prices are flexible and all markets clear at all times but household decisions are not readily aggregated because of incomplete capital markets and the indivisible nature of labor supply. We demonstrate that if we were to explain the model-generated aggregate time series using decisions of a ``fictitious'' stand-in household, such a household is likely to have a non-concave or unstable utility.

 

 

Whether technological progress raises or lowers aggregate employment in the short run has been the subject of much debate in recent years. We show that cross-industry differences in inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face of productivity shocks. In particular, the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories, the more elastic industry demand is, and the more flexible prices are. Using data on 458 4-digit U.S. manufacturing industries over the period 1958-1996, we find statistically significant effects of variations in inventory holdings and demand elasticities on short-run employment responses, but less conclusive evidence pertaining to the effects of measured price stickiness..

 

 

We show that a simple heterogeneous-agent economy with incomplete capital markets and indivisible labor can exhibit a strong increase in aggregate employment and consumption without a corresponding movement in wages. In the presence of aggregate productivity shifts, the interaction between partial insurance and indivisible labor results in a very low employment-productivity correlation and creates a time-varying wedge between the real wage and the marginal rate of substitution in consumption and leisure. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles.

 

 

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. We find that the data support the latter specification.

 

 

We find that technology's effect on  employment varies greatly across manufacturing industries. Some industries exhibit a temporary reduction in employment in response to a permanent increase in TFP, whereas far more industries exhibit an employment increase in response to a permanent TFP shock. This raises serious questions about existing work that finds that a labor productivity shock has a strong negative effect on employment. There are tantalizing and interesting differences between TFP and labor productivity. We argue that TFP is a more natural measure of technology because labor productivity reflects shifts in the input mix as well as in technology.

 

 

At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate. While the model is parsimonious, it provides a reconciliation between the micro and macro labor-supply elasticities.

 

 

Studying the incentives and constraints in the non-market sector – that is, home production – enhances our understanding of economic behaviour in the market. In particular, it helps us to understand (a) small variations of labour supply over the life cycle, (b) the low correlation between employment and wages over the business cycle, and (c) large income differences across countries.

 

 

The labor supply elasticity of an individual household and the aggregate labor supply elasticity of all households can differ significantly. If individual households not only decide on their hours worked, but also on whether to work or not, then the aggregate labor supply is determined not only by the willingness to substitute leisure over time, but also by the distribution of reservation wages. We present a model economy where earnings and wealth distributions are comparable to those in the micro data. We find that the aggregate labor supply elasticity of such an economy is around 1 which is greater than the typical micro estimates but smaller than those often assumed in the aggregate models.

  • Trends in Unemployment Rates in Korea: A Search-Matching Model Interpretation (joint with Changyong Rhee and Jaeryang Nam), Journal of the Japanese and International Economies, 18 (2) 241-163, 2004.

 

We investigate the steady decline in aggregate unemployment rates in Korea since the 1960's.  We argue that a pronounced decrease in the intensity of reallocation shocks, which resulted in a downward trend in the natural rate of unemployment, has been an important factor in this decline.  Our claim is based on a structural search-matching model, the times series of job-separation and job-finding rates, and sectoral-shift measures that we construct from a micro data for the past three decades.

 

We investigate the role of labor-supply shifts in economic fluctuations. We propose a new identification scheme for innovations to labor-supply schedule, which does not rely on a form of households' utility function. According to a VAR analysis of post-war U.S. data, the labor-supply shift accounts for about half the variation in hours and one-fifth of variation in output. To assess the role of labor-supply shifts in a more structural framework, predictions from a home production model with stochastic variation in home technology are compared to those from the VAR. We ask whether recent U.S. recessions are associated with unusually high productivity in non-market activity. Two recessions out of six recessions in the past 40 years are consistent with this interpretation.

 

We examine the impact of wage stickiness when employment has an effort as well as hours dimension.  Despite wages being predetermined, the labor market clears through the effort margin.  Consequently, welfare costs of wage stickiness are potentially much, much smaller.

 

This paper suggests that skill accumulation through past work experience, or "learning-by-doing'', can provide an important propagation mechanism in a dynamic stochastic general equilibrium model, as the current labor supply affects future productivity. Our econometric analysis uses a Bayesian approach to combine micro-level panel data with aggregate time series. Formal model evaluation shows that the introduction of the LBD mechanism improves the model's ability to fit the dynamics of aggregate output and hours.

  • Cyclical Movements in Hours and Effort Under Sticky Wages (joint with Mark Bils) International Economic Journal, 15:2; 1-26, 2001.

 

We examine the response of a sticky-wage economy to various real and nominal shocks.  In addition to variations in hours, we allow for an endogenous response in worker effort per hour.  Despite wages being predetermined, the labor market clears through the effort margin.  We find that the ability of a sticky-wage model to mimic U.S. business cycles is much improved by allowing for reasonable effort movements.  The model also provides a ready explanation for the finding that TFP is negatively affected by nominal shocks.

  • Decomposition of Hours based on Extensive and Intensive Margins of Labor (joint with Noh-sun Kwark), Economics Letters, 72, 361-367, 2001.

 

We decompose underlying disturbances in total hours into three kinds: disturbances that shift the aggregate employment in the long- run, those that change the sectoral composition of employment in the long-run, and those that cause temporary movement of hours around the steady-state. Our identifying restriction exploits the distinctive nature of the two margins of labor: employment and hours per worker. According to the variance decomposition from a VAR based on Post-War U.S. monthly data, we find that aggregate and sectoral disturbances are roughly equally important in the cyclical fluctuation in aggregate hours.

The importance of sticky prices in business cycle fluctuations has been debated for many years. But we argue, based on a large empirical literature from the 1950's and 60's, that it is necessary to distinguish the response of price to an increase in factor prices from its response to an increase in marginal cost generated by an expansion in production. Consistent with that earlier literature, we find for 450 U.S. manufacturing industries that prices do respond more dramatically to increases in costs driven by changes in factor prices than to an increase in marginal cost precipitated by expansions in output. We explore two models that can potentially explain these findings. Both break the link between price and marginal cost, thereby generating what one might naively interpret as average-cost pricing. The first is driven by firms pricing to limit entry. The second is driven by firms pricing to limit non-price competition within their market.

Two investment anomalies in aggregate home production models are investigated: excess volatility and comovement. Adjustment cost in capital accumulation reduces both volatility and the negative correlation in investments on capital goods in the market and at home. Investments comove to the extent that durable goods and time are good substitutes in consumption activities. Consumers substitute durable goods for time at home when the opportunity cost of time is high during booms. Based on the Consumer Expenditure Survey, I show that households' expenditure shares on durable goods are negatively associated with household leisure, indicating that durable goods are relatively good substitutes for time.

The standard equilibrium models of business cycles face a puzzling fact that total hours vary greatly over the business cycle without much variation in aggregate wages. The model augments the standard RBC model to include Lucas span of control. Distinction between market and non-market and managerial and non-managerial work makes aggregate wage far less cyclical than individual wages. A weak cross-sectional comparative advantage between market and home production can increase aggregate labor supply elasticity substantially. As a result, the model provides a reconciliation between data and equilibrium macroeconomics.