Creative destruction and aggregate productivity growth

Productivity growth is the engine of economic growth and is responsible for rising standards of living. But all firms do not partake equally in the nation's productivity growth. Rather, according to economist Joseph Schumpeter's theory, firms undergo a process of "creative destruction": New firms that adapt to new knowledge cause the decline and eventual demise of incumbent firms. In "Creative Destruction and Aggregate Productivity Growth," Shigeru Fujita surveys recent studies that examine the role of creative destruction in aggregate productivity growth.Productivity

Economic effects of the unemployment insurance benefit

The U.S. labor market has remained weak in recent years, even though the overall economy itself has started to grow again after the deep recession. In response to the weak labor market conditions, the U.S. government has greatly expanded the entitlement period of unemployment insurance (UI) benefits. In “Economic Effects of the Unemployment Insurance Benefit,” Shigeru Fujita reviews some of the academic literature on the economic effects of UI benefits. On the one hand, UI can improve people’s well being because it helps them avoid a large drop in consumption in the face of job losses when job losers do not have enough savings. On the other hand, there is a concern that it might produce an adverse effect on the incentive to look for a job. The author covers leading theoretical as well as empirical studies, which are useful in evaluating the recent expansion of unemployment insurance benefits.Unemployment insurance

Effects of extended unemployment insurance benefits: evidence from the monthly CPS

This paper attempts to quantify the effects of extended unemployment insurance benefits in recent years. Using the monthly Current Population Survey, I estimate unemployment-to-employment (UE) hazard function and unemployment-to-inactivity (UN) hazard function for male workers. The estimated hazard functions for the period of 2004-2007, during which no extended benefits were available, exhibit patterns consistent with the expiration of regular benefits at 26 weeks. These patterns largely disappear from the hazard functions for the period of 2009-2010, during which largescale extended benefits had become available. I conduct counterfactual experiments in which the estimated hazard functions for 2009-2010 are replaced by the counterfactual hazard functions whose patterns are inferred from those for the 2004-2007 period. The experiments suggest that extended benefits in recent years have raised male workers’ unemployment rate by 1.2 percentage points with a 90% confidence interval of 0.8 to 1.8 percentage points. The increases in the unemployment rate largely come from the effects on the UE hazard function rather than the UN hazard function.Unemployment insurance ; Unemployment

Dynamics of worker flows and vacancies: evidence from the sign restriction approach

This paper establishes robust dynamic features of the worker reallocation process in the U.S. labor market. The author uses structural VARs with sign restrictions, which take the form of restricting the short-run negative relationship between vacancies and unemployment (i.e., Beveridge curve). Despite the "weakness" of these restrictions, they reveal a clear, unambiguous pattern that when unemployment increases and vacancies drop, (i) both the separation rate and gross separations rise quickly and remain persistently high, (ii) the job finding rate and vacancies drop in a hump-shaped manner, and (iii) gross hires respond little initially, but eventually rise. These results point to the importance of job loss in understanding U.S. labor market dynamics. This pattern also holds with respect to different kinds of shocks that induce the same Beveridge curve relationship. Given the robustness, these results should be taken seriously in the quantitative macro/labor literature. This paper also considers the "disaggregate model," which uses data disaggregated by six demographic groups and incorporates transitions into and out of the labor force. The author finds that the separation rate continues to play a dominant role among prime-age male workers, while, for other groups, changes in the job finding rate are more important. ; Previous title: Dynamics of worker flows and vacancies: evidence from the agnostic identification approach.Labor market

Reality of on-the-job search

This paper provides a set of simple, yet overlooked, facts regarding on-the-job search and job-to-job transitions using the UK Labour Force Survey (LFS). The LFS is unique in that it asks employed workers whether they search on the job and, if so, why. The author finds that workers search on the job for very different reasons, which lead to different outcomes in both mobility and wage growth. A nontrivial fraction of workers engage in on-the-job search due to a fear of losing their job. This group mimics many known features of unemployed workers, such as wage losses upon finding a job. Workers also search on the job because they are unsatisfied. This group is roughly equally split into those who are unsatisfied with pay and those who are unsatisfied with other aspects of their job. Distinguishing these two groups allows the author to highlight the importance of the nonpecuniary value of a job. He further shows that the evidence that firms make a counteroffer in response to a worker's outside offer is scarce and that wage outcomes at the time of job-to-job transitions are closely linked to the worker's outside option. The evidence in this paper contributes not only to deepening our understanding of labor reallocation, but it also suggests the fruitful directions of future research in the labor search literature.Job satisfaction ; Job security ; Labor market ; Employment

What do worker flows tell us about cyclical fluctuations in employment?

Many official surveys give us important information about labor markets and unemployment, as well as other statistics. However, these surveys reveal only the net gains or losses in employment over a given period. Consequently, how many gross hires and separations lie behind the net changes is missing from these statistical releases. Data on gross flows turn up additional valuable information. In “What Do Worker Flows Tell Us About Cyclical Fluctuations in Employment?,” Shigeru Fujita uses such data to examine cyclical changes in the pace of the worker reallocation process and its effects on the U.S. labor market.Employment

Earnings losses of job losers during the 2001 economic downturn

Job losses may involve not only lost earnings during unemployment but also declines in earnings at subsequent jobs. After a time consuming job search, workers may need to restart their careers from scratch, accepting a lower wage. Workers may also need time to acquire new skills, and total earnings lost during such a period of re-adjustment can be considerable. But experiences may vary widely. In this article, using a novel data set, Shigeru Fujita and Vilas Rao provide evidence on earnings losses after unemployment. Although the usefulness of the evidence is limited by the short sample period, the data set allows us to ask some important questions, the answers to which may help inform us about important macroeconomic issues such as the cost of business-cycle fluctuations and the benefits of policies intended to avoid such fluctuations.Recessions ; Unemployment ; Wages

Reassessing the Shimer facts

In a recent influential paper, Shimer uses CPS duration and gross flow data to draw two conclusions: (1) separation rates are nearly acyclic; and (2) separation rates contribute little to the variability of unemployment. In this paper the authors assert that Shimer's analysis is problematic, for two reasons: (1) cyclicality is not evaluated systematically; and (2) the measured contributions to unemployment variability do not actually decompose total unemployment variability. The authors address these problems by applying a standard statistical measure of business cycle comovement, and constructing a precise decomposition of unemployment variability. Their results disconfirm Shimer's conclusions. More specifically, separation rates are highly countercyclical under various business cycle measures and filtering methods. The authors also find that fluctuations in separation rates make a substantial contribution to overall unemployment variability.

Private equity premium in a general equilibrium model of uninsurable investment risk

This paper studies the quantitative properties of a general equilibrium model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks in the presence of a borrowing constraint. The calibrated model matches the highly skewed wealth and income distributions of entrepreneurs. The authors provide an accurate solution to the model despite the significant nonlinearities that are absent in the economy with uninsurable labor income risk. The model is capable of generating the average private equity premium of roughly 3 percent and a low risk-free rate. The model also produces procyclicality of the risk-free rate and countercyclicality of the average private equity premium. The countercyclicality of the average equity premium is largely driven by tightening (loosening) of financing constraints during recessions (booms).Risk ; Private equity ; Business cycles

Exogenous vs. endogenous separation

This paper assesses how various approaches to modeling the separation margin affect the ability of the Mortensen-Pissarides job matching model to explain key facts about the aggregate labor market. Allowing for realistic time variation in the separation rate, whether exogenous or endogenous, greatly increases the unemployment variability generated by the model. Specifications with exogenous separation rates, whether constant or time-varying, fail to produce realistic volatility and productivity responsiveness of the separation rate and worker flows. Specifications with endogenous separation rates, on the other hand, succeed along these dimensions. In addition, the endogenous separation model with on-the-job search yields a realistic Beveridge curve correlation and performs well in accounting for the productivity responsiveness of market tightness. While adopting the Hagedorn-Manovskii calibration approach improves the behavior of the job finding rate, the volume of job-to-job transitions in the on-the-job search specification becomes essentially zero.Job hunting ; Unemployment