Labor Market Dysfunction During the Great Recession

This paper documents the abnormally slow recovery in the labor market during the Great Recession, and analyzes how mortgage modification policies contributed to delayed recovery. By making modifications means-tested by reducing mortgage payments based on a borrower's current income, these programs change the incentive for households to relocate from a relatively poor labor market to a better labor market. We find that modifications raise the unemployment rate by about 0.5 percentage points, and reduce output by about 1 percent, reflecting both lower employment and lower productivity, which is the result of individuals losing skills as unemployment duration is longer.

An anatomy of monopsony : Search frictions, amenities and bargaining in concentrated markets

We contribute a theory in which three channels interact to determine the degree of monopsony power and therefore the markdown of a worker’s spot wage relative to her marginal product: (1) heterogeneity in worker-firm-specific preferences (non-wage amenities), (2) firm granularity, and (3) off- and on-the-job search frictions. We use Norwegian data to discipline each channel and then reproduce new reduced-form empirical relationships between market concentration, job flows, wages and wage inequality. In doing so we provide a novel method for clustering occupations into local labor markets. Our main exercise quantifies the contribution of each channel to income inequality and wage markdowns. The average markdown is 21 percent in our baseline estimation. Removing nonwage amenity dispersion narrows them by a third. Giving the next-lowest-ranked competitor a seat at the bargaining table narrows them by half, suggesting that granularity and strategic interactions in the bargaining process is an important source of markdowns. Removing search frictions narrows them by two-thirds. Each counterfactual reduces wage inequality and increases welfare.publishedVersio

Unemployment, negative equity, and strategic default

Using new household-level data, we quantitatively assess the roles that job loss, negative equity, and wealth (including unsecured debt, liquid assets, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5 - 13 percentage points, ceteris paribus, compared with the sample average default rate of 3.9 percent. We also find that only 13.9 percent of defaulters have both negative equity and enough liquid or illiquid assets to make one month's mortgage payment. This finding suggests that "ruthless" or "strategic" default during the 2007 - 09 recession was relatively rare and that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages

Can't pay or won't pay? Unemployment, negative equity, and strategic default

Prior research has found that job loss, as proxied for by regional unemployment rates, is a weak predictor of mortgage default. In contrast, using micro data from the PSID, this paper finds that job loss and adverse financial shocks are important determinants of mortgage default. Households with an unemployed head are approximately three times as likely to default as households with an employed head. Similarly, households that experience divorce, report large outstanding medical expenses, or have had any other severe income loss are much more likely to default. While household-level employment and financial shocks are important drivers of mortgage default, our analysis shows that the vast majority of financially distressed households do not default. More than 80 percent of unemployed households with less than one month of mortgage payment in savings are current on their payments. We argue that this has important implications for theoretical models of mortgage default as well as for loss mitigation policies. Finally, this paper provides some of the first direct evidence on the extent of strategic default. Wealth data suggest a limited scope for strategic default, with only one-third of underwater defaulters having enough liquid assets to cover one month´s mortgage payment

Rational Expectations Models with Higher Order Beliefs,” mimeo

Abstract This paper develops a general method of solving rational expectations models with higher order beliefs. Higher order beliefs are crucial in an environment with dispersed information and strategic complementarity, and the equilibrium policy depends on infinite higher order beliefs. It is generally believed that solving this type of equilibrium policy requires an infinite number of state variable

Rational Expectations Models with Higher Order Beliefs,” mimeo

Abstract This paper develops a general method of solving rational expectations models with higher order beliefs. Higher order beliefs are crucial in an environment with dispersed information and strategic complementarity, and the equilibrium policy depends on infinite higher order beliefs. It is generally believed that solving this type of equilibrium policy requires an infinite number of state variable

How Do Employers Use Compensation History?: Evidence from a Field Experiment

We report the results of a field experiment in which treated employers could not observe the compensation history of their job applicants. Treated employers responded by evaluating more applicants, and evaluating those applicants more intensively. They also responded by changing what kind of workers they evaluated: treated employers evaluated workers with 7% lower past average wages and hired workers with 16% lower past average wages. Conditional upon bargaining, workers hired by treated employers struck better wage bargains for themselves. Using a structural model of bidding and hiring, we find that the selection effects we observe would also occur in equilibrium

Essays on Private Consumption Smoothing Mechanisms

This dissertation studies the interaction between private consumption smoothing mechanisms and labor markets. Chapter 1 studies the growth in credit card access among the unemployed over the last 40 years and how this credit growth has impacted labor markets. I begin by developing a general equilibrium business cycle model with search in both the labor market and in the credit market. Calibrating to the observed path of credit between 1974 and 2012, I find that growth in credit card access can lead to deeper and longer recessions as well as moderately slower recoveries. Chapter 2, which is co-authored with Lee E. Ohanian, looks at the impact of foreclosure protection on unemployment during the 2007-2009 financial crisis. Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of ``informal'' unemployment insurance during the 2007 recession and the subsequent recovery. In a dynamic model, we capture this behavior by treating both delinquency and foreclosure not as one period events, but rather as protracted and potentially reversible episodes that influence job search behavior and wage acceptance decisions. After calibrating, we find that the observed foreclosure delays increase the unemployment rate by an additional 1/3%-3/4%. And finally, Chapter 3, which is co-authored with Lee E. Ohanian, Kris Gerardi, and Paul Willen, looks at the empirical determinants of default and provides a new suggestive measure of strategic default. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month's mortgage payment. This suggests that ``ruthless,'' or ``strategic'' default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages

Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry

How are the welfare costs from monopoly distributed across U.S. households? We answer this question for the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above perfectly competitive pricing, and has repeatedly lost antitrust lawsuits. We depart from existing competitive models by integrating oligopolistic lenders into a heterogeneous agent, defaultable debt framework. Our model accounts for 20 to 50 percent of the spreads observed in the data. Welfare gains from competitive reforms in the 1970s are equivalent to a one-time transfer worth between 0.24 and 1.66 percent of GDP. Along the transition path, 93 percent of individuals are better off. Poor households benefit from increased consumption smoothing, while rich households benefit from higher general equilibrium interest rates on savings. Transitioning from 1970 to 2016 levels of competition yields welfare gains equivalent to a one-time transfer worth between 1.87 and 3.20 percent of GDP. Lastly, homogeneous interest rate caps in 2016 deliver limited welfare gains