Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Land Prices and Unemployment By: Zheng Liu, Jianjun Miao, and Tao Zha

Marcus Mølbak Ingholt Department of Economics University of Copenhagen

Macro Reading Group September 28, 2016

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Outline 1

Introduction Motivation Transmission Mechanism

2

Model Key Building Blocks Patient and Impatient Households Wage Setting

3

Estimation Setting Up the Estimation Results

4

Real Wage Rigidity and Unemployment Real Wage Rigidity and Unemployment Solution to the Shimer Puzzle?

5

Summary

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Outline 1

Introduction Motivation Transmission Mechanism

2

Model Key Building Blocks Patient and Impatient Households Wage Setting

3

Estimation Setting Up the Estimation Results

4

Real Wage Rigidity and Unemployment Real Wage Rigidity and Unemployment Solution to the Shimer Puzzle?

5

Summary

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

Motivation The paper studies dynamic interactions between land prices and unemployment in a DSGE model. More specifically, it studies how shocks to the land demand of households are propagated to firms through a collateral constraint: n o Bc,t ≤ ξt Et ω1 Ql,t+1 Lc,t + ω2 Qk,t+1 Kt

Shocks to the firms then affect (un)employment. Focuses on land prices because fluctuations of house prices are mostly driven by those of land prices. So when house prices change, it is actually the land prices that change.

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Figure: Log unemployment rate (l.s.) and log real land price (r.s.)

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Transmission Mechanism Similar to the standard collateral propagator: Housing demand ↓ ⇒ Land price ↓ ⇒ Borrowing capacity of the capitalist ↓ ⇒ But with an productive externality (additional propagation): Investment spending ↓ ⇒ Capital stock ↓ ⇒ Future marginal productivity of each employed worker ↓ ⇒ Present value of an employment match ↓ ⇒ Job vacancies ↓ ⇒ Unemployment rate ↑

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Figure: IRF to a negative one std. dev. BVAR land-price shock (l.c.) or model land preference shock (r.c.), log deviations from SS

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Figure: IRF to a negative one std. dev. BVAR land-price shock (l.c.) or model land preference shock (r.c.), log deviations from SS

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Outline 1

Introduction Motivation Transmission Mechanism

2

Model Key Building Blocks Patient and Impatient Households Wage Setting

3

Estimation Setting Up the Estimation Results

4

Real Wage Rigidity and Unemployment Real Wage Rigidity and Unemployment Solution to the Shimer Puzzle?

5

Summary

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Key Building Blocks

Credit friction: Similar to Kiyotaki and Moore (1997), Iacoviello (2005), Iacoviello and Neri (2010). Household (patient), capitalist (impatient), and firm. Collateral constraint. Search-and-matching labor market: Diamond-Mortensen-Pissarides. Search unemployment. Nash wage bargaining.

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

The Patient Household: Utility Maximization Problem Utility function: ( E0

∞ X

βht

 log(Ch,t − ηh Ch,t−1 ) + ϕL,t log Lh,t

t=0

h1+ν −χ t Nt 1+ν

) .

Subject to a budget constraint: Ch,t +

Bh,t + Ql,t (Lh,t − Lh,t−1 ) = Bh,t−1 + Wt ht Nt + bZtp (1 − Nt ) − Tt . Rt

Land preference shock: log ϕL,t = (1 − ρL ) log ϕL + ρL log ϕL,t−1 + εL,t

Choice variables: Ch,t , Lh,t , Bh,t .

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

The Impatient Capitalist: Utility Maximization Problem Utility function: ( E0

∞ X

) βct

log(Cc,t − ηc Cc,t−1 ) .

t=0

Subject to a budget constraint: Cc,t + Ql,t (Lc,t − Lc,t−1 ) + It + Φ(et )Kt−1 + Bc,t−1 =

Bc,t + Rk,t et Kt−1 + Rl,t Lc,t−1 + Πt . Rt

Law of motion for the capital stock:  2  Ω  It Kt = (1 − δ)Kt−1 + 1 − − γI It 2 It−1

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

And subject to a collateral constraint: n o Bc,t ≤ ξt Et ω1 Ql,t+1 Lc,t + ω2 Qk,t+1 Kt

Collateral constraint shock: log ξt = (1 − ρξ ) log ξ + ρξ log ξt−1 + εξ,t

Choice variables: Cc,t , Kt , Lc,t , It , Bc,t , et .

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

Wage Setting The search-and-matching model has an exogenous separation rate. When a job match is formed, the firm and the worker bargain over wages and hours in a Nash bargaining game. The value to the firm of an employment match is: JtF = πt − Wt ht + Et



i βc Λc,t+1 h F (1 − ρ)Jt+1 + ρVt+1 . Λc,t

The value to the worker of an employment match is: JtW

χg (ht ) = Wt ht − + Et Λh,t



i βh Λh,t+1 h u W u U (1 − ρ(1 − qt+1 ))Jt+1 + ρ(1 − qt+1 )Jt+1 . Λh,t

The value to the worker of unemployment is: JtU

=

bZtp

 + Et

i βh Λh,t+1 h u W u U qt+1 Jt+1 + (1 − qt+1 )Jt+1 . Λh,t

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

The Nash bargaining problem they face is: ϑt

1 F 1+ϑ t

max (JtW − JtU ) 1+ϑt Jt

Wt ,ht

.

The first order conditions with respect to the wage rate and labor hours are: Wt =

  htν  χ 1+ν Zp 1 βh Λh,t+1  u F +b t + ϑt JtF − Et (1 − ρ)(1 − qt+1 )ϑt+1 Jt+1 Λh,t ht ht Λh,t

∂yt χhtν = . Λh,t ∂ht

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Outline 1

Introduction Motivation Transmission Mechanism

2

Model Key Building Blocks Patient and Impatient Households Wage Setting

3

Estimation Setting Up the Estimation Results

4

Real Wage Rigidity and Unemployment Real Wage Rigidity and Unemployment Solution to the Shimer Puzzle?

5

Summary

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Setting Up the Estimation

They estimate the model by Bayesian maximum likelihood. The estimation sample contains 6 variables covering the U.S. economy in 1975Q1-2015Q3: Real land price. Real private consumption p.c. Real private non-residential investment p.c. Job vacancy rate. Unemployment rate. Total hours p.c.

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Their model contains 6 stochastic structural shocks: Land preference. Wage bargaining. Matching efficiency. Permanent technology. Stationary technology. Collateral constraint.

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

Results The land preference shocks explain: Almost all fluctuations in the land price. 21 pct. of the fluctuations in the unemployment rate at a one-year horizon. 18 pct. of the fluctuations in the unemployment rate at a six-year horizon. Comparison: Land preference shocks account for a larger share of the fluctuations than in Iacoviello and Neri (2010). This is to be expected since there are no productive externalities working through the collateral constraint in Iacoviello and Neri (2010).

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Did land preference shocks cause the Great Recession? Figure: Counterfactual paths of the log land price and the unemployment rate, conditional on the estimated land preference shock only.

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Outline 1

Introduction Motivation Transmission Mechanism

2

Model Key Building Blocks Patient and Impatient Households Wage Setting

3

Estimation Setting Up the Estimation Results

4

Real Wage Rigidity and Unemployment Real Wage Rigidity and Unemployment Solution to the Shimer Puzzle?

5

Summary

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

Real Wage Rigidity and Unemployment Two channels are active following a land preference shock: A credit channel. A labor channel. The credit channel Land prices ↓ ⇒ Capital stock ↓ ⇒ Future marginal productivity of each employed worker ↓. Workers respond to this by lowering wages since: Unemployment effect: Job finding rate ↓ ⇒ Unemployment duration ↑ ⇒ Wage ↓. Wealth effect: Capital stock ↓ ⇒ Land price ↓ ⇒ Poorer household ↓ ⇒ Consumption ↓ ⇒ Marginal utility of consumption ↑ ⇒ Wage ↓.

The channel lacks real wage rigidity to increase unemployment (the Shimer puzzle).

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

The labor channel introduces endogenous real wage rigidity conditional on the presence of negative land preference shocks: Relative consumption preference ↑. Consumption ↑. Marginal utility of consumption ↓. Wage ↑. The labor channel insures that consumption (hence the marginal utility of consumption) is roughly unchanged. The workers reservation wage in the bargaining game is thus unchanged.

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Figure: IRF to negative one std. dev. land preference (asterisk lines) and stationary technology shocks (solid lines).

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

Solution to the Shimer Puzzle? The authors state that the Shimer volatility ratio in the model (22.58) matches the Shimer volatility ratio (i.e., the std. dev. of labor market tightness to std. dev. labor productivity) in the data (25.34). But the model volatility ratio is computed from a simulation with only land preference shocks (see p. 98, bottom). The economy is generally driven by more than land preference shocks (they only account for 20 pct. of unemployment). The model can thus only be seen as a description of unemployment formation in the U.S. during the Great Recession.

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Outline 1

Introduction Motivation Transmission Mechanism

2

Model Key Building Blocks Patient and Impatient Households Wage Setting

3

Estimation Setting Up the Estimation Results

4

Real Wage Rigidity and Unemployment Real Wage Rigidity and Unemployment Solution to the Shimer Puzzle?

5

Summary

Summary

Introduction

Model

Estimation

Real Wage Rigidity and Unemployment

Summary

Summary

The paper develops a novel model for how land preference shocks are propagated to firms through a collateral constraint, and what the consequences for (un)employment are. The paper finds that land preference shocks explain almost all fluctuations in land prices and around 20 pct. of the fluctuations in the unemployment. Land preference shocks were more important during the Great Recession. The paper presents a solution to how search-and-matching labor markets can explain the volatility of unemployment, given that the economy is primarily driven by land preference shocks.

Land Prices and Unemployment

Sep 28, 2016 - 21 pct. of the fluctuations in the unemployment rate at a one-year horizon. 18 pct. of the fluctuations in the unemployment rate at a six-year horizon. Comparison: Land preference shocks account for a larger share of the fluctuations than in Iacoviello and Neri (2010). This is to be expected since there are no ...

816KB Sizes 0 Downloads 100 Views

Recommend Documents

Land Prices and Unemployment - Tao Zha
May 8, 2016 - Email address: [email protected] (Tao Zha). Preprint submitted ... comove (Figure 1). Never is this feature more true than in the Great Recession,.

Border Prices and Retail Prices
May 31, 2011 - 4 In their example complete pass-through would be 100% pass through. ..... telephones and microwave ovens. ... There are, for example, the wedges associated with small-screen .... has gone out of business; (2) the BLS industry analyst,

Unemployment and Business Cycles
Nov 23, 2015 - a critical interaction between the degree of price stickiness, monetary policy and the ... These aggregates include labor market variables like.

Automobile Prices, Gasoline Prices, and Consumer ...
mobile manufacturers adjust their prices cyclically over vehicle model-years (e.g., Copeland, ... 22We use one-month futures contracts for reformulated regular gasoline at the ... Finally, a comparison of coefficients across columns suggests.

Unemployment and Development
Wright and seminar/conference audiences at Midwest Macro, NYU, Trinity College Dublin, UCSD and the. West Coast Search ..... (IPUMS) (Minnesota Population Center, 2017) or the World Bank's Living Standards Mea- surement ..... and its steady-state val

Housing and Unemployment
Nov 2, 2013 - that there are significant information frictions within each market. ... into the market as workers find jobs, the supply of homes is also tied to .... a constant returns to scale production technology in which labor is the only input.

unit 3 money and prices - eGyanKosh
economy, we need to estimate the average velocity of money. When we ..... with developing a theory of the shifting equilibrium wherein changing views about ... 3) The prices of other factors entering into marginal costs also rise in varying .... Frie

Unemployment Insurance and Cultural Transmission
An online appendix contains all the proofs which are not included in the .... benefits to which they are not entitled, I just run a probit regression where 1 stands for ... The business cycle coeffi cient is negative and significant. This implies ...