Optimal Monetary Policy with Labor Market Frictions: The Role of the Wage Channel

This paper introduces right‐to‐manage bargaining into a labor search model with sticky prices instead of standard efficient bargaining and examines the Ramsey‐optimal monetary policy. Without real wage rigidity, even when the steady state is inefficient, price stability is nearly optimal in response to technology or government shocks. Right‐to‐manage bargaining creates the wage channel to inflation, because there is a direct relationship between real wages and real marginal cost. In the presence of the wage channel, price markups consist of only real marginal cost, and real wages and hours per worker are determined such as in the Walrasian labor market.     

The Cost of Nominal Rigidity in NNS Models

We present a model with Calvo wage and price setting, capital formation, and estimated rules for government spending and monetary policy. Our model captures many aspects of U.S. data, including the volatility that has been observed in various efficiency gaps. We estimate the cost of nominal rigidity—welfare under flexible wages and prices minus welfare with nominal rigidities—to be as much as 3% of consumption each period. Since there are interest rate rules that virtually eliminate this cost, our model suggests that—contrary to Lucas's (2003) assertion—there is considerable room for improvement in demand management policy.     

Presidential Address: The Cost of Active Investing

I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980–2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. Society's capitalized cost of price discovery is at least 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980–2006 period if he switched to a passive market portfolio.     

Labor market responses to rising health insurance costs: evidence on hours worked.

Increases in the cost of providing health insurance must have some effect on labor markets, either in lower wages, changes in the composition of employment, or both. Despite a presumption that most of this effect will be in the form of lower wages, we document a significant effect on work hours as well. Using data from the Current Population Survey (CPS) and the Survey of Income and Program Participation (SIPP), we show that rising health insurance costs during the 1980s increased the hours worked by those with health insurance by up to 3%. We argue that this occurs because health insurance is a fixed cost, and as it becomes more expensive to provide, firms face an incentive to substitute hours per worker for the number of workers employed.     

Screening Discrimination in a Broader Context

I employ simulations to investigate the impact of screening discrimination, which addresses discrimination in hiring. I extend a well‐known model of screening discrimination by including minority firms, wages, worker preferences and competition among the firms for workers. The Gale–Shapley algorithm is used to find a stable matching of heterogeneous workers to heterogeneous firms. Screening discrimination gives majority applicants an advantage in the hiring process, but this advantage is reduced by the presence of minority firms. In this broader context, screening discrimination produces segregated firms but has little impact on median wages or employment probabilities. Copyright © 2016 John Wiley & Sons, Ltd.     

Search and matching frictions and optimal monetary policy

A recent literature has merged the New Keynesian and the search and matching frameworks, which has allowed the former to analyze the joint dynamics of unemployment and inflation. This paper analyzes optimal monetary policy in this kind of hybrid framework. I show that zero inflation is optimal when all wages are Nash bargained in every period and the economy's steady state is efficient. In the more realistic case in which nominal wage bargaining is staggered, a case against price stability arises: in response to real shocks, the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates. For a plausible calibration, the welfare loss under the zero inflation policy is about three times as large as under the optimal policy.     

Accounting for Changing Prices: The Value Relevance of Historical Cost, Price Level, and Replacement Cost Accounting in Mexico

This paper investigates the value relevance of historical cost, price level and replacement cost accounting using a sample of Mexican firms from 1989 to 1995. It contributes to prior research by distinguishing between two distinct aspects of changing prices:(1) the change in the general price level, and (2) the change in the value of specific non-monetary assets. I select Mexico to examine because it is unique in requiring and disclosing separately price level and replacement cost adjustments. A sample of Mexican firms also addresses a key reason cited for mixed results in previous assessments of the usefulness of price level and replacement cost accounting using United States data: the effects of inflation are too weak to detect. High rates of inflation in Mexico, ranging between 7% and 52% during the sample period, mitigate that potential problem. Results indicate that replacement cost adjustments are relatively and incrementally relevant beyond historical cost and price level measures while price level adjustments are incrementally value relevant beyond historical measures.     

The standard of living debate,rational expectations,and neutrality: Some evidence from the industrial revolution

There exists a debate among economic historians concerning the ‘standard of living’ of the British working class during the industrial revolution. In this debate, trends in real wages figure prominently and virtually all long- and short-term real wage movements are attributed to price level variation. This attribution conflicts with recent ‘neutrality’ propositions associated with rational expectations. We test a version of the rational expectations-neutrality hypothesis by examining whether prices caused real wages in the period 1790–1850. This period is of particular interest due to the competitive nature of the British economy at that time. We find the hypothesis is consistent with the data. This is in contrast to all existing interpretations of the period.     

A Possibilitarian History of Price Change Accounting in the UK: 1971-1985

This paper offers a 'possibilitarian' analysis of the history of price change accounting in the UK, exploring how events might have turned out differently at a number of key nodal points. It argues that a stable current cost accounting regime could have been established significantly before SSAP16 was in fact adopted or, alternately, that the retreat from SSAP16 could have been managed in a way that would have maintained compliance with current cost accounting. Had a substantial period of widespread compliance within a stable regime eventuated, a quite different dynamic might have emerged, including significant user pressure to maintain current cost accounting, thereby underpinning the regime and leading to its long-term survival.     

Markups and the Welfare Cost of Business Cycles: A Reappraisal

Gali, Gertler, and Lopez‐Salido (2007) recently show quantitatively that fluctuations in the efficiency of resource allocation do not generate sizable welfare costs. In their economy, which is distorted by monopolistic competition in the steady state, we show that they underestimate the welfare cost of these fluctuations by ignoring the negative effect of aggregate volatility on average consumption and leisure. As monopolistic suppliers, both firms and workers aim to preserve their expected markups; the interaction between aggregate fluctuations and price‐setting behavior results in average consumption and employment levels that are lower than their counterparts in the flexible‐price economy. This level effect increases the efficiency cost of business cycles. It is all the more sizable with the degree of inefficiency in the steady state, lower labor–supply elasticities, and when prices instead of wages are rigid.     

Assessing the Social Impact of Corporations: Evidence from Management Control Interventions in the Supply Chain to Increase Worker Wages

This study examines an initiative by a large multinational garment retailer (H&M Group) to increase wages at its supplier factories by intervening in their wage-related management practices. Difference-in-differences estimates based on eight years of data from over 1,800 factories show that the interventions were associated with an average real wage increase of approximately 5% by the third year of implementation. Our estimates suggest that the intervention-associated wage increase was many times greater than if the retailer's cost for the program was instead paid directly to affected workers. We find that the wage effects were driven by factories with relatively poorer supplier ratings and do not find significantly different wage effects depending on the presence of trade unions. We also examine several nonwage outcomes such as factory orders, supplier price competitiveness, overtime pay, and total employment to probe the mechanisms underlying the wage increases. These findings offer new evidence on corporate social impact in global supply chains.     

The price of protein

The paper examines micro-level price dynamics of the major dietary sources of protein in India, based on demand-supply fundamentals. As levels of affluence increase, the demand for proteins increases. But some categories show a long-term decline in availability, others show volatile growth due to structural imbalance between demand and supply, raising the prospect of price surges. Persistent price increases in commodities for which there are no effective substitutes raise wages and the potential rate of inflation over a period of time, warranting a monetary tightening. To the extent diets are affected human resources are weakened. Improving the agricultural supply response is urgent.     

The Relationship Between Market Efficiency and Insider Ownership in Large and Small Firms

The study examines insider ownership in large and small firms in relation to market efficiency. Recent studies have found a positive and significant relation between inside ownership and stock market performance. Such a finding is predicated upon the idea that inside ownership minimizes agency costs caused by the conflict between hired managers and shareholders. It is argued here that semi-strong form market efficiency requires that all public information, including insider ownership, be quickly impounded into the price of a stock. If that is the case, the expected present value of a change in agency cost should be incorporated into the stock price shortly after any significant change in ownership. Hence, if the estimate is unbiased, the longer-term performance of firms should not be effected by such changes. The issue is examined for both large, well-known firms and for smaller, less-known firms. The hypothesis that markets are generally efficient with respect to insider ownership information is rejected.     

Wage rigidity and job creation

Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level data from the CPS to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions. The wage of new hires, unlike the aggregate wage, is volatile and responds almost one-to-one to changes in labor productivity. We conclude that there is little evidence for wage rigidity in the data.     

Effects of Progressive Taxes under Decentralized Bargaining and Heterogeneous Labor

We consider changes in income tax progressivity in an economy where workers' productivities differ and workers and firms bargain individually over wages. With given employment a pure increase in tax progressivity reduces wages by reducing workers' relative bargaining power. When average taxes also increase, after-tax wages are unambiguously reduced, while the effects on gross wages and firm profitability are ambiguous. We next endogenize employment and firm entry under a uniform worker productivity distribution and the government's only policy instrument is a linear income tax. While a first-best solution then is ruled out, a second-best solution can be implemented using a family of linear tax functions, where a more progressive tax implies a higher tax revenue to the government. We show that the government can increase its tax revenue, and reduce after-tax income differences, without any additional disturbance to allocation.     

Deep Habits,Price Rigidities,and the Consumption Response to Government Spending

This paper studies two frictions, good‐specific habit formation and price rigidities, used in theoretical models to generate the crowding‐in of consumption by expansionary government spending observed in the data. Both frictions generate countercyclical price markups, rising wages, and ensuing consumption–leisure substitution to overcome the negative wealth effect of the fiscal expansion. I demonstrate that while they independently support the rise of consumption, when used together the two frictions exert opposing pressures on the markup and the wage, weakening consumption–leisure substitution. Crucially, when price stickiness is high enough in an economy with “deep” habits, consumption is crowded out by the fiscal expansion.     

Financial Reporting Quality and Wage Differentials: Evidence from Worker-Level Data

We examine whether financial reporting quality affects worker wages using employer-employee matched data in the United States. We find that low financial reporting quality is associated with a compensating wage differential—that is, a risk premium—using three distinct approaches while controlling for worker characteristics by (1) regressing wages on firm-year–level and firm-level reporting quality, (2) documenting wage changes when workers switch firms, and (3) estimating a structural approach that separates reporting quality from performance-related volatility. We find evidence consistent with two channels: performance pay and turnover risk, where workers bear risks from noise in performance measurement and unemployment, respectively. To mitigate endogeneity concerns, we show that—after the accounting scandals in 2002 and after the announcements of an internal control weakness (ICW)—former Arthur Andersen clients and ICW firms pay wage premiums to employees, with magnitudes between 0.9% and 2.8% of annual wages.     

Optimal disinflation in new Keynesian models

Central bankers' conventional wisdom suggests that nominal interest rates should be raised to attain a lower inflation target. In contrast, I show that the standard New Keynesian monetary model with rational expectations and full credibility predicts that nominal interest rates should be decreased to attain this goal. Real interest rates, however, are virtually unchanged. These results also hold in recent vintages of New Keynesian models with sticky wages, price and wage indexation and habit formation in consumption.     

Pairing provision price and default remedy: optimal two‐stage procurement with private R&D efficiency

This article studies cost‐minimizing two‐stage procurement with Research and Development (R&D). The principal wishes to procure a product from an agent. At the first stage, the agent can conduct R&D to discover a more cost‐efficient production technology. First‐stage R&D efficiency and effort and the realized second‐stage production cost are the agent's private information. The optimal two‐stage mechanism is implemented by a menu of single‐stage contracts, each specifying a fixed provision price and remedy paid by a defaulting agent. A higher delivery price is paired with a higher default remedy, and a more efficient type opts for a higher price and higher remedy.