The Redistribution Recession How Labor Market Distortions Contracted the Economy

by Mulligan, Casey B.

• ISBN13: 9780199942213
• ISBN10: 0199942218
• Format: Hardcover
• Copyright: 2012-11-02
• Publisher: Oxford University Press

Summary

Since 2007, many fundamental aspects of the economy and the labor market have changed dramatically. With the exception of Medicaid, subsidies flowing to the unemployed and financially distressed households in the forms of loan forgiveness and government transfers almost tripled. The generosity of mean-tested subsidies like food stamps, and employment-tested subsidies like unemployment insurance have steadily increased. Congress considered legislation that would raise marginal income tax rates, and would present Americans with new health benefits that would be phased out as a function of income. Also, a large number of homeowners owed more on their mortgages than their houses were worth, and many in both the private and public sectors renegotiated their mortgage contracts. And many others renegotiated business debts, consumer loans, student loans, and tax debts. Labor economist Casey B. Mulligan argues that because the way these trends have affected the labor market, they deepened, if not caused, the recession. He explains how progressive tax rates and binding minimum-wage laws reduce labor usage, consumption, and investment, and how they increase labor productivity. This means that while a small part of the population actually works more, overall hours worked in the whole economy are less. He explains and examines the pratical ways that for many people during a recession it costs more to earn more, and how people are working less because of it. One newly discovered aspect of the costs on earning is the large portion of the labor force renegotiating debt. Mulligan quantifies how borrowers can expect their earnings to affect the amount that lenders will forgive in debt renegotiation, and how this has acted as a massive implicit tax on earning. He also measures the changes in market tax rates that resulted directly from "social safety net" programs, and quantifies these changes' effects on the labor market and the economy. Mulligan argues that much of the decline in labor usage since 2007 was a reaction to the combination of higher marginal tax rates and a higher federal minimum wage, and that it is important to understand why labor market distortions like these suddenly increased, and to what degree those increases were caused by the various measures enacted to boost the labor market. The Redistribution Recessionis a controversial, clear-cut, and thoroughly researched analysis of the effects of various government policies on the labor market during the recent recession.

Author Biography

Professor of Economics, University of Chicago, author of Parental Priorities and Economic Inequality, weekly contributor to Economix blog for the New York Times

Table of Contents

Preface

Introduction

The Rise of Labor Productivity

Quarterly Indicators of Aggregate Economic Quantities

Movements Along an Aggregate Marginal Productivity Schedule

On Average, Real Wages did not Fall

Was It Customer Demand? Factor Reduction and Factor Substitution by Industry

Neither Wealth Effects nor Intertemporal Substitution Effects Explain the "Supply" Shift

Labor Market Distortions since 2007

Conclusion: Productivity Patterns Begin to Reveal the Recession's Causes

Productivity, Labor, and Residuals in Prior Downturns

Sensitivity Analysis

The Expanding Social Safety Net

A Framework for Quantifying the Generosity of the Safety Net as a Whole

Legislation Made the Safety Net Available to Millions More

Legislation Increased the Amount of Benefits Received per Program Participant

Most of the Increase in Government Safety Net Expenditure is the Direct Result of Program Rule Changes

Safety Net Rule Changes and Assistance for the Unemployed

Means-tested Loan Forgiveness

Conclusion: Replacement Rates for Aggregate Analysis

Calculation and Aggregation of Statutory Eligibility and Benefit Indices

Sensitivity Analysis

The Self-Reliance Rate Outlook

The Making Work Pay Tax Credit

Supply and Demand: Labor Market Consequences of Safety Net Expansions

The Income-Maximization Fallacy

Labor and Output Effects of Safety Net Expansions

Predictions for Consumption and Investment

Calibrating the Wage Elasticity of Aggregate Labor Supply

Conclusions and Interpretation

Comparative Advantage with Heterogeneous Effects of the Safety Net Expansions

Calibrating the Supply Elasticity from Unemployment Duration Studies

Safety Net Distortions Measured in Dollars per Year

Means-Tested Subsidies and Economic Dynamics since 2007

The Neoclassical Growth Model with Targeted Means-Tested Subsidies

Data and Simulation Results

Effects of the Safety Net Expansion

Interpreting the Residual Labor Market Distortions

An Investment Distortion by Itself does not Fit Actual Behavior

Conclusions

Calibration, Simulation, and Additional Sensitivity Analysis

Cross-Sectional Patterns of Employment and Hours Changes

Cross-sectional Patterns of Self-Reliance Rate Changes

Work Hours Changes by Demographic Group and Region

Program Participation Changes by Demographic Group

Conclusion: The Cross-Sectional Patterns of Employment and Hours Changes are as Expected from a Large Safety Net Expansion

Appendix: Summary Statistics and Additional Results

Keynesian and Other Models of Safety Net Stimulus

The Safety Net and Consumer Spending

Transfers and Government Purchases are not the Same

Labor Market Slack and the Marginal Effects of Supply

Sticky Prices, the Wage Elasticity of Labor Demand, and the Zero Lower Bound

An Econometric Model that Nests My Approach with the Slack Market and Sticky Price Hypotheses

Conclusion: Whether Labor Supply Matters More, or Less, during a Recession is an Empirical Question

Appendix: The Safety Net, Sticky Prices, and Monetary Policy

Recession-Era Effects of Factor Supply and Demand: Evidence from the Seasonal Cycle, the Construction Market, and Minimum Wage Hikes

The Christmas and the Academic Seasons as Demand and Supply Shifts

Christmas Demand in Recessions and Booms

The Summer Seasonal for Employment and Unemployment

Housing Investment Crowds Out Non-Residential Construction

The Employment Effects of Recent Minimum Wage Hikes Were No Less than Before

The Federal Minimum Wage Hikes Likely Reduced National Employment by Hundreds of Thousands, Especially Among the Young and Unskilled

Conclusion: Labor Supply Still Matters, About as Much as It Did in the Past

Incentives and Compliance under the Federal Mortgage Modification Guidelines

The Budget Set of a Borrower Facing the FDIC-HAMP Modification Guidelines

Borrower Reactions under Full Information and Full Compliance: Spend More and Work Less

Lender Incentives to Expand Modification Capacity

Conclusions

Principal Modifications and the Eligible Income Range

Marginal Tax Rates with Various Horizons and Discount Rates

Uncertainty, Redistribution, and the Labor Market

A Model of the Equity-Efficiency Tradeoff

Possible Changes in the Equity-Efficiency Tradeoff, and the Optimal Degree of Social Insurance

The Cost-Benefit Analysis of Safety Net Expansions: Necessary Ingredients

Conclusions

Conclusions

Incentives Matter

Was the Financial Collapse a Cause, or Effect?

Labor Supply and Demand Help Explain an Unhappy Situation

Bibliography

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