Essays on economic crisis, labour supply choice and conspicuous leisure

Abstract

Each of the three chapters in my PhD thesis can be viewed as an independent paper. The first chapter is an empirical work that aims to assess the potential usefulness of leading macro indicators to reveal credit risk in the 2008 US financial crisis. With data covering the period 1992–2010, the robustness of the macro indicators at different risk levels are investigated separately. And with the comparison of the indicators robust at each risk level, some particularly interesting indicators are marked out and discussed. The study is extended to the theoretical discussion of the 2008 US financial crisis and the ensuing global economic crisis in general in the second chapter. To explain the phenomenon that advanced economies appear to have been struck much harder than developing nations in the recent global financial crisis, we model the network of trading with inframarginal analysis of division of labor. The results show that, ironically, higher transaction efficiency in each individual transaction can lead to a higher aggregate coordination risk. And the aggregate coordination risk can be enlarged when individual’s preference for leisure increases. Furthermore, several cases of network restructuring in the post-crisis era are proposed to illustrate the difficulty in easing the persistent high unemployment in labor market after transaction efficiency plunged. While the third chapter appears very different from the previous two chapters in the sense that it is not centred on the economic crisis, the three chapters are nonetheless connected. Hours worked are found to be significant when credit risk level is high in the first chapter, and the results from the second chapter indicate that a greater number of hours spent on producing a traded good are related to higher aggregate coordination risk. As a strand of the latest literature suggests that income inequality is the root cause of the US financial crisis, the study is then extended to examine the effect of inequality on hours worked and conspicuous leisure, with Australia as its focus. The third chapter starts with Thorsten Veblen’s theory that individuals tend to emulate the “wealthy leisure class” and signal their own worth via conspicuous consumption or conspicuous leisure. This theory has been investigated in a number of empirical studies, with most suggesting that consumption is more widely used than leisure when social status is the concern. With the data on inequality and hours worked, we show that the opposite is true in Australia. A theoretical model is also presented to separate conspicuous leisure from total leisure time. The model shows that more conspicuous leisure and fewer hours worked can be induced when there is greater income inequality, given that the preference for conspicuous leisure is sufficiently large.