Labor Productivity Shocks Research Articles

Productivity Shocks of Dominant Companies and Local Housing Markets

We extend the literature on the influence of firm-level characteristics on housing markets by exploring the association between the labor productivity shocks of dominant firms and local housing prices. Using a sample of all U.S. firms from COMPUSTAT during 1980-2017, we find that the aggregate shocks of labor productivity of dominant firms at the metropolitan statistical area (MSA)-level explain for a significant portion of the local housing price changes in MSAs while controlling for other housing price determinants. About a year or more is required for the shocks to propagate through the local housing markets, which make them a viable predictor of future housing price. The productivity shock – housing price relation is stronger in areas that have more concentrated high-tech dominant firms or where dominant firms have closer links to their local non-dominant industry peers. Shocks are also more influential during economic expansion than economic contraction. Furthermore, the relation also exists at the zipcode level but the shocks propagate faster than at the MSA-level. The findings provide helpful insights for real estate practitioners and policymakers, especially in areas with a higher concentration of large companies.

Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth

Abstract Governments are always dealing with unexpected shocks, like wars, terrorism, financial crises, natural disasters, and the like. A recent prominent example is the SARS-CoV-2 pandemic. Since early 2020, governments around the world have enacted a range of unprecedented measures in an attempt to protect their citizens, with quite mixed results. This varied record has in turn had dramatic effects on peoples’ perceptions of their government, especially on their trust in government and so on their willingness to obey the many government mandates generated by the pandemic. This willingness to obey government mandates extends well beyond pandemic policies to all other dimensions of government laws and regulations. An important dimension of individual compliance with government mandates is tax evasion. What will be the effects of the pandemic and the associated government policies on post-pandemic tax evasion and economic growth, especially via the effects of government policies on “trust” in the government? In this paper we incorporate both tax evasion and trust in an endogenous growth model in order to examine the short and long run impacts on tax evasion of various shocks – a pandemic shock, a government policies shock, and a tax morale shock (and the resulting impact on trust in government). We then use real data on 11 representative economies to simulate these effects, economies representing developed and developing countries as well as economies representing governments that opted for various policy responses to COVID-19, modelled as a labor productivity shock. We find that varied public policy responses to the pandemic have immediate and persistent impacts on tax evasion in the short and long run, largely via their effects on trust in government. We also find that these evasion impacts vary in important and predictable ways that depend especially on whether government dealt effectively or not with the pandemic. Our methodology is readily adapted to examine the effects of other shocks and their respective policy responses on trust in government, tax evasion, and economic growth.

COVID‐19 and the economic recovery in South Asia: Economywide modeling scenarios for Bangladesh and Nepal

AbstractWe use economywide models to examine the economic recovery from COVID‐19 shocks in Bangladesh and Nepal during 2020–2026. Declining labor productivity, capital underutilization, consumption shifts, and international investment shocks had significant and differential sectoral and country‐level impacts in these countries. By 2026, GDP will be 6.9% and 13.9% lower in Bangladesh and Nepal, respectively, and the two countries will have an additional 3.3 million people in poverty compared to a no‐COVID baseline. Regaining economic and welfare losses will require substantial investments in key industrial, agricultural, and tourism sectors, although tough policy decisions will be required given high levels of public debt.

How to reverse a negative asymmetric labor productivity shock in the European Union? A directed technical change analysis with fiscal and monetary policies

We developed a directed technical change growth model with two stylized (European) countries. Although Covid19 had several economic implications, it caused a negative asymmetric shock in EU member states’ labor productivity, which is slightly stronger in the impoverished South. This instrumental option arose from the need to isolate this effect from all others. The shock causes an immediate fall in the Union’s growth rate and inflation rate. The fiscal policy, driven by the country’s governments and materialized through direct and indirect subsidies to R&D activity, reinforces its production, technological knowledge, and wage level. The effects are stronger when conducted by North/Germany. The monetary policy, led by the central bank through a decline in the nominal interest rate, influences the R&D activity through Cash-in-Advance constraints and is limited by the zero nominal interest rate. The inflation rate is positively affected by monetary-transaction costs and the way money influences the utility function.

The impact of Industry 4.0 on the Indonesian economy: A general equilibrium assessment

AbstractUsing a recursive‐dynamic multiregional computable general equilibrium (CGE) modelling approach, we introduced a set of sector‐specific labour productivity shocks representing the effect of Industry 4.0 on the Indonesian economy. The results suggest that Indonesia’s long‐term economic growth will increase from 5.2% per year to 5.7% per year. In terms of output expansion, the top gainer would be the machinery and motor vehicles sector, and to a lesser extent, finance, whereas low gainers include extractive and agricultural sectors and food processing industries. Region‐wise, Java, the already advanced region, will be the primary beneficiary of the growth, while other islands will not benefit as much. There is not much risk of unfavourable distributional effect. However, agriculture workers will lose out compared with workers in other sectors, particularly those with intermediate skill levels.

Labor leverage, coordination failures, and aggregate risk

This paper studies an economy in which demand spillovers make firms’ production decisions strategic complements. Firms choose their operating leverage trading off higher fixed costs for lower variable costs. Operating leverage governs firms’ exposures to an aggregate labor productivity shock. In equilibrium, firms exhibit excessive operating leverage because they do not internalize that an economy with higher aggregate operating leverage is more likely to fall into a recession following a negative productivity shock. Welfare losses coming from firms’ failure to coordinate production are amplified by suboptimal risk-taking, which magnifies the impact of productivity shocks onto aggregate output.

Sungbae An Comments on The Global Macroeconomic Impacts of COVID-19: Seven Scenarios

May 15 2021 Sungbae An Comments on The Global Macroeconomic Impacts of COVID-19: Seven Scenarios Author and Article Information Online ISSN: 1536-0083 Print ISSN: 1535-3516 © 2021 by the Asian Economic Panel and the Massachusetts Institute of Technology2021American Society of Health Economists and Massachusetts Institute of Technology Asian Economic Papers (2021) 20 (2): 31–33. https://doi.org/10.1162/asep_a_00817 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Sungbae An Comments on The Global Macroeconomic Impacts of COVID-19: Seven Scenarios. Asian Economic Papers 2021; 20 (2): 31–33. doi: https://doi.org/10.1162/asep_a_00817 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Sungbae An, Korea Institute for International Economic Policy: The COVID-19 pandemic sheds unprecedented light on how to incorporate health shocks into macroeconomic models. Previous literature on diseases, as summarized in the paper, focuses largely on the economic welfare effects of long-term public health conditions and chronic illnesses linked to mortality and disability. There are a number of reasons for the dominance of these approaches. First, the evaluation of consequences is readily available through traditional labor supply channels. When a part of the labor force is affected by a disease, additional labor costs arise from the temporary loss of working hours by patients and care-givers, medical costs until recovery, and possible long-term deficiency in productivity due to mortality and disability. In this case, the epidemiological literature can estimate the impact of disease on the population and labor force, and it is introduced as an exogenous labor productivity shock to macroeconomic models.... You do not currently have access to this content.

Labor Market Networks and Asset Returns

This paper proposes a measure of labor market connectivity based on the similarity in the composition of occupational knowledge characteristics across industries and provides evidence of return predictability in the cross-section of industries that are connected through the labor market. In long-short portfolios, an industry's return is strongly predicted by the past return of its labor-market-connected neighboring industries with an annualized return of up to 9%, which is not explained by established asset pricing models. The return predictability remains significant after controlling for the supply chain momentum as well as the industry lead-lag effect, and is concentrated in stocks with higher arbitrage costs and higher ownership of uninformed investors. We find similar predictive relations for the labor productivity, wages, employment, and profitability of labor connected industries. Our findings are consistent with positive spillover of productivity shocks among industries that are connected through the labor market. Informational frictions, costly arbitrage, and investors' limited attention magnify the delayed response of stock prices to the spillover of labor productivity shocks, which results in the observed return predictability.

Modelling and Estimating Large Macroeconomic Shocks During the Pandemic

This paper proposes and estimates a new Two-Sector One-Agent model that features large shocks. The resulting medium-scale New Keynesian model includes the standard real and nominal frictions used in the empirical literature and allows for heterogeneous COVID-19 pandemic exposure across sectors. We solve the model nonlinearly and we propose a new nonlinear, non-Gaussian filter designed to handle large pandemic shocks to make inference feasible after 2020. Monte Carlo experiments show that it correctly identifies the source and time location of shocks with a massively reduced running time, making the estimation of macro-models with disaster shocks feasible. The estimation is carried out using the Sequential Monte Carlo sampler recently proposed by Herbst and Schorfheide (2014).Our empirical results show that the pandemic-induced economic downturn can be reconciled with a combination of large demand and supply shocks. More precisely, starting from the second quarter of 2020, the model detects the occurrence of a large negative demand shock in consuming all kinds of goods, together with a large negative demand shock in consuming contact-intensive products. On the supply side, our proposed method detects a large labor supply shock to the general sector and a large labor productivity shock in the pandemic-sensitive sector.

Labor Force Telework Flexibility and Asset Prices: Evidence from the COVID-19 Pandemic

We show that labor force telework flexibility (LFTF) is a first-order effect in accounting for the variations of asset prices and firm policies during the COVID-19 pandemic. Specifically, firms in high LFTF industries significantly outperform firms in low LFTF industries in stock returns. The positive LFTF-return relation extends to G7 countries and is stronger in countries with more severe pandemic. A decomposition analysis of the LFTF measure shows that the job characteristics associated with the central component of telework, information and communication technologies, are the main driving force of the result. A dynamic neoclassical model of firms operating multiple job tasks together with pandemic shocks captures the positive relationship between labor force flexibility and stock returns. The model mechanism highlights that i) job task flexibility is a key driving force of the cross-industry heterogeneity in firm value fluctuations, and ii) combining labor productivity (supply) and uncertainty shocks is crucial to generate the large drop and persistent recovery in firm value and output.

Pricing the Economic Risk of Coronavirus: A Delay in Consumption or a Recession?

This paper prices the probable economic risk of coronavirus, where possible outcomes range from partial delay of consumption (blip), to a full scale of recession due to disruption of supply chain and labor productivity shock. We present the lifecycle that the virus goes through (Genesis, Epidemic-pandemic, and Stasis), and suggest that the length of the life cycle determines the economic consequences. To date in the current case of coronavirus, corporations will miss original Q1/2020 earnings forecasts due to reduced or delayed consumer spending. Looking forward, there are three economic scenarios; in the first, should the coronavirus exhibit a marked decline by mid-April, then companies will have outstanding Q2 earnings, arising from the delayed blip in consumption from Q1. In the second, should the coronavirus effects continue through May, then there will be a moderate recession due to a limited labor shock. In the third, there is an extended pandemic that creates a full-scale recession. To respond to the GDP gap created by coronavirus, I propose that the optimal fiscal and monetary policy is intervention to fill in the GDP gap with infrastructure projects and unemployment benefits, up to the amount of $5 Trillion (half of it for states revenue shortfall). And to address the gap in the stock market, the Fed should purchase assets (not push on a string by cutting rates). With these policies, there would be a soft landing for the US economy and the stock market.

Financial Intermediation and Economic Growth: From Idiosyncratic Shocks to Aggregate Fluctuations

The objective of this paper is to explore the transmission of non-capital shocks through banking networks. We develop a methodology to construct non-capital (real) shocks, idiosyncratic shocks, using labor productivity shocks to large firms. We document a change in the relationship between (foreign) idiosyncratic shocks in state j and (domestic) economic growth in state i between 1978 and 2000 wherein the relation changes from positive to negative over this period. We show that the contemporaneous changes in banking integration across states is a key driver of this phenomenon. This is driven by geographically diversified banks diverting funds away from economies experiencing negative shocks towards other unaffected economies. This result operates through changes in bank loan supply. Our instrumental variable estimates suggest that a 1% increase in the bank loan supply is associated with a 0.05-0.26 pp increase in economic growth. Lastly, we argue that this mechanism can explain the decrease in covariance of state-level fluctuations, potentially explaining the Great Moderation, the period of relatively low aggregate volatility.

A Granular View of the Australian Business Cycle

We provide evidence supporting the hypothesis that idiosyncratic firm‐level shocks are important drivers of the Australian business cycle (granular hypothesis). We first document that the distribution of firm size in Australia is substantially asymmetric and follows a power‐law distribution with a long right tail. We then show that labour productivity shocks to the largest non‐financial firms in Australia account for about 20–40 per cent of the variation in Australian GDP growth over the period 2000–18. Besides energy sector firms, firms in the construction, transportation and consumer services sectors appear to be relevant drivers of GDP growth.

Operating Leverage, Risk Taking and Coordination Failures

This paper studies an economy where demand spillovers make firms' production decisions strategic complements. Firms choose their operating leverage trading off higher fixed costs for lower variable costs. Operating leverage governs firms' exposures to an aggregate labor productivity shock. In equilibrium, firms exhibit excessive operating leverage as they do not internalize that an economy with higher aggregate operating leverage is more likely to fall into a recession following a negative productivity shock. Welfare losses coming from firms' failure to coordinate production are amplified by suboptimal risk-taking, which magnifies the impact of productivity shocks onto aggregate output.

Asia's rebalancing and growth

AbstractThe paper investigates the impact of Asia's demand rebalancing and supply‐side productivity changes on long‐term economic growth in Asia and worldwide. Results from a panel vector autoregression model show that a productivity–neutral demand‐rebalancing shock has no permanent effect on Asian output, whereas labour productivity shocks have significant, positive and permanent effects. Simulations using a global intertemporal multisector general equilibrium model suggest that labour productivity shocks increase the foreign GDP over time, but rebalancing shocks have a negative international spillover effect. In addition, labour productivity shocks help in rebalancing. Structural reforms promoting labour productivity growth along with rebalancing policies across Asia can achieve higher economic growth worldwide.

Asia's Rebalancing and Growth

The paper investigates the impact of Asia's demand rebalancing and supply‐side productivity changes on long‐term economic growth in Asia and worldwide. Results from a panel vector autoregression model show that a productivity–neutral demand‐rebalancing shock has no permanent effect on Asian output, whereas labour productivity shocks have significant, positive and permanent effects. Simulations using a global intertemporal multisector general equilibrium model suggest that labour productivity shocks increase the foreign GDP over time, but rebalancing shocks have a negative international spillover effect. In addition, labour productivity shocks help in rebalancing. Structural reforms promoting labour productivity growth along with rebalancing policies across Asia can achieve higher economic growth worldwide.

Youth Unemployment and Jobless Recoveries: A Risk-based Explanation

We quantitatively analyze an equilibrium job-matching model in the presence of time-varying discount rates and persistent aggregate shocks to labor productivity. In our model workers and firms learn about an unobservable, idiosyncratic component of match productivity. We obtain three results. First, the unemployment rate of young, inexperienced workers is more sensitive to economic conditions than older, experienced workers. Second, labor productivity shocks are amplified and propagated more strongly in states with higher discount rates. We find this effect to be quantitatively large. Third, our model features jobless recoveries which are more pronounced after recessions in which risk premia is higher. We provide empirical evidence for these findings.

Working Capital Requirement and the Unemployment Volatility Puzzle

Shimer (2015) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data.

Testing market structure assumptions for DSGE modelling in Croatia using the SVAR model with long-run restrictions

Assumptions on market structure are crucial in formulating dynamic stochastic general equilibrium (DSGE) models. The inclusion of the price stickiness assumption in DSGE models has questioned the money neutrality, which is a characteristic of DSGE models with perfect competition, and has thus opened the space for monetary policy analysis. One of the criteria used to determine which DSGE models are better suited to the characteristics of an observed empirical economy is the impact of technology shocks in the structural vector autoregression (SVAR) model with long-run restrictions. In DSGE models, assuming perfect competition with no price rigidity, i.e. real business cycle (RBC) models, changes in productivity that are driven by productivity shocks increase employment. On the other hand, new Keynesian (NK) models that assume imperfect competition and price rigidities, suggest that technological shocks decrease employment, since companies cannot adjust to excess production by reducing prices. In order to assess the impact of productivity shocks, the SVAR model with long-run restrictions is estimated using data on labour productivity, working hours and consumption in Croatia. The estimated impact of labour productivity shocks on working hours is statistically significant and negative, whereas the estimated impact on consumption is statistically significant and positive. The conducted analysis points to the fact that the DSGE model with imperfect competition and price rigidities describes the empirical characteristics of the Croatian economy better than the model with perfect competition.

Empathy, Unemployment, and Wages

In this paper, we study the role and impact of workers’ empathy — or the interdependence of workers’ preferences — on the business cycle. We show how empathy affects managerial practices and how it impacts labor market outcomes such as wages and employment. To this end, we consider a labor market in which a firm’s manager chooses the set of workers to hire and how much to pay each worker. We explore how managers react to labor productivity shocks. In economic expansions, managers elect to raise wages and to hire more workers. However, in economic slowdowns, managers may find it optimal to freeze both wages and employment. Moreover, consistent with Bewley (1999), in times of severe economic downturns managers respond by reducing workforce, but not wages. The rationale of these asymmetric responses to productivity shocks is that a profit-maximizing firm is reluctant to cut wages, as that choice may trigger a low morale equilibrium, affecting its profits discontinuously.