Publications


 We compare two welfare programs: the universal basic income (UBI) and negative income tax (NIT). Under a linear income tax system, we show that (i) the NIT can replicate the allocation of the UBI exactly by providing an identical marginal effective tax schedule, and (ii) the budget of the NIT is always smaller than that of the UBI. According to our quantitative model, which is calibrated to approximate the income and wealth distributions in the United States, the optimal UBI is to pay everyone 7.2% of the average income. We also show that the NIT can achieve a similar average welfare with a much smaller budget (2.3% of the GDP) by providing a subsidy that is generous to the very poor and quickly phases out as income increases.


We consider a matching model of employment with flexible wages for new hires, but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort's response can greatly increase wage inertia.



We derive a fully nonlinear optimal income tax schedule in the presence of a private insurance market. As in the standard taxation literature without private insurance (e.g., Saez (2001)), the optimal tax formula can still be expressed in terms of sufficient statistics such as the Frisch elasticity of labor supply. In the presence of private insurance market, however, the formula involves the statistics that reflect households' savings pattern (the marginal propensity to save) and their interaction with public insurance (crowding in/out elasticity). Since these statistics are not easy estimate nor policy-invariant, we obtain them from a structural model that is calibrated to reproduce salient features of the U.S. economy. The difference in optimal tax rates with and without private insurance is quantitatively significant.


Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around individual structural breaks in labor-income volatility. According to our estimates, when income risk doubles, households reduce their risky share of financial assets by 5 percentage points, thus tempering their overall risk exposure. We show that our estimated risky share response is consistent with a standard portfolio choice model augmented with idiosyncratic, time-varying income volatility.


The standard models with incomplete markets (e.g., Aiyagari) have difficulty justifying the current income tax rates as an optimal or political equilibrium outcome. Given the highly skewed income distribution, the majority of the population would be in favor of raising taxes to a much higher level. We show that incorporating (i) the ex-ante heterogeneity of earnings and (ii) income-dependent voting behavior helps us to reconcile the large gap between the model and data.



In booms, households substitute luxuries for necessities, e.g., food away from home for food at home. Ignoring this cyclical pattern of composition changes in the consumption basket makes the labor-market wedge—a measure of inefficiency that reflects the gap between the marginal rate of substitution and the real wage—appear to be more volatile than it actually is. Based on the household expenditure pattern across 10 consumption categories in the Consumer Expenditure Survey, we show that taking into account these composition changes can explain 6-15% of the cyclicality in the measured labor-market wedge. 


Standard heterogeneous agent macro models that highlight idiosyncratic productivity shocks do not generate the near zero cross-sectional correlation between hours and wages found in the data. We ask whether matching this moment matters for business cycle properties of these models. To do this we explore two extensions of the model in Chang et al. (2019) that can match this empirical cross-section correlation. One of these departs from the assumption of balanced growth preferences. The other introduces an idiosyncratic shock to the opportunity cost of market work that is highly correlated with the shock to market productivity. While both extensions can match the empirical correlation, they have large and opposing effects on the cyclical volatility of the labor market. We conclude that the cross-sectional moment is important for business cycle analysis and that more work is needed to distinguish the potential mechanisms that can generate it. 


We study business cycle fluctuations in heterogeneous agent general equilibrium models featuring intensive and extensive margins of labor supply. A nonlinear mapping from time devoted to work to labor services generates operative extensive and intensive margins. Our model captures the salient features of the empirical distribution of hours worked, including how individuals transit within this distribution. We study how various specifications influence labor supply responses to aggregate technology shocks and find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small. 


The standard life-cycle models of household portfolio choice have difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent, labor market uncertainty into an otherwise standard model. A great uncertainty in the labor market—high unemployment risk, frequent job turnovers, and an unknown career path—prevents young workers from taking too much risk in the financial market. As labor market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.


We develop a quantitative heterogeneous-agents general equilibrium model that reproduces the income inequalities of 32 countries in the Organization for Economic Co-operation and Development. Using this model, we compute the optimal income tax progressivity and redistribution for each country under the equal-weight utilitarian social welfare function. A policy reform to adopt the optimal progressivity is supported by the majority of the population. Finally, we uncover the Pareto weights in the social welfare functions of each country that justify the current redistribution policy.


We identify cyclical turning points for 74 U.S. manufacturing industries and uncover new empirical regularities: (a) industries tend to comove between expansion and contraction phases over the business cycle; (b) clusters of industry turning points are highly asymmetric between peaks and troughs: troughs are much more concentrated and sharper than peaks; (c) the temporal pattern of phase shifts across industries supports the spillovers through input-output linkages; and (d) macroeconomic shocks, such as unanticipated changes in monetary policy, government spending, oil prices, and financial conditions, are significant drivers of industrial phase shifts.


Many successful examples of economic development, such as South Korea, exhibit long periods of sustained capital accumulation. This process is characterized by a gradually rising investment rate along with a moderate rate of return to capital, both of which are strongly at odds with the standard neoclassical growth model that predicts an initially high and then declining investment rate with an extremely high return to capital. We show that minor modifications of the neoclassical model go a long way toward accounting for the capital accumulation path of the South Korean economy. Our modifications recognize that (i) agriculture (which makes up a large share of the aggregate economy in the early stage of development) does not rely much on capital and (ii) the relative price of capital declined substantially during the transition period.


We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data.


Data from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative-agent model is estimated. Preference and technology parameter estimates of the representative-agent model are not invariant to policy changes and the bias in the representative-agent model’s policy predictions is large compared to predictive intervals that reflect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes.


Worker heterogeneity in productivity and labor supply is introduced into a matching model. Workers who earn high wages and work high-hours are identified as those with strong market comparative advantage—high rents from being employed. The model is calibrated to match separation, job finding, and employment in the SIPP data. The model predicts a big drop in employment for workers with weak comparative advantage during recessions. But the data show that workers with strong comparative advantage also display sizable employment fluctuations, implying that aggregate employment fluctuations are not explained by the responses of workers with small rents to employment.


Using a standard incomplete-markets model, we compute the welfare of two socioeconomic systems: laissez-faire and egalitarianism. The egalitarian system (in which after-tax wages are compressed) provides insurance against income risks but at the cost of inefficiency: it undermines productive workers’ incentives to work. When the stochastic process of idiosyncratic productivity shocks are calibrated to match the earnings inequality, the egalitarian society yields a much higher welfare as the insurance benefit dominates the efficiency loss. However, when the idiosyncratic productivity shocks are calibrated to capture the ex-post heterogeneity of earnings only, households are better off under laissez-faire if the labor supply is elastic enough. Transition between the two regimes is computed. When the wage compression is removed from the egalitarian steady state, the inequality emerges quickly and reaches its laissez-faire steady state in 20 years.


We built a model of family labor supply in which individuals choose between full-time work, part-time work, and nonemployment. The model is calibrated to replicate the movements of both male and female workers among these states. Although the individual labor supply problem is a discrete choice problem, individuals are able to adjust hours along the intensive margin by moving between part-time and fulltime work. Intuitively, adjustment along the intensive margin potentially allows one to estimate the true value of the underlying curvature parameter describing the utility from leisure. We explore the extent to which standard labor supply methods can achieve this in our setting. Although these methods deliver precise estimates that are significantly different from zero, the estimates are effectively unrelated to the true underlying values. These methods also deliver elasticity estimates for women, even when the underlying preference parameters are the same for men and women. 


We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off—it cannot produce both realistic dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment.


Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a nonconcave or unstable utility as is often found with the aggregate US data.


Whether technological progress raises or lowers employment in the short run has been the subject of much debate in the recent years. We show that cross-industry differences in inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face of productivity shocks. In particular, the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories, the more elastic industry demand is, and the more flexible prices are. Using data on 458 4-digit U.S. manufacturing industries over the period 1958–1996, we find statistically significant effects of variations in inventory holdings and demand elasticities on short-run employment responses, but less conclusive evidence pertaining to the effects of measured price stickiness.


The cyclical behavior of aggregate consumption, hours worked, and productivity is hard to reconcile with the equilibrium outcome of the representative agent with standard preferences. The fact that hours worked are not strongly correlated with labor productivity has been considered one of the most salient shortcomings of the equilibrium business cycle theory. We demonstrate that a heterogeneous-agent economy with incomplete capital markets and indivisible labor can generate a low employment-­productivity correlation. When we apply the optimality condition implied by the representative agent to the model-generated aggregate time series, we find a time-varying wedge between the marginal rate of substitution and labor productivity, despite the fact that our model has neither distortion nor exogenous labor-supply shocks. Our results caution against viewing the measured wedge as a failure of labor-market clearing or as a fundamental driving force behind aggregate fluctuations.

Reply to “Comments on Heterogeneity and Aggregation: Implications for Labor Market Fluctuations,” American Economic Review. 


The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Using Bayesian methods we estimate a stochastic growth model in which hours worked are stationary and a modified version with permanent labor supply shocks. If firms can freely adjust labor inputs, the data support the latter specification. Once we introduce frictions in terms of labor adjustment costs, the overall time series fit improves and the model specification in which labor supply shocks and hours worked are stationary is preferred.


We find that technological improvement raises employment in many U.S. manufacturing industries. This finding substantially differs from those of previous studies based on labor productivity, which found a negative correlation between the permanent component of labor productivity and employment in manufacturing. We argue that TFP is the natural measure for technology because labor productivity reflects the input mix as well as technology. We show that TFP and labor productivity behave quite differently at the sectoral level and that permanent shocks to input mix are indeed associated with the short-run reduction of hours. Using micro data on average price duration, we ask whether the variation in employment’s response to a technology shock across industries is correlated with the average duration of industry-output prices. Among 87 manufacturing industries, we do not find strong evidence of this relationship.


At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate.


We demonstrate both qualitatively and quantitatively how the slope of the aggregate labor supply schedule is determined by the reservation wage distribution, rather than by the willingness to substitute leisure intertemporally.  The aggregate elasticity of labor supply is neither time-invariant nor iso-elastic.


We investigate the steady decline in aggregate unemployment rates in Korea since the 1960s. We argue that a pronounced decrease in the intensity of reallocation shocks, which resulted in a downward trend in the natural rate of unemployment, has been an important factor in this decline. Our claim is based on a structural search-matching model, the times series of job-separation and job-finding rates, and sectoral-shift measures that we construct from a micro data for the past three decades.


We propose a new VAR identification scheme that distinguishes shifts of and movements along the labor demand schedule to identify labor-supply shocks. According to our VAR analysis of post-war US data, labor-supply shifts account for about 30 percent of the variation in hours and about 15 percent of the output fluctuations at business cycle frequencies. To assess the role of labor-supply shifts in a more structural framework, estimates from a dynamic general equilibrium model with stochastic variation in home production technology are compared to those from the VAR.


We examine the impact of wage stickiness when employment has an effort as well as hours dimension. Despite wages being predetermined, the labor market clears through the effort margin. Consequently, welfare costs of wage stickiness are potentially much, much smaller.


This paper suggests that skill accumulation through past work experience, or “learning-by-doing” (LBD), can provide an important propagation mechanism in a dynamic stochastic general-equilibrium model, as the current labor supply affects future productivity.Our econometric analysis uses a Bayesian approach to combine micro-level panel data with aggregate time series. Formal model evaluation shows that the introduction of the LBD mechanism improves the model’s ability to fit the dynamics of aggregate output and hours.


We examine the response of a sticky-wage economy to various real and nominal shocks. In addition to variations in hours, we allow for an endogenous response in worker effort per hour. Despite wages being predetermined, the labor market clears through the effort margin. We find that the ability of a sticky-wage model to mimic U.S. business cycles is much improved by allowing for reasonable effort movements. The model also provides a ready explanation for the finding that TFP is negatively affected by nominal shocks.


We decompose the underlying disturbances in total hours into three kinds: disturbances that shift the level of employment in the long run, those that change the sectoral composition of employment in the long run, and those that cause temporary movement of hours. Our identifying restriction exploits the distinctive nature of the two margins of labor: employment and hours per worker. Based on the postwar U.S. data, we find that aggregate and sectoral disturbances are roughly equally important for the cyclical fluctuations of aggregate hours.


The importance of sticky prices in business-cycle fluctuations has been debated for many years. Bet we argue, based on a large empirical literature from the 1950s and 60s, that it is necessary to distinguish the response of price to an increase in factor prices from its response to an increase in marginal cost generated by an expansion in production. Consistent with that earlier literature, we find for 450 U.S. manufacturing industries that prices do respond more to increases in costs driven by expansions in output. We explore two models that can potentially explain these findings. Both break the link between price an marginal cost, thereby generating what one might naively interpret as average-cost pricing. The first is driven by firms pricing to limit entry. The second is driven by firms pricing to limit non-price competition within their market.


Two investment anomalies in aggregate home-production models are investigated: excess volatility and comovement. Adjustment cost in capital accumulation reduces both volatility and the negative correlation in investments on capital goods in the market and at home. Investments comove to the extent that durable goods and time are good substitutes in consumption activities. Consumers substitute durable goods for time at home when the opportunity cost of time is high during booms. Based on the Consumer Expenditure Survey, I show that households' expenditure shares on durable goods are negatively associated with leisure, indicating that durable goods are relatively good substitutes for time.


The standard equilibrium models of business cycles face a puzzling fact that total hours vary greatly over the business cycle without much variation in aggregate wages. The model augments the standard RBC model to include Lucas span of control. Distinction between market and non-market and managerial and non-managerial work makes aggregate wages far less cyclical than individual wages. Cross-sectional comparative advantage between market and non-market sector in the workforce substantially increases the response of aggregate hours to shifts in relative productivity. As a result, the model provides a reconciliation between data and equilibrium macroeconomics.