Abstract: This paper explores the role of a minimum wage in counteracting a labor force participation decline and in mitigating a consumer demand contraction during a downturn. Following an economic downturn, a large and persistent contraction in consumption is associated to a rise in income inequality. The significant rise in inequality in the bottom half of the male labor earnings distribution in the U.S. is correlated with a declining labor force participation rate. I provide empirical evidence that the increase in the federal minimum wage in the U.S. during the Great Recession had a positive and substantial impact on the labor force participation of prime-aged men. I also show that the minimum wage increase helped raise consumer demand. To assess the general equilibrium effects of raising the minimum wage in a recession, I build a theoretical model featuring heterogeneous agents, search frictions and nominal rigidities. The model shows that the minimum wage can be an effective stabilizing policy during downturns, mitigating the exit from the labor force and substantially reducing the volatility of both employment and aggregate consumption.  

Abstract:  Trends in demographics and income inequality have been considered as explanations for the drift in the natural rate of interest. The conclusion reached so far is that, while time-series evidence is not decisive, microeconomic evidence challenges demographics (Mian, Straub, and Sufi, 2021). We confirm, via cointegration analysis and estimation of interest rate rules, the difficulties of finding decisive evidence in a time-series approach. However, further consideration of the microeconomic evidence not only does not challenge the demographic interpretation of the trend, but also suggests that the rise in income inequality is partially explained by demographics. 

Abstract: During downturns, rigid average wages squeeze firms’ cash flows forcing them to cut investment and hiring, due to financial constraints (Schoefer, 2021). Given a significant increase in the use of broad-based equity-compensation schemes, the question arises whether these effects of wage rigidity could be moderated by equity-based pay. Namely, for firms that compensate employees with a combination of cash wage and equity pay, could the ability to adjust the part of the total labor compensation paid in the form of future equity claims during downturns make employment more stable while making wages livable in the future? Using hand-collected data for 2000 firms from 2008 to 2020, I find that adjusting equity-pay can indeed moderate the financial effects of wage rigidity. The moderating role of equity pay is more significant when wages are more rigid, as I also show with a theoretical model.