Abstract: Analyses of GDP per capita differences across countries focus almost exclusively on differences in productivity. This paper shows that there are also large differences in medium-run dynamics in the employment-to-population ratio. The paper finds a general tendency for productivity growth to be negatively correlated with changes in the employment to population ratio for a large sample of EMDEs—a phenomenon described using the term jobless development in this paper. The paper also shows that there are large differences in the steady state levels of the employment to population ratios that countries are converging to. There are also countries that experience substantial increases in their employment-to-population ratio during the development process. Using a two-stage procedure, the paper studies this issue in a large sample of EMDEs. In the first stage, the paper estimates differences in steady-state employment ratios across countries. In the second stage, it documents which institutional and policy factors are correlated with steady-state employment ratios. The paper finds particularly large differences across countries in steady-state employment ratios for women. Fewer legal protections of women’s rights are associated with lower steady-state employment ratios for women, without an offsetting positive effect for men.
Optimal Unemployment Insurance with Costly Self-Control, with Pei-Cheng Yu
Abstract: This paper examines optimal unemployment insurance design when individuals prefer immediate rewards due to temptation and self-control problems. In addition to moral hazard, unemployment benefits also affect search effort through self-control costs. We show that the incentive constraint may not bind, potentially avoiding immiseration and justifying the need for a base income. Compared to setups without costly self-control, the optimal unemployment insurance features front-loaded consumption upon employment—lending theoretical support to back-to-work bonuses—while consumption for the unemployed is more back-loaded. Additionally, we provide quantitative evaluations of the optimum, highlighting its potential to significantly enhance welfare.
A Quantitative Analysis of Multidimensional Changes in Unemployment Insurance Policies, with Lei Fang and Jun Nie
Paper download (Updated November 2023; First version July 2020) Revise & Resubmit at JEDC
Abstract: Unemployment insurance (UI) policies along three different policy dimensions—weekly benefit amount, benefit duration, and benefit eligibility–have been used in the United States during past economic downturns. This paper studies the effect of these three types of policies and their interaction on the labor market. While higher weekly benefit amounts and longer benefit duration reduce the individual unemployed worker’s work incentive, expanding the benefit eligibility increases UI recipient rates. At the disaggregated level, the impact of each policy is hump-shaped over a worker’s wage income. We quantify the impact of the CARES Act UI, which combined all three policies during the COVID-19 pandemic. The CARES Act UI package raised the average unemployment rate by 1.61 percentage points during April–December 2020, with two-thirds of the effect coming from the amplification of the economic shutdown policy and the COVID-19 infection risk. Decomposing the CARES Act UI package, the interaction between the three policies was quantitatively important and accounted for one-third of the total effect.
The Short and the Long of It: Stock-Flow Matching in the US Housing Market, with Eric Smith and Lei Fang
Paper download (Updated August 2024; First version October 2022) Revise & Rebumit at IER
Abstract: From 2006 until 2020, the probability of selling a house in the US housing market declined sharply after listing for two weeks. Moreover, sales within the first two weeks of listing ("quick sales") and sales happening afterward ("slow sales") behaved differently over the housing cycle. The probability and associated price of a quick sale recovered from the housing slump sooner, faster, and more prominently than a slow sale. This paper demonstrates that a calibrated stock-flow matching model not only generates quantitatively consistent sales, prices, listings, and time on the market but also captures the distinctions between fast and slow sales over the housing cycle.
Timing and Time Inconsistency in Search Models, with Yun Pei, Economic Letters, Vol 220, Nov 2022, 110846.
Abstract: We study how timing assumption matters for the commitment problem and time inconsistency in search models with unemployment insurance. We analyze the Markov equilibrium without commitment and the Ramsey policy with commitment under two different timings. The first timing is where consumption takes place before search within each period, and the second timing is where search takes place before consumption. We show that time inconsistency occurs mainly through search disincentive under the first timing, but only indirectly under the second timing. We show theoretically and numerically that the magnitude of time inconsistency is stronger under the first timing.
A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation, with Si Guo and Yun Pei, Journal of Public Economics, Vol 212, Aug 2022, 104692.
Abstract: This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central government makes transfers to local governments to offset vertical and horizontal fiscal imbalances. But the anticipation of transfers lowers local governments’ expected cost of borrowing and leads to overborrowing ex ante. Absent commitment, the central government over-transfers to reduce local governments’ future need to borrow, and in the equilibrium both local and central debts are inefficiently high. Consistent with empirical evidence, when fiscal decentralization widens vertical fiscal imbalances, local governments become more reliant on transfers, and both local and central debts rise. Applied to Spain, the model explains 39 percent of the rise in total government debt when the vertical fiscal imbalances widened during 1988–1996, and 18 percent of the fall in debt when the imbalances narrowed during 1996–2006.
A Quantitative Theory of Time-Consistent Unemployment Insurance (Job market paper), with Yun Pei, Journal of Monetary Economics, Vol 117, Jan 2021, pp. 848-870.
Abstract: During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. Benefit extensions increase UI coverage and lead to higher average consumption of unemployed workers, but the expectation of an extension may reduce unemployed worker’s job search incentives and lead to higher future unemployment. We show that benefit extensions in recessions arise naturally when the government forgoes prior commitment and makes discretionary UI policies. We endogenize a time-consistent non-commitment UI policy in a stochastic equilibrium search model, and use the model to quantitatively evaluate the benefit extensions implemented during the Great Recession. Switching to the (Ramsey) commitment policy would reduce the unemployment by 2.9 percentage points with small welfare gains.
Delayed Collection of Unemployment Insurance in Recessions, European Economic Review, Vol 118, Sep 2019, pp. 274-295.
Abstract: Using variations in UI policies over time and across U.S. states, this paper provides evidence that allowing unemployed workers to delay the collection of benefits increases their job-finding rate. In a model with discrete job take-up decisions, benefit entitlement, wage-indexed benefits, and heterogeneous job types, I demonstrate that the policy can increase an unemployed worker’s willingness to work, even though more benefits in general reduce the relative value of employment. In a calibrated quantitative model, I find that allowing delayed benefit collection increases the overall job finding rates and may lower unemployment rate both in a steady state stationary economy and over a transition path during 2008-2012.