Wednesday, May 5, 2010

The First Day of the Rest of My Academic Career

I just finished my partial differential equations final yesterday, and I increasingly have the sense that I am entering a new leg of my journey as a scholar. This was part of a round of math courses I took after finishing my master's degree in public policy in 2009, in preparation for applying to PhD programs this fall. So now I'm really beginning to focus on why I'm going for the PhD and what research I'm interested in doing.

Despite my habit of posting on broad political economy questions, obscure disputes in the history of economic thought, and the Austrian School, these aren't my only interests. They just seem to me to be interests that are comparatively easier to blog about, and are more appealing to a wider audience. I'm going to start drafting my personal statement very soon, and a big part of that is sketching out goals and a research agenda. So I thought I'd outline that research agenda here.

For a while now, I've been very interested in the literature on gross labor market flows: the work of people like John Haltiwanger, Robert Shimer, Robert Hall, Steven Davis, Scott Schuh, and others. People generally think in terms of net labor market adjustments. The change in the unemployed population, for example, is the difference between the number of people entering the state of unemployment and the people leaving unemployment. But simply looking at the unemployment rate leaves out a lot of information. There's an enormous difference between a 0% change in the unemployment rate where everyone that was unemployed last month is still unemployed this month, and a 0% change in the unemployment rate where all of the unemployed from last month found new jobs and an identical number of people became newly unemployed. The first situation would be an extremely unhealthy labor market, while the second would be a very robust labor market.

Without getting into too many details, researchers focus on two kinds gross labor market flows: gross job flows and gross worker flows. Gross job flows are the gross changes in jobs at a particular firm. Gross worker flows are the gross changes in individual labor force statuses (ie - hiring, firing, quiting, etc.). Net job flows should equal net worker flows, which should both equal the change in the employed population. I have two "macroeconomics of the labor market" research questions I want to pursue in graduate school: one having to do with gross job flows and one with gross worker flows.

Gross Worker Flows and the Price Level
One of the best known economic relationships is the Phillip's Curve, which highlights a negative relationship between inflation and unemployment. The Phillip's Curve has (justifiably) taken quite a beating over the years. The immediate concern was its inability to predict the stagflation of the 1970s, but there are other issues as well. The basic idea has survived through a series of adjustments, including the inclusion of "expectation adjustments" (an adjustment that I would argue was anticipated by Keynes in his Tract on Monetary Reform), and the New Keynesian sticky wage models. One huge problem that I see with the Phillip's Curve is that it relies so heavily on the relationship between unemployment and inflation. It seems to me that the relationship between inflation and the labor market is primarily driven by wage setting behavior. Even if we don't assume substantial wage rigidity, the biggest wage adjustments are going to occur when labor contracts begin or end. In other words, gross worker flows (changes in hiring and separation rates) are going to be much more important for the determination of the price level than net worker flows (changes in the unemployment rate). I want to work with the relationship between gross worker flows and the price level, although I'm not sure exactly what I would look into. I have to better familiarize myself with the job search literature, which already has done a great deal of work on search behavior and wages. Robert Shimer has a new book out on gross worker flows and the business cycle, but I'm not sure how big of a role the price level plays into it. There's also a relatively new book out on the status of the Phillip's Curve today, although based on my review of the table of contents it doesn't seem to deal with these gross worker flows issues. I just need to situate myself in the existing literature and think a little more on it.

Gross Job Flows and Output
I'm also interested in John Haltiwanger's work on gross job flows (ie - firm level job creation and destruction) over the business cycle. My top choice for schools is the University of Maryland, which in addition to the advantage of being in the D.C. area, also has John Haltiwanger on the faculty. My concern, though, is that a lot of Haltiwanger's work has been quite descriptive. I'd want to dig a little deeper into the reasons why these relationships hold. I think an important source for the answer to this question is going to be Roger Farmer of UCLA. In a recent book, which I have yet to read, Farmer presents a modified Keynesian model where "animal spirits" in asset markets make corporate liquidity crucial to hiring decisions. [Although Farmer specifically talks about "hiring" (a gross worker flow concept), his model (as I understand it) assumes that all workers separate from their firms at the end of the period. This imposed 100% separation rate turns changes in Farmer's hiring rate into a job creation rate (a gross job flow concept)]. What we have here is a disaggregated liquidity preference model of output and employment that can explain the employment level with an appeal to gross labor market adjustments rather than net labor market adjustments. In other words, it has a Keynesian flavor but it gets past a lot of the problems with older Keynesian models that I have concerns about. And Farmer is explicit that it doesn't rely on rigid wages, which he argues (and I agree) was an unnecessary distraction introduced by New Keynesians. That's not to say I think wages aren't rigid. They almost certainly are. But focusing on them distracts from the more important dynamics. Again, I need to figure out where I fit in all this, but I think Farmer provides a good place to start, and I think I have a good point that his assumptions about the separation rate make his model essentially one concerned with gross job flows rather than gross worker flows.

That's dissertation fodder. I have a couple other "research interests" as well:

A Hicks-Hayek-Modigliani-Garrison Model (The "Kuehn Model" for short)
In the past, I've alluded to a Keynesian-Austrian synthesis. One thing I specifically have in mind is Roger Garrison's model of the macroeconomics of the capital structure. I've seen him present this in a lecture, and I've read papers of his, and I'm very impressed by it. It really brings to the forefront one of the most important contributions of Austrian economics: the capital structure. However, one nagging concern I have with it (at least as I've seen it presented) is that it offers no theory of output. From what I've seen, Garrison simply assumes that we sit happily on the production possibilities frontier with no explanation of why he would assume such a thing. Of course, Keynes and his descendants provide an answer to this question. Garrison has half the Keynesian answer: the loanable funds market. It seems to me if you add liquidity preference to it, you can then determine output in Garrison's model. Then you don't simply assume the level of output, and I see no reason why you can't maintain all of Garrison's great insights into the capital structure. So at some point I think it would be interesting for me to add a couple quadrants to Garrison's model and see how all this works out. First, however, I need to beef up my basic familiarity with Garrison. I just bought his Time and Money to do just that, which will be next on my reading list after 1848: Year of Revolution, which I'm currently reading. I think I can get by with a few articles from Modigiliani. I think I'll also rely on Garrison for my insights into Hayek (Pure Theory of Capital is really expensive in the bookstore!). Who knows when I'll get to the project itself, but I've sketched this out with pencil and paper in a few ways, and at some point I'd like to dive in and write something.

The Georgia Job Creation Tax Credit: A Regression Discontinuity Design Approach
Writing this right now, now that my 1920-21 depression paper is basically drafted. It's going very well. The title is pretty self-explanatory. Job creation tax credits have been of interest to me for quite a while.

1 comment:

  1. I should note - Roger Farmer has major doubts about the efficacy of fiscal policy, which don't rely on the classical arguments that I've listened to patiently but don't really buy into. I don't know precisely what his objection is - I'm still only generally familiar with his theory. But I'm excited to learn more - it's always good to have your views challenged, particularly if they're challenged in new and insightful ways.


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