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This edition was written by Sarah Ahmad, Tristan Loa, Andrew Rosin, and David Wessel
Labor force participation among prime-aged men (between 25 and 54 years old) in the U.S. has fallen for the past 50 years—from 95% in 1970 to 88% in 2015. Remy Levin and Daniela Vidart of the University of Connecticut find that part of the decline reflects the lasting influence of labor market conditions men experienced while growing up. Linking men's labor force participation to the wage and employment conditions to which they were exposed when young, the authors find that men who grew up in places and periods with stronger labor markets are more likely to participate in the labor force as adults, even after accounting for current economic conditions. A one-standard-deviation improvement in the male labor market a man experienced increases the likelihood of his participating in the labor force by about 7 percentage points. The effects are largely driven by experiences during childhood and adolescence and persist even for men who experience different labor markets later in life. The authors conclude that men's past experiences—not just current wages—are a big driver of participation, which can help explain why male labor supply responds weakly to short-term wage gains.
The GI Bill offered returning WWII veterans generous education, training, and housing benefits. While the bill was nominally race-blind, its administration at the state and local levels led to widely disparate outcomes by race. Comparing men just old enough to be drafted with men born just too late, Lukas Althoff of Stanford and Christiane Szerman of the London School of Economics estimate that the GI Bill increased the college completion rate among white veterans by 9.5 percentage points but did not increase the college completion rate among Black veterans. Instead, Black veterans were steered into often-fraudulent vocational programs, increasing their vocational enrollment by 36 percentage points; these programs delivered few marketable skills and therefore produced no significant earnings gains. The authors find that the GI Bill widened racial inequality across generations, too. The program improved the neighborhood socioeconomic status of white veterans’ sons, while worsening that of Black veterans’ adult sons. The authors further estimate that GI Bill eligibility increased the white-Black college gap for the children of veterans by 47% and the income gap by 11%. These effects provide further evidence that “de jure race-blind policies often generate racially unequal outcomes in practice.”
Local labor markets in the U.S. are highly concentrated, with fewer than 6% of firms accounting for 40% of employment. Bence Bardóczy of the Federal Reserve Board and Gideon Bornstein and Sergio Salgado of the University of Pennsylvania show that firms with high-monopsony-power—those accounting for more than 10% of their local labor market's wage bill—respond less to monetary policy than firms with lower local labor-market shares. Following an unexpected 25 basis point rate cut, the wage bill of low-monopsony-power firms rises by about 40% more than that of high-monopsony-power firms. The authors identify two channels through which labor market concentration dampens monetary transmission. First, when expansionary monetary policy raises demand, firms with high-monopsony-power pass through less of the increase in prices and marginal revenue to wages, limiting the increase in labor supplied to those firms and dampening the output response. Second, monetary easing shifts employment toward lower-monopsony-power firms, which are less productive on average, reducing aggregate total factor productivity and further dampening the effect on output. Calibrating their model to U.S. data from 2015 to 2019, the authors find that labor market concentration reduces the output response to monetary policy by 12%, with two-thirds attributable to the incomplete passthrough channel and one-third to the misallocation channel.
"I don’t believe that we have a cruel choice [with regard to the dual mandate]. I don’t share the view that was expressed a few generations ago that Federal Reserve chairmen show up at a podium like this and say you got to choose. And you’re going to have to decide whether you’re willing to tolerate higher inflation to put more people at work. I don’t believe in that. What I believe is if we do our job we can make strong growth, low prices, and strong employment mutually compatible. And so what you heard from the committee today is we’ve got some work to do on the price stability front...," says Kevin Warsh, Chairman of the Federal Reserve.
"[The FOMC] thought that the labor markets were stable. There were some people around the committee who thought that it was trending better than that. Trends matter more than datapoints. What’s happening over three or six months matters more than any one data point, any one data release. And I’d say the jobs data has been moving in a good direction.
"If I heard one other thing around that subject over the course of the last couple of days, what I heard was that strong productivity-led growth is not something that we fear but something we embrace."
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