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This edition was written by Sarah Ahmad, Chase Parry, Andrew Rosin, and David Wessel.
Americans still work more hours than workers in other advanced economies, but the gap has narrowed. Specifically, non-Americans worked 15% fewer hours than Americans in the 1990s, but 8% fewer in the 2010s. Serdar Birinci of the Federal Reserve Bank of St. Louis, Kurt See of the National University of Singapore, and Loukas Karabarbounis of the University of Minnesota find that the reduction in average hours worked per person in the U.S. can be explained by an increase in publicly-provided health benefits—primarily Medicaid—for non-employed individuals. Government benefits in other advanced economies did not become more generous over time; meanwhile, rising wages, falling fixed costs (e.g., transportation expenses or commuting time), and a lower disutility of work have led to an increase in labor supply outside of the U.S. The authors find no evidence that compositional changes contributed to the decline in hours worked in the U.S., as the upward pressure on hours due to rising educational attainment was roughly offset by the downward pressure from an aging population.
A growing body of empirical work suggests that monetary policy shocks produce smaller effects on real activity today than in past decades. Justin Bloesch of Cornell University and Jacob P. Weber of the Federal Reserve Bank of New York argue that secular changes in both the production and composition of investment goods have eroded investment's role in transmitting interest rate changes to labor earnings and consumption. They document three reinforcing trends: the labor share of value added in investment goods production has declined, the import share of investment has risen, and investment has shifted markedly toward intellectual property—such as R&D and software—that are far less sensitive to interest rate changes than equipment or structures. Because the production of tangible investment goods generates labor income for households that spend a high share of their earnings, these structural shifts mean that rate changes reach household wallets with diminished force. The authors find that labor income responds roughly 23% less, and consumption about 17% less, to a real interest rate shock today than in the earlier period.
Christoph Boehm of the University of Texas at Austin and Changseok Ma of the Korea Development Institute study how households responded to the stimulus payments from the Economic Stimulus Act of 2008. Using monthly data from the Consumer Expenditure Survey, they find that households spent about 80 cents of each stimulus dollar on durable goods within three months. Most of this response was driven by motor vehicle purchases. To finance these purchases, households traded in or sold older vehicles or borrowed more, increasing auto debt by about 40 cents per dollar of stimulus. The authors find clear anticipation effects: durable goods spending was about $260 on average higher than it would have been in the month prior to receipt and $300 on average higher in the month of receipt. Advance notice of the payment schedule likely enabled households to time those purchases.
“The recent increase in energy prices also complicates my inflation forecast. The cost of many products rose sharply during the pandemic, and Americans still feel those higher prices when they shop and pay their bills. The recent jump in gasoline prices understandably adds to frustrations. I am highly attentive to the fact that inflation has remained above the Fed's 2% target for five years. Low and stable inflation, alongside maximum employment, is the best outcome for all Americans. That is why I am committed to returning inflation to our target," says Philip N. Jefferson, Vice Chair of the Federal Reserve Board.
"Inflation has eased from its pandemic-era peak, but progress has stalled over the past year mainly due to tariffs. In addition, I expect elevated energy prices will be reflected in upcoming inflation readings.
“It has been my expectation that the disinflationary process would resume once higher tariffs are no longer pushing up consumer prices. In addition, the strong productivity growth and deregulation efforts, which I previously mentioned, may further help in bringing inflation down to our 2% target. The recent increase in energy prices, however, will apply some upward pressure on headline inflation, at least in the near term. The ongoing trade policy uncertainty and geopolitical tensions pose upside risk to my inflation forecast.”
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