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This edition was written by Emily Araujo, Alex Conner, Tristan Loa, Georgia Nabors, and David Wessel.
In a competitive labor market, a minimum wage leads to job losses, but under monopsony conditions—where firms have market power and can set wages below the competitive rate—it can increase both wages and employment. Priyaranjan Jha of the University of California, Irvine, and co-authors construct 19 measures of labor market monopsony: fluidity measures, which capture the ease at which workers can switch between employers, and concentration measures, which consider the number of employers in a market. Using data from the restaurant industry from 2001 to 2019, they find that monopsonistic markets with low fluidity experience smaller negative employment effects from the imposition of a minimum wage. Concentration measures are less consistent in predicting the effects of a minimum wage. The authors also find that average earnings are higher in cities, meaning that a minimum wage is less likely to bind in these areas. Failing to account for this urban wage premium overstates the role of employer market power in reducing the unemployment effect of a minimum wage.
Stablecoins are a rapidly growing form of cryptocurrency designed to be pegged, in most cases, to the U.S. dollar and are backed by imperfectly liquid dollar assets. The stablecoin market is structured in two layers: a primary market, where a small set of arbitrageurs exchange stablecoins with the issuer for $1, and a secondary market, where everyone else trades with arbitrageurs and the stablecoin's value can fluctuate from $1. Yiming Ma of Columbia, Yao Zeng of the University of Pennsylvania, and Anthony Zhang of the University of Chicago find a tradeoff between price stability and risk in the secondary market depending on the number of arbitrageurs; the more arbitrageurs, the more stable prices in the secondary market, but also the greater risk of panic selling. In other words, runs are less likely when arbitrage is less efficient because a surge in sales of stablecoins by investors drives down prices more and that lower price discourages other investors from panic selling. Both regulators and investors want rules that promote stable prices and lower run risks, but policies that focus on one can be counter to the other. Mandating unconstrained redemption access, for instance, can promote price stability at the expense of increased run risk, the authors say.
Eleni Gousgounis of the Commodity Futures Trading Commission and co-authors use transaction-level data to identify providers and consumers of liquidity in the U.S. Treasury futures market. The authors find that the share of total market liquidity provided by principal trading firms (PTFs) has risen since 2012 from roughly 40% to 70% while provision by broker-dealers has fallen. But the authors argue that PTFs do not hold large net positions and therefore may not be able to respond to changes in demand as well as broker-dealers with larger net positions. The authors show that PTFs decreased liquidity provision and broker-dealers increased liquidity provision during the market dysfunction of March 2020, although PTFs were still responsible for providing a large majority of liquidity. During this period they also find that asset managers—not basis traders, who exploit the gap between cash prices and futures—had the largest negative impact on liquidity.
"Recently, I have been paying attention to the possible interaction between the financial vulnerabilities of firms and their exposure to trade. As global economic tensions rise and supply chains evolve, understanding how a company's financial health intersects with its international trade exposure becomes increasingly crucial. This research could provide valuable insights for both policymakers and business leaders navigating an uncertain global economic landscape," says Adriana Kugler, Governor of the Federal Reserve Board.
"Second, lately, I have been monitoring the financial stability implications of the potential lower desirability of U.S. financial assets in flight-to-safety events. Traditionally, U.S. assets have been seen as a safe haven during times of global economic uncertainty. One notable example of this was during the Global Financial Crisis. However, we recently saw instances in which the VIX went up, stock prices went down, long-term yields from U.S. Treasury securities went up, and the U.S. dollar depreciated against the currencies of advanced foreign economies (AFEs), with a notable role for the euro. Importantly, the historical relationships and the observed moves in the VIX and interest rates of AFEs would have been associated with a decrease in long-term yields from U.S. Treasury securities and an appreciation of the dollar. As the global economic landscape shifts, it is crucial to examine how possible changes in the role of U.S. financial assets as a safe haven might affect financial stability both domestically and internationally."
Lastly, I have been keenly interested, for some time now, in how stresses in the commercial real estate (CRE) sector could potentially spill over to the rest of the U.S. economy. The CRE sector continues to face challenges from low vacancy rates and valuation losses, especially in urban centers for the office sector. Another challenge is that some banks, insurers, and securitization vehicles continued to have concentrated exposures to CRE. As we have seen in past crises, such as the Global Financial Crisis, vulnerabilities in specific sectors can have far-reaching consequences for the financial system. Understanding potential vulnerabilities and potential domino effects are vital for maintaining overall economic stability and crafting preemptive policies.”
