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This edition was written by Sarah Ahmad, Tristan Loa, Chase Parry, and David Wessel.
The pace of technology creation is an important driver of the college wage premium, according to Tarek Alexander Hassan of Boston University, Aakash Kalyani of the Federal Reserve Bank of St. Louis, and Pascual Restrepo of Yale University. Their model of labor markets, informed by patent text identifying new technologies and job postings tracking their use across jobs, shows that new technologies initially rely more heavily on college-educated workers, who learn to use them more quickly than less-skilled workers and therefore receive higher wages. The model suggests that the acceleration in the creation of new technologies accounts for about one-third of the rise in the college wage premium between 1980 and the 2010s. New technologies arrive earlier in dense cities, where young, college-educated workers are early adopters—leading to a higher college premium among these populations.
Using data on 70 million home insurance policies linked to mortgage records and property-level disaster risk, Joshua Blonz of the Federal Reserve Board and co-authors find that homeowners in the bottom quintile of the credit score distribution pay 24% more for homeowners' insurance than those in the top quintile, even for identical coverage. Leveraging a natural experiment in Washington State, where credit-based insurance pricing was temporarily banned from June to October 2021, the authors find that the ban erased about 70% of this premium gap. The higher prices do not appear to be driven by deferred maintenance on older properties or by disputed claims that generate legal expenses. Instead, insurers expect lower-credit homeowners to be more likely to file claims when they suffer damages. Using data for 2024, the authors find that a low credit score raises housing costs through higher insurance premiums about as much as it does through higher mortgage interest rates. As a result, credit-based insurance pricing makes homeownership less affordable for people with low credit scores.
David Splinter of the Joint Committee on Taxation and Jeff Larrimore of the Federal Reserve Board find that membership in the top 1% of the income distribution is far more fluid than annual snapshots suggest. Roughly one-third of top earners fall out of the top 1% group within a year; two-thirds are no longer there after a decade. Because of this, the share of income going to the top is lower when using multi-year income measures, as standard single-year measures overstate how concentrated income is at the very top. Accounting for this turnover over a two-decade period reduces top 1% fiscal income shares by about 12%. It also suggests that roughly 20% of the apparent growth in top income shares over the past 25 years reflects increased income volatility at the top rather than persistent gains. The effect is even larger higher up the distribution, with two-decade mobility reducing top 0.001% shares by 40%. The authors trace the rise in income volatility at the top almost entirely to pass-through business income—income from sole proprietorships, partnerships, and S corporations that began flowing heavily onto individual tax returns after the Tax Reform Act of 1986—rather than to dividends or capital gains.
"Today’s conditions call for greater prudence than in the late 1990s for two main reasons. The first is that, at the time, productivity data already showed signs of acceleration by the mid-1990s. The Federal Reserve did not bet on purely hypothetical gains. Today, by contrast, productivity growth remains subdued, at least in the euro area, and there is considerable uncertainty around the timing, scale, and distribution of the productivity effects of AI. The transmission into measurable aggregate productivity may be gradual, uneven across sectors and accompanied by transitional frictions. In fact, in the short run AI is more likely to be inflationary than disinflationary. It requires large investments in energy-intensive data centers and may create new bottlenecks in specialized chips and skilled labor," says Isabel Schnabel, Executive Board Member of the European Central Bank.
"The second reason for greater prudence today is that the stakes are arguably higher. The long period of elevated inflation, and the marked rise in the frequency of supply shocks, has left inflation expectations more fragile than in the past, as shown by the ECB’s Consumer Expectations Survey. Despite the significant progress we have made in bringing inflation down, median inflation expectations remain elevated across horizons, while mean inflation expectations have been creeping up even before the recent energy price shock. In this context, the costs of misjudging the balance between supply and demand are higher.
"If central banks were to accommodate aggregate demand based on AI optimism and inflation were to resurge, the loss of credibility would be severe. It could also fuel financial stability risks at a time when market participants are already concerned about potential overvaluations.”
Call for papers
We are seeking proposals for papers on the municipal bond market and state and local fiscal policy to be considered for the Municipal Finance Conference to be held in-person Tuesday, July 21, 2026 and Wednesday, July 22, 2026 in Washington, D.C.
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