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This edition was written by Elijah Asdourian, Sam Boocker, Georgia Nabors, and Louise Sheiner.
Wage inequality between men and women and among whites, Blacks, and Hispanics has been persistent over the last few decades. Using data on wages from 1979 to 2019, Francine Blau of Cornell and co-authors find that raising the federal minimum wage from $7.25 to $12 per hour would reduce between-group wage gaps for low-wage workers (below the 15th percentile of the wage distribution) by 25% to 50%. Male-female, white-Black, and white-Hispanic wage gaps all would decrease because a higher proportion of female, Black, and Hispanic workers earn very low wages, and are thus more likely than white workers to benefit from a minimum wage increase. Hispanic workers have fared especially well as a result of recent state minimum wage increases because they are more likely to live in states that have already opted to raise the minimum wage.
Using firm-level financial data from 2005 to 2019, Falk Brӓuning, José Fillat, and Gustavo Joaquim of the Boston Federal Reserve find that increases to a company’s operating expenses have a larger effect on consumer prices in industries dominated by a few large firms. Specifically, when costs increase by 1%, prices are 0.7% higher one quarter later and, on average, remain elevated for three quarters before reverting to pre-shock levels. The effect of an increase in operating expenses on prices is about 27% larger in highly concentrated industries, while the impact of a cost reduction is negligible regardless of industry concentration. Furthermore, in the most concentrated markets, firms experience a smaller reduction in profits following a hike in their costs, and the profits of industry leaders are almost entirely unaffected. The authors conclude that high industry concentration, coupled with costly supply chain disruptions, contributed to high inflation in the wake of the COVID-19 pandemic.
Inflation swaps (financial products used to protect the buyer of the swap against inflation risk) have long shown promise as a measure for predicting inflation but suffer from noise because of variations in the risk premium (the compensation required by the seller to sell the swaps.) Using data since 2004 on inflation swaps from Barclays and Bloomberg and the monthly Blue Chip Economic Indicators Survey, Anthony Diercks of the Federal Reserve Board and co-authors compare the one-year forecasting performance between inflation swaps and inflation expectations surveys. The authors find that when excluding periods of financial uncertainty like the Global Financial Crisis and the pandemic lockdowns from the sample, swaps predict inflation more accurately than survey- or TIPS-based measures. By optimally weighing a combination of inflation swaps and surveys, the authors develop a new method of forecasting inflation that improves forecasting inflation over the entire sample period. Their new method predicts that inflation will be closer to target in 2024 than suggested by surveys.
"Adoption of generative AI is certainly happening at a rapid clip. ….As with all revolutionary technologies, when we turn our attention from productivity to the labor market, many express concern, focusing on jobs that may disappear, while others focus on which jobs will replace them. Economic history suggests cautious optimism here. When the world switched from horse-drawn transport to motor vehicles, jobs for stable hands disappeared, but jobs for auto mechanics took their place. New technologies may displace some types of labor, but they can also raise the productivity and incomes of jobs they create or complement. The increase in consumption that follows may raise demand for labor overall. Nonetheless, the displacement effect might be concentrated and the productivity effect more diffuse. Therefore, while many workers throughout the economy benefit, a smaller set bear the brunt of the negative effects. Just as the introduction of computerized machine tools replaced skilled machinists and personal computers made many routine clerical and administrative jobs obsolete, the widespread adoption of AI will be a difficult transition for some workers," says Lisa D. Cook, member of the Federal Reserve Board of Governors.
"Importantly, in the policy arena—as well as health care, consumer finance, insurance, and many others—decisionmakers have legal and ethical duties to be deliberate about the effects their choices have on affected groups. In this context, an AI black box with no insight into the decision-making process is of limited value. As a policymaker, I look upon model-generated forecasts with a skeptical eye, if they are not coupled with a plausible explanation for the driving factors behind them. More generally, when stakeholders have an opportunity to appeal a decision, they are entitled to understand how the decision was made…. So I am particularly interested in seeing progress on 'explainable AI,' which may help bridge the divide between the technical sphere and the user."
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