Econ 8503 Wages and Employment Spring 2010

José-Víctor Ríos-Rull:,

  • Department of Economics, University of Minnesota, Minneapolis, MN 55455.
  • Tue and Th 12:20 pm to 14:15. In Hanson Hall, 4-168. Off Hours: Before and after class and by appointment., email:, Phone-(612) 625-0941 Fax: (612) 624-0209 Fed Phone (612) 204-5528
  • The web page to sign up for homework presentations is ready. Click here

  • There is an interesting seminar on Monday in WIlley Hall 50 at 12:15 about educational differences in mortality.

    What are we doing? A class by class ex-post diary.

    1. May 4.

      We will talk about household formation and about how the homeworks were performed. Please be ready to answer.
    2. Apr 30.

      We did finish the discussion of bankruptcies posing the problem with Bayesian updating. We discussed the meaning of Markov equilibria. I also talked about how to think of equilibria where agents make approximations. Finally, I discussed the main ingredients of the paper Credit lines where customers are capital and where banks cannot commit to future actions requiring that the continuation policies are time consistent.
    3. Apr 29.

      We went over the problem of bankruptcy and the equilibrium interest rates. We talked about various extensions including that of private information about types (FICO scores).

    4. Apr 27.

      We finished the problem of joint decision making when the two household members decide by means of Nash bargaining. This required the specification of the outside option. We went over the modelization of entrepreneurial activities. We pose a few possibilities: Whether the opportunities or ideas come back or not, whether there are ample financial frictions, and whether there was a secondary market for capital goods.

    5. Apr 22.

      We discussed the problem of continuity of the statistics of the model with respect to parameters and on how this should be the main concern. We went over a a bit of the joint decision making problem.

    6. Apr 20.

      This class is delayed. We will recover it later.

    7. Apr 15.

      Jose talked about the disability paper. Thanks Jose. We started describing the possible marital status of people. We also discussed what are the constraints that demographics poses on the distribution of types.

    8. Apr 13.

      Tayyar went over homework 5 with these notes. We started posing a model where marital status is exogenous and stochastic. We discussed some issues involving joint decision making.

    9. Apr 8.

      Daolu talked briefly about the Frisch elasticity of labor supply (his slides are here). Jan continued characterizing the extent to which the term n entered the Euler equation of learning by doing and Scott reviewed some evidence of the male population around WWI in Britain. We discussed a few extensions of things that matter and shape the life of people in addition to income/wage shocks. We reviewed health mostly but also discused other possible shapers (occupation, education, marital status).

    10. Apr 6.

      We had two nice class presentations: one ( of homework 4 by Joe and the other by Jan for the derivative with respect to human capital in the learning models. We started with the problem of joint decision making and how to think of both bargaining and the Pareto weights.

    11. Apr 1.

      We finished learning by not doing and we talked about some of its implications for the importance of learning and for the value of the labor elasticity. We went over the learning by doing model that has some additional complications. We then went over competitive search.

    12. Mar 30.

      We continued talked about the Life Cycle model. We also talked about how to solve where the issue is a second order difference equation with two terminal conditions. We went over equivalence scales. We used the life insurance example to talk about the importance of identification and of about how to use data to learn things. We then started posing the problem of learning by not doing and discussed some its characteristics.

    13. Mar 25.

      We talked about the Life Cycle model. How to write it, how it aggregates into a macro model. We discussed various items: survival, leisure, the relation with the interest rate, social security, stable population and others.

    14. Mar 23.

      We talked about the class, and what it is about. We discussed very lightly what are the possible topics that we will cover (see below). We also talked about how we think about labor issues from macro, and the role, if any, of general equilibrium. We started with a brief listing of the theories capable of yielding an age wage profile like that in the data.

    List of Homeworks Organized by batchs.

  • Fourth Homework batch. Do it by May 10.
    1. Your choice. One of the three.

      7.A. Pose and solve for the decision rules and the stationary distribution in a model where households have multiple members that have a motive to disagree and where there are exogenous, Markovian shocks to composition. Use a Nash bargaining protocole to arrive to decisions.

      7.B. Pose and solve a model of activity choice (entrepreneurial or other).

      7.C. State and solve a model where people choose whether to marry or divorce. Pose an additional iid shock to love with continuous domain, and transferable utility and a seduction game to determine whether marriages happen or not.

  • Third Homework batch.
    1. Health Shocks Due April 17.

      6.A. Pose a model with health shocks in one of thes that we talked about. Make those shocks Markovian. Solve for the decision rules. Use both discrete and continuous shocks.

      6.B. Compute the stationary Distribution of this problem.

      6.C. State what would you use the model for and make the case for your choice of shock specification. Why is it a good one?

  • Second Homework batch. Do it by April 8.
    1. Solving problem 4 when there is learning by doing, learning by not doing and both. Choose the learning technologies (explain how you did so) and solve for the optimal paths of consumption, savings hours worked, productive hours worked and wages. Plot them.

  • First Homework batch.
    • 1 2 and 3 Due March 30th. These ones should only be done if you think that you do not know how to do them. I will assume that you can do this type of things but will not check that you did them.
    • Homework 4 due April 1.

    1. Data manipulation.

      1.A Fetch and plot US quarterly GDP Employment, Total hours worked, Hours per worker, Hours per adult of working age and Hourse per person not in jail over 18 years of age both from CPS and from the firm survey (see Cooley chapter 1, page 30). Store it in pdf, eps, and emf or wmf formats.

      1.B HP filter and plot US quarterly (log) GDP and the series in 1.A. Store it in postcript or pdf. Compute the same table as in the Cooley book for those 4 variables using data up to 2003:4 or later.

      1.C Calculate a linear trend and decompose log GDP in the linear trend the hp trend and the hp residual.

      1.D Plot the growth rates together with the hp residual and comment the differences.

      1.E Compute a VAR of GDP, Total Hours and Labor Productivity and plot the impulse responses. Make sure that you explicitly state what are the identifying assumptions that you make.

    2. Interpolation.

      Write a routine that linearly interpolates. Apply it by storing the value of exp (x) between 0 and 1. in intervals of .1 and assessing the value by interpolation in intervals of .05. Plot the function and what results from using approximation.

    3. Solving Equations of one unknown.

      (Parts of Homework 1 of Chapter 5 of Judd's book.) Solve sin 2 p x- 2x=0 using bisection between x 0 =-5 and x 1 =5 (If this interval is a bad one change it).

    4. A life cycle problem.

      4.A Solve for the assets and consumption of the houeholds in an economy where they live 90 years (assume they are born at 16) and have the wage profile and of American persons. (Find it from somewhere in the literature, later we will compute it from data). Let the agents have standard per period preferences over consumption with risk aversion coefficient of 2, discount rate of 1. and interest rate of 3\%. Plot them. You should use the three methods we discussed in class to solve this problem (if you want you can solve in five year intervals, for which you have to adjust the interest and discount rates). These methods were forward and backward iterations that transform the problem into one equation and one unknown and brute force.

      4.B Now make changes in preferences so that the induced profiles for consumption are inversed U-shaped. Plot them too.

      4.C Briefly explain the computationally logic that you followed. (I will talk a bit in class for this on TUesday but start now).

    Course Description

    This course should be thought of as a Labor course with a close link to Macro that should be of interest to people with interest in both areas. Its main purpose is to learn the map from models to data i.e. to answer quantitative questions that we are interested in (in the process of doing so, some interesting theoretical questions arise). We will develop tools by stating general questions, and then discussing how to approach its answer.

  • Tools. The tools that we will be developing beyond those already covered in the first year can be grouped into:

    • Theoretical tools. Not all the necessary tools have been acquired in the first year. We will look at models of individual decision making, obviously, but mostly in the context of equilibrium models. We will look at representative agent models, models with a continuum of agents represented with measures, overlapping generations models, as well as models where agents form households. We will look at models where equilibria are optima and where they are not. We will look at stationary and non--stationary equilibria. We will look at models without perfect commitment and without perfect information.

    • Empirical tools. A necessary condition to be able to do applied theory is to be able to characterize some properties of the world. This involves the capability of accessing some data and of understanding the way it is organized as well as the principles that guide the construction of the main sources. This requires some knowledge of NIPA and of the way data are organized,

    • Computational Tools. Students should be able to construct and characterize the properties of the equlibrium allocations of artificial model economies.

    • Calibration. We will spend a lot of time thinking of how a model is related to the data. This is I think the more important part of the learning process. We will discuss this in much detail.
  • Style. This is a Ph.D. course not a Masters course. Not to learn about others but to to do things, and, therefore, it requires to do some things.
  • Format. Every class except the first one we will devote the first twenty minutes or so to students presentations of homeworks. I expect professional competence in this regard.

  • Relation to 8501 and 8502. This course complements those courses. We will overlap a bit with enough differences to make them all worthwhile to the enthusiast. Any one of them provides sufficient material, if properly mastered, to pass the prelim.

  • Content. In terms of content here is a list of some of the issues that we may cover.
    1. Wage formation. Over ages, education, sexes, occupation, marital status, states, cities, what not.

    2. Household Types. Single, cohabitating, married, with children, with other adults, with elderly, sharing dwellings. How does it shape people?

    3. Household Formation. How does it change? How is it chosen? Both children and spouses.

    4. Time Allocation. What do we do with our time? Is labor/leisure useful?

    5. Engagement in the labor market. Female labor force participation, choices of hours, retirement. Really?

    6. Occupational Choice. What career to choose (in a parallel sense). This includes entrepreneurship, and even which legal status to choose.

    7. Crime. We will think of it in part as a form of occupational choice (for property crime). But we will also talk in terms of murder. How could we think of it.

    8. Savings and borrowing. With special emphasis on the particular set of U.S. laws that guarantee the right to bankruptcy.

    9. Death and Health. Death is unequal why people die? Does health care matter? Really?

    10. Aggregate Search Models. We will look at how to build protoypical search models with flows of workers entering and exiting the labor force.

    11. Aggregate Fluctuations and Macro in general. Are any of these things changing over time?

    Course Requirements

    Students will place the solution to the homeworks and to other requirements in electronic form.

    You have to send an email ASAP to stating your name and university email and username and that you are in my course to have access to a directory named /pkg/econ8503 and a subdirectory your user name.

    There are various types of requirements that are a necessary part of the course, all of which have to be fulfilled.
    • Regular Homeworks.The ones posted here. Full credit only if on time. Partial credit otherwise.

    • Class Presentations Every student will make at least two class presentations with at least one being of a subset of a homework. The first presentation should take no more than 15 minutes and it will be absolutely professional. Every second wasted, every statement not planned, every bad thing will be highlighted. The second presentation (that will depend on class size and interests) maybe on a paper or on another homework.

    • Referee Report. I will assign a paper to each of you as we go along to write a referee report and perhaps also to present the paper in no more than 20 minutes. The refere report should be no longer than five pages and should contain a clear and concise exposition of the main points of the article as well as a critical evaluation of the article's contributions. In addition, you should write a letter to the editor with your personal recommendations. If very good, I will use them, anonymously.

    • Wikipedia Article. Optional, but excellent training. This is something that should be done by the end of the course. The moment you post it email me and place a copy in your directory. Think of a topic of the course no matter how silly.

    This course believes drastically in Learning by Doing. To learn the material that we cover requires that students do all the homeworks in a timely manner. Given the way to collect the homeworks, timeliness is automatically recorded. I will look at what is done weekly.

    Grading Rules and Registration.

    To do superbly in the course, registered students have to do all the requirements well.

    For those that do not register but take the course, I recommend that they do the homeworks. We learn to solve problems by facing them. Learning jointly with others greatly speeds the process.

    In any case, the University is to help you learn and become a great economist not to issue grades, so use the course in the way you say it is best for you. If all equal, register so that there is evidence that the course is useful.

    What about the prelim?

    The prelim will consist on some problem or question or discussion of something that has been at the core of the course. Take a look at the last two prelims (from Kara, I think) and the homepages of the courses of previous years (via my homepage) for clues.