Econ 8503 Wages and Employment Spring 2011

José-Víctor Ríos-Rull:,

  • Department of Economics, University of Minnesota, Minneapolis, MN 55455.
  • Tue and Th 12:20 pm to 14:00. In Hanson Hall, 4-170. 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

  • Homework batches 2 and 3 are ready.

    What are we doing? A class by class ex-post diary and a forecast of next class.

    1. Mar 22.

      We talked about the class and what it is about. We discusses what are the possible topics that we will cover (see below). We discussed various issues about wage determination We then went over the theories capable of yielding an age wage profile like that in the data. We went in some detail over the hormone theory and the learning by doing theory.

    2. Mar 24.

      We finished the Ben-Porath model. We then talked about how to aggregate this Life Cycle model into a macro model. We discussed various items: survival and its markets, leisure, the relation with the interest rate, social security, equivalence scales. how to think of prices of stuff that people have to account for changes (skills, traits). We discussed how to deal with heterogeneity in human capital investment models.

    3. Mar 29.

      We started talking about the possible usefulness of a project about using global methods to solve new keynesian models and their possible usefulness. We then moved on to discuss how to think of muliperon households and we talked about why would we need a notion of economies of scale and, also, time varying utility weights. We then discussed a bit how to account for educational differences between boys and girls.

    4. Mar 31.

      We had two very nice homework presentations by Laura and Hitesh that induce a discussion of various items related to the computation of the homeworks. We then used a life insurance example to talk about identification and alos about how to use data to learn things via the eyes of a model.

    5. April 5.

      I talked about Lotteries. What do they do, what do they solve. How should we sometimes think of markets. How does Arrow-Debreu get preserved, in case we wanted that to be the case. Insurance. What about loans? What about mortgages? What do lotteries do for the labor market. How non-convexities (and private information) expand the role of lotteries. Pareto Optimal allocations depend on how we define the set of possible allocations. Hopefully it was useful for some of you to think differently about various issues. I discussed the new homeworks.

    6. April 7.

      We discussed disagreement within a household and the possible ways to get around it: Pareto weights, bargaining, repetead games, competitive search.

    7. April 12.

      I presented an environment with search and matching. It is a version of the Charon-Langot (04), Andolfatto (95) or Choi-Rios-Rull(09). I also talked about personality traits.

    8. April 19.

      Zhen talked about the sticky wage model without log-linearization. Neha started talking about endogenous job destruction. They both did a great job.

    9. April 25 Class 1.

      Neha finished the stuff on endogenobous job destruction. In particular, she discussed how the flow Bellman equation arises from the continuous time problem. I went over the data in education related mortality and over how to decompose it into its different constituents.

    10. April 25 Class 2.

      Jiwoon talked about the Simplicial Interpolation in order to solve a problem with a kink. I finished the discussion of how to deal with human capital investment when there are two types of capital, financial and health.

    11. April 26.

      I talked about competitive search in the context of an RBC model where demand shocks look like productivity shocks.

    12. April 28.

      Sebastian will tell us about how to use the endogenous grid method to solve for the location of a problem where there is a non-concavity (a kink in the value function which is different than a kink in the decision rule).

    13. May 3.

      Naoki talked about open MP and MPI (Parallel computing). John talked a bit about Mortensen Pissarides models of the business cycle, using the Cole-Rogerson paper.

    14. May 5.

      Bernabe will talk about Block Recursive Equilibrium. Jiwoon will briefly tell us about an improvement over the Simplicial Interpolation that solves a problem with a kink using endogenous grid search. Zhen may talk about how to specify a RA model with staggered wage setting but without slavery. Neha may talk 10 minutes about the joint issue of learning by doing and by not doing.

    List of Homeworks Organized by batchs.

  • First Homework batch. Do it by April 1, April Fools' day.

    1. Data manipulation.

    2. 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.

    3. A life cycle problem.

    4. 2.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.

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

      2.C Briefly explain the computational logic that you followed. (I will talk a bit in class for this but start now).

    5. A more complicated life cycle problem.

    6. 3.A Choose a learning-by-doing technology (explain how you did so) and solve for the optimal paths of consumption, savings hours worked, productive hours worked and wages. Plot them. Do they match the data?

      3.B Choose a Ben-Porath learning-by-not-doing technology (explain how you did so) and solve for the optimal paths of consumption, savings hours worked, productive hours worked and wages. Plot them. Do they match the data?

      3.C Specify a model with both a learning-by-doing and a learning-by-not-doing technology (explain how you did so) and solve for the optimal paths of consumption, savings hours worked, productive hours worked and wages. Plot them. Do they match the data?

      3.D Discuss your findings

  • Second Homework batch. Do it by April 15, Tax day.

    1. Life Cycle or infinitely medium hard problem.

    2. 4.A Pose a stochastic problem with compact but continous support of the shock that affects the household. A boring possibility is an income shock. A nicer one is a shock to the wage or efficiency units of labor. Shocks to health in the form of either expenses or disability are also fine. Make sure that you handle corner solutions (no borrowing, no working negative). Solve it by piecewise linear approximations to the Euler equations. Pose the details yourself.

      4.B Solve for the stationary distribution of these people. Compute average wealth and labor. Compute also the following measure of the persistence of wealth. What is the probability that households in each wealth quintile at age 45, are in each other quintile at age 50. Note that you have to do it by both approximating the stationary measure and by generating large samples of households.

  • Third Homework batch. Do it by April 30, Nothing day.

    1. A harder life cycle problem.

      5.A Pose a problem where agents make decisions that are of a different kind. Discrete choices. Have a baby, get married, file for bankruptcy, quit a job, get divorced. First by posing an effort function that keeps the solution in the Euler equation world.

      5.B Now pose one of those problems as a purely discrete shock. Solve it by posing an iid idiosyncratic shock with continuous domain when there are finitely many states.

      5.C Now do the continuous domain problem, say of a bankruptcy problem, using endogenous grid method. This requires a lot of ingenuity and some good luck.

    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.

    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/8503-11 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.