Econ 8503 Wages and Employment Spring 2011

José-Víctor Ríos-Rull:,

  • Department of Economics, University of Minnesota, Minneapolis, MN 55455.
  • Tue and Th 12:10 pm to 13:50. 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

  • The course is over. Put in the directory a description of your work and hopefully see many of you in the labor workshop.

    Have a happy Summer.

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

    1. Mar 20.

      We talked about the class and what it is about. We discussed what are the possible topics that we will cover (see below) including the chapter Inequality in Macroeconomics. We talked about what is labor about and how to think of agents, households, people?

      We started with various issues about wage determination over ages. We talked about the hormone theory of wage determination (wages are exogenous) and we started the learning by doing. We finished attempting to develop the FOC of the problem wrt hours worked.

    2. Mar 22.

      Keaton helped us get the FOC in the learning by doing environment that we finished. Thanks Keaton. We then move to the Ben-Porath model and I left the calculation of the FOC withhout derivatives of the value function as a homework. After that we talked about how to aggregate this Life Cycle model into a macro model. First in St St, and then in a regular RCE. We then discussed various items: survival and its markets, the relation with the interest rate, social security, and I left for people to read Bick and Choi on equivalence scales.

    3. Mar 27.

      Jingyi talked about the Euler equation of the learning by not doing problem. Thanks Jingyi. We discussed the Bick and Choi piece of 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 how to account for educational differences between boys and girls. We also talked about a great new paper on wage determination Learning by working in dense cities by Diego Puga and Jorge de La Roca that deals with wages across large and small cities and over the life cycle. Exciting stuff.

    4. Mar 29.

      David Wiczer mostly talked about job finding rates and unemployment duration and how one calculates these in the CPS, even just taking it as a repeated cross-section. In particular, we discussed the increase in unemployment duration in this recession and how it's mostly coming from the fall in the finding rate of long-term unemployed. We had an aside about synthetic panels in the CPS and I how one can use this technique to answer questions of how distributions evolve without having to follow particular individuals. Then we talked about chaining the CPS and how that helps one accommodate the fact that some unemployed people exit the labor force. Finally we talked about the PSID and I showed some pictures about general occupational mobility. How, using cohort and age variation we can see how the age-profile of occupational switching probability has been changing over time.

      Students wanted to talk a bit about linked employee-employer data, so David is going to discuss that a bit next time along with the SIPP and connecting occupational mobility to unemployment duration. Part I of II.
    5. Apr 3

      Gustavo had the patience to put up with my endless pestering to tell us how to solve the learning by not doing model. Thanks Gustavo. I then started to talk about using Euler equations in different contexts to learn what people really like (Life insurance, health). In particular, I talked about setting up a model where people marry and divorce and form households albeit exogenously. The gist of the class is to look at how to model the details of how households differ from people and how to model many details of how the family is, to see how we can learn about how people are from the things that they do, and to deal with the problem of how to make decisions within a household when the members disagree.
    6. Apr 5

      Enoch presented the solution of the problem of learning by doing. Thanks Enoch. We finished the problem of the households using life insurance from these slides. We talked about sophisticated multiperson households and many issues about how to solve them and how to think of them. We discussed disagreement within a household and the possible ways to get around it: Pareto weights, bargaining. We then moved to health using these other slides. We started talking about the longevity of people according to various socio-economic characteristics.
    7. Apr 10

      We continued the discussion of how health and mortality shapes people. I posed a couple of homeworks related to doing calculations about the value of life and optimality of investments. We discussed a few possible explanations of why the educated live longer than the uneducated. We also posed a human capital model on investment in health and discussed what I called option 1, a model without health modifiers that can be used to estimate beta's by education level.
    8. Apr 12

      Filippo presented briefly Understanding gross worker flows aross US states by Daniele Coen-Pirani. We then moved onto what I called option 2, How to estimate preferences that include a health modifier. We also talked about a new homework, a Life-Cycle version of Aiyagari.
    9. Apr 17

      Kelvin presented Kaplan's job market?. Thanks Kelvin. After that I started talking about unsecured credit first going over this paper.
    10. Apr 19

      Bitmaro presented Klein, Paul & Ventura, Gustavo, 2009. "Productivity differences and the dynamic effects of labor movements," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1059-1073, November. thanks Bitmaro. I finished talking about credit without commitment. We will also talk about homeworks.
    11. Apr 24

      Kailin talked about Shocks, stocks and socks by Martin Browning and Thomas Crossley. Thanks Kailin. He may come back with some IV notes. I then talked about a possible project to understand the (lack of) wealth of the poor due to having multiple people with claims to their assets. I also started talking about Aggregate shocks in economies without commitment. I
    12. Apr 26

      Hyai may talked about The Disappearing Gender Gap: The Impact of Divorce, Wages, and Preferences on Education Choices and Women's Work. I finished the discussion of the model of the borrowing model without commitment and with aggregate shocks and I described the gist of the Krusell-Smith approximation.
    13. May 1

      Zoe discussed two papers by Michele Tertilt, Families as roommates and Women's lib (what is in it for men?). I then discussed the paper on business cycles with Dyrda and Kaplan.
    14. May 3

      I finished the course discussing a variety of models of household formation (I talked about widows) but mostly about this paper with Regalia and Short on the increase of singles. I also talked a bit about a paper on sex ratios with Seitz and Tanaka and about a paper on interracial marriages with Wong. This finished the course.

    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 17, Tax day.

    1. Health and human capital.

    2. 4.A Say something inteligent about the value of the life expectancy differential between college graduates and dropouts.

      4.B Pose a model of human capital investment in health where the investments are in income and unpleasant things and the differences across groups are in income and preferences. Use the FOC to characterize the outcomes.

  • Third Homework batch. Do it by May 1, Labor day (in the rest of the world).

    1. Solving Life-Cycle decision rules in an Aiyagari environment.

    2. 5.A Pose three processes from the literature of earnings over the life cycle (actually some for earnings and some for wages). Make sure that you understand why you chose them. Such processes have to have some form of Markovian representation.

      5.B Solve Pose for the implied decision rules of these households and describe the cross sectional properties of the joint wealth and earnings distribution both when leisure is in the utility and when is not. Make sure that households can choose wealth in a continuous manner. You could (but do not have to) use piecewise linear decision rules. Approximate the wealth distribution by say a very fine approximation of the implied cdf or by generating large samples of agents. Make sure also that you report many statistics of this wage distribution.

      5.C Comment the properties of such joint distribution and compare them with that in US data, as reported by say, here.

    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. This year, I want to organize this course a bit around the issues of Inequality in Macroeconomics. In terms of traditional content here is a list of some of the issues that we may also cover. In the end we will do a combo of both things depending on interest, energy and mood.
    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.