Liberty Street Economics

Wage Insurance: A Potential Policy for Displaced Workers

Ben Hyman, Brian Kovak, and Adam Leive

photo: Male industrial worker working with manufacturing equipment in a factory.

Despite the existing safety net, worker displacement continues to have severe consequences that motivate the consideration of new social insurance programs. Wage insurance is a novel policy that temporarily provides additional income to workers who lose their job and become re-employed at a lower wage. In this post, we draw on evidence from our recent working paper analyzing the effects of a U.S. wage insurance program on worker earnings and employment outcomes. Among workers displaced by international trade, we find that eligibility for wage insurance increased the probability of employment in the first two years following job loss and led to higher long-term earnings. The program resulted in net savings to the government because workers collected fewer benefits and paid taxes on their increased earnings. Together, these findings suggest that wage insurance could support displaced workers more effectively than traditional social insurance programs.

Posted at 7:00 am in Labor Market | Permalink

What Was Up with Grocery Prices?

Thomas Klitgaard

Photo of groceries including peppers, broccoli, lemons and eggs, on a kitchen table in a reusable shopping bag.

The consumer price index for groceries has risen more than the overall price index since the start of the pandemic, with a particularly large jump in 2022. In looking for explanations, a starting place is the behavior of raw commodity prices, which surged from early 2021 to mid-2022. In addition, wages for low-paid grocery workers have gone up faster than wages for the workforce as a whole. Finally, even though profit margins for grocery stores have gone up, the increase appears to be only a small contributor to the rise in food prices relative to the increase in their operating costs. This analysis suggests that the significant moderation in food inflation since the start of 2023 is due to still-high wage inflation for grocery workers being offset by the retreat in commodity prices.

Posted at 7:00 am in Inflation | Permalink | Comments (3)

The Mysterious Slowdown in U.S. Manufacturing Productivity

Danial Lashkari and Jeremy Pearce

Photo: assembly line with several men and women in blue overalls.

Throughout the twentieth century, steady technological and organizational innovations, along with the accumulation of productive capital, increased labor productivity at a steady rate of around 2 percent per year. However, the past two decades have witnessed a slowdown in labor productivity, measured as value added per hour worked or sectoral output per hour worked. This slowdown has been particularly stark in the manufacturing sector, which historically has been a leading sector in driving the productivity of the aggregate U.S. economy. What makes this slowdown particularly puzzling is the fact that manufacturing accounts for the majority of U.S. research and development (R&D) expenditure. Despite several recent studies (see, for example, Syverson [2016]), much remains to be uncovered about the nature of this slowdown. This post illustrates a key facet of the mystery: the productivity slowdown appears to be pervasive across industries and across firms of various sizes.

Posted at 7:00 am in Labor Market, Macroeconomics | Permalink | Comments (1)

On the Distributional Consequences of Responding Aggressively to Inflation

Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, and Brian Pacula

decorative photo: curled up shopping receipt with the word price at that top.

This post discusses the distributional consequences of an aggressive policy response to inflation using a Heterogeneous Agent New Keynesian (HANK) model. We find that, when facing demand shocks, stabilizing inflation and real activity go hand in hand, with very large benefits for households at the bottom of the wealth distribution. The converse is true however when facing supply shocks: stabilizing inflation makes real outcomes more volatile, especially for poorer households. We conclude that distributional considerations make it much more important for policy to take into account the tradeoffs between stabilizing inflation and economic activity. This is because the optimal policy response depends very strongly on whether these tradeoffs are present (that is, when the economy is facing supply shocks) or absent (when the economy is facing demand shocks).

Posted at 7:00 am in Inequality, Inflation, Monetary Policy | Permalink

On the Distributional Effects of Inflation and Inflation Stabilization

Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, and Brian Pacula

This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more, however, while the opposite is true for demand shocks, as discussed in the companion post.

Posted at 7:00 am in Inequality, Inflation, Monetary Policy | Permalink

Exploring the TIPS‑Treasury Valuation Puzzle

Guillaume Roussellet

Since the late 1990s, the U.S. Treasury has issued debt in two main forms: nominal bonds, which provide fixed-cash scheduled payments, and Treasury Inflation Protected Securities—or TIPS—which provide the holder with inflation-protected payments that rise with U.S. inflation. At the heart of their relative valuation lie market participants’ expectations of future inflation, an object of interest for academics, policymakers, and investors alike. After briefly reviewing the theoretical and empirical links between TIPS and Treasury yields, this post, based on a recent research paper, explores whether market perceptions of U.S. sovereign credit risk can help explain the relative valuation of these financial instruments.

Posted at 7:00 am in Treasury | Permalink

Racial and Ethnic Inequalities in Household Wealth Persist

Rajashri Chakrabarti, Natalia Emanuel, and Ben Lahey

Decorative image: African American Man holding coins in his had showing money disparity.

Disparities in wealth are pronounced across racial and ethnic groups in the United States. As part of an ongoing series on inequality and equitable growth, we have been documenting the evolution of these gaps between Black, Hispanic, and white households, in this case from the first quarter of 2019 to the fourth quarter of 2023 for a variety of assets and liabilities for a pandemic-era picture. We find that real wealth grew and that the pace of growth for Black, Hispanic, and white households was very similar across this timeframe—yet gaps across groups persist.

Posted at 7:00 am in Equitable Growth, Household Finance, Inequality, Pandemic | Permalink

Deciphering the Disinflation Process

Sebastian Heise and Ayşegül Şahin

Photo: stacked shipping containers with a few worked in hard hats walking along side.

U.S. inflation surged in the early post-COVID period, driven by several economic shocks such as supply chain disruptions and labor supply constraints. Following its peak at 6.6 percent in September 2022, core consumer price index (CPI) inflation has come down rapidly over the last two years, falling to 3.6 percent recently. What explains the rapid shifts in U.S. inflation dynamics? In a recent paper, we show that the interaction between supply chain pressures and labor market tightness amplified the inflation surge in 2021. In this post, we argue that these same forces that drove the nonlinear rise in inflation have worked in reverse since late 2022, accelerating the disinflationary process. The current episode contrasts with periods where the economy was hit by shocks to either imported inputs or to labor alone.

Posted at 7:00 am in Inflation, Supply Chain | Permalink | Comments (1)

The Growing Risk of Spillovers and Spillbacks in the Bank‑NBFI Nexus

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

Decorative image: View of high rise glass building and dark steel in London

Nonbank financial institutions (NBFIs) are growing, but banks support that growth via funding and liquidity insurance. The transformation of activities and risks from banks to a bank-NBFI nexus may have benefits in normal states of the world, as it may result in overall growth in (especially, credit) markets and widen access to a wide range of financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. In this post, we consider the systemic implications of the observed build-up of bank-NBFI connections associated with the growth of NBFIs.

Posted at 7:00 am in Banks, Financial Intermediation, Nonbank (NBFI), Systemic Risk | Permalink

Banks and Nonbanks Are Not Separate, but Interwoven

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

In our previous post, we documented the significant growth of nonbank financial institutions (NBFIs) over the past decade, but also argued for and showed evidence of NBFIs’ dependence on banks for funding and liquidity support. In this post, we explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities and being substituted by NBFIs. The enduring bank-NBFI nexus is best understood as an ever-evolving transformation of risks that were hitherto with banks but are now being repackaged between banks and NBFIs.

Posted at 7:00 am in Banks, Nonbank (NBFI) | Permalink

Markets & Policy Implementation

Liberty Street Economics

What Was Up with Grocery Prices?

The Mysterious Slowdown in U.S. Manufacturing Productivity

On the Distributional Consequences of Responding Aggressively to Inflation

On the Distributional Effects of Inflation and Inflation Stabilization

Exploring the TIPS‑Treasury Valuation Puzzle

Racial and Ethnic Inequalities in Household Wealth Persist

Deciphering the Disinflation Process

The Growing Risk of Spillovers and Spillbacks in the Bank‑NBFI Nexus

Banks and Nonbanks Are Not Separate, but Interwoven

Economic Inequality

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