Year in review: Summary of 2023 Institute Working Papers

Many of the papers added to the Institute Working Papers series in 2023 reflect important themes that have emerged during the unusual economic circumstances of the past few years. Some papers make use of natural experiments created by recent events to study how the availability of reliable child care affects parents’ labor supply and how cash transfers during pregnancy affect infants’ birth weight. Other papers deepen our understanding of how monetary policy operates in a world in which inflation and interest rates affect people differently. This year’s additions also include papers that investigate patterns and sources of income inequality as well as diverse factors that influence health care provision and health outcomes.

In all, the Institute Working Papers series saw 19 new papers added in 2023. This summary article provides a brief overview of their main findings.

The business cycle and access to credit

One of the more interesting questions to emerge in the recent monetary policy environment is if higher interest rates will bring down inflation without pushing the economy into high unemployment and low growth—in other words, a recession. Some experts are optimistic, though uncertainty remains. But even if a recession can be avoided now, it’s unlikely to be avoided forever and always—the business cycle is so named because it is cyclical.

When recessions do happen, one way that governments try to ease households’ distress is via unemployment insurance (UI). However, the criteria governing who is eligible for UI mean payments reach only a fraction of those who are unemployed. Amanda Michaud estimates roughly a quarter of the U.S. workforce is ineligible for UI (see Figure 1). In “Expanding Unemployment Insurance Coverage,” Michaud studies how the job-finding rate differs between those who are and are not eligible for UI, which can be used to study how changing UI eligibility criteria might impact the economy.

Firms are impacted by business cycle fluctuations, too. Firms that are late paying their bills are more likely to end operations than firms that make payments on time. But what makes firms late? In “Firm Exit and Liquidity: Evidence from the Great Recession,” Fernando Leibovici and David Wiczer show that difficulty accessing credit is an important determinant of which firms will close their doors, more important than firm-level productivity, size, or age. This finding helps to explain why so many firms shuttered during the Great Recession, when access to credit dried up.

Access to credit has also been cited as a reason Black-owned startups do not experience the same growth or profitability that White-owned startups do, which makes it harder for Black entrepreneurs to build wealth. In “Consumer Demand and Credit Supply as Barriers to Growth for Black-Owned Startups,” Eugene Tan and Teegawende Zeida point out that insufficient access to credit is not the only possible explanation, however. There may be a demand-side explanation: Consumers might discriminate against Black-owned businesses, consuming less of their goods and services. The economists’ analysis finds that both mechanisms contribute to the lower growth experienced by Black-owned startups.

The inputs and outputs of labor

The business cycle is one factor that influences how much labor is demanded and supplied in the economy, but there are, of course, many others. Michael Keane and Timothy Neal study the Frisch labor supply elasticity, which measures the extent to which labor responds to wage changes. People tend to work more when their pay goes up, but how much more? The magnitude of that effect has implications for many economic analyses. In “Robust Inference for the Frisch Labor Supply Elasticity,” the authors provide a more reliable and precise estimate than was previously available.

For parents, access to child care is another factor that plays a role in determining their labor force participation. In “Parenthood and Labor Market Outcomes: Evidence from Chile,” Misty Heggeness and Ana Sofía León study parents’ work decisions as schools in Chile reopened following the COVID-19 pandemic, which happened district by district based on local conditions. They find that the reopening of schools had a significant impact on mothers’ labor force participation. Having a teenager in the house mattered too, helping both mothers and fathers be actively present at their jobs rather than on leave, a finding that underlines the importance of reliable child care for parents’ ability to work.

Two other papers added to the Institute Working Papers series this year focus on one of the most important labor outcomes for individuals: their income. A rich, new dataset that combines income from tax returns with demographics from the U.S. census allowed Kevin Rinz and John Voorheis to provide a new and detailed picture of income inequality in America. In “Re-examining Regional Income Convergence: A Distributional Approach,” the economists find that the income distributions of the 50 states have converged over the past 40 years for the bottom 85 percent of the income distribution—but they have diverged at the top. The economists’ data also reveal that in even the lowest-income states, White incomes are more or less in line with the national distribution. And in even the highest-income states, Black incomes are below the national distribution (Figure 2).

Iacopo Morchio and Christian Moser study a different income gap: the one between men and women. Studying empirical data from Brazil, they find that women tend to work at employers with lower pay but better nonpay attributes than the firms where men work. In “The Gender Pay Gap: Micro Sources and Macro Consequences,” the economists use theory and data to show that these workplace amenities account for about half of the gender pay gap in Brazil.

Obtaining wage data isn’t easy—even for job seekers. In “Online Job Posts Contain Very Little Wage Information,” Honey Batra, Amanda Michaud, and Simon Mongey find that only 14 percent of online job postings contain any wage information, and often that “information” is a wide range, not a precise number. Of the 20 firms with the most posts between 2012 and 2017, only four gave wage information in more than 1 percent of their posts. This lack of wage data matters for economists exploring new sources of data on wages offered to workers as well as for job seekers navigating the labor market.

Women in abusive relationships face other obstacles to employment. One form that relationship abuse often takes is economic, such as taking control of finances or sabotaging work projects. Not having the economic means to leave is one reason women stay with abusers. In “The Dynamics of Abusive Relationships,” Abi Adams-Prassl, Kristiina Huttunen, Emily Nix, and Ning Zhang use rich data from Finland to quantify the affect that cohabiting with a physically abusive partner has on the victim’s economic outcomes. The effects are stark and sobering: Moving in with a partner who is or will become abusive leads to a decline in employment and income relative to similar women who are not in abusive relationships.

Education and the power of expectations

One path to achieving higher wages in the labor market is education, and in particular, college education, as workers with a college degree earn wages that are 75 percent higher than wages for those without a college degree, on average. But getting a college degree is a major undertaking for both parents and children, requiring academic and financial preparation. Making use of a remarkably detailed dataset from Great Britain, Uta Bolt, Eric French, Jamie Hentall MacCuish, and Cormac O’Dea conclude in “Intergenerational Altruism and Transfers of Time and Money: A Life Cycle Perspective” that parents invest more time, energy, and resources in their children if they expect their kids will go to college. This means that financial assistance for college for lower-income families has a much larger impact if parents know the assistance is coming years in advance—18 years, if possible.

Interestingly, college graduation rates were similar among men and women in the United States in the 1960s, a pattern that held among White, Black, and Hispanic Americans. Fast forward to today, and women have notably higher graduation rates (Figure 3). In “What Explains the Growing Gender Education Gap? The Effects of Parental Background, the Labor Market and the Marriage Market on College Attainment,” Zvi Eckstein, Michael Keane, and Osnat Lifshitz consider how parent characteristics, labor market opportunities, and the age people get married have influenced education attainment over time. Their analysis finds that women whose mothers are college educated get more utility from attending college themselves, which is one factor leading to an increase in women’s college attainment. That more women now marry at later ages also plays a role.

As Figure 3 shows, the college completion of Black Americans lags that of White Americans by a substantial degree. This gap is particularly large in St. Louis, where 47 percent of White children but only 19 percent of Black children will earn a college degree. In “The Impact of Racial Segregation on College Attainment in Spatial Equilibrium,” Victoria Gregory, Julian Kozlowski, and Hannah Rubinton consider whether the fact that St. Louis neighborhoods are segregated by race contributes to this gap. This work builds on research by Institute advisor Nathaniel Hendren, former Institute advisor Raj Chetty, and others that demonstrates that the neighborhood in which someone grows up has a profound influence on their adult outcomes. The analysis by Gregory and co-authors finds that the channels leading to neighborhood segregation—including the Black-White wage gap and the tendency of people to live near same-race neighbors—also explain a large amount of the gap in college attainment.

To your health

With “epidemic” still in daily vernacular, 2023 saw four papers added to the Institute Working Papers series that address the intersection of economics and health, in four different ways.

Jonathan Dingel, Joshua Gottlieb, Maya Lozinski, and Pauline Mourot start with a simple-sounding question: Where do people go for medical services? The economists conceptualize health care as a “tradeable good” that can be imported and exported—not by moving doctors, but because people can choose to consume care close to home or far away. In “Market Size and Trade in Medical Services,” the authors use Medicare records to categorize every health care market in the U.S. as either an “importer” or an “exporter” of medical services. Exporting markets have larger populations than importing markets, which means doctors there get more experience in specific procedures, with the result that their quality is higher than doctors in smaller markets who are less specialized. Because of this difference in doctor quality, the economists conclude that welfare may increase more if governments subsidize patient travel to larger markets rather than subsidizing doctors to locate in smaller, importing markets.

The paper by Dingel and co-authors nods to the importance of understanding how medical services markets work—at some point, almost all of us will need medical care. How does bad health affect how much people work and earn, Elena Capatina and Michael Keane ask? People may miss days at work. Over time, they may become less productive or have to stop working entirely, both of which lead to less income. In “Health Shocks, Health Insurance, Human Capital, and the Dynamics of Earnings and Health,” the authors also incorporate health insurance in their model of labor supply, because insurance affects how much individuals pay for medical care and thus whether they seek treatment at all. This, in turn, may affect a person’s future health trajectory. With their model, the economists can then study how changes to health insurance provision might impact labor supply and earnings.

Poor health eventually limits most people’s ability to work at older ages, but research has found that health at the beginning of life—in infancy and even in utero—matters for one's path through the labor market, too. Research has found that the consequences of low birth weight (defined as a newborn weighing less than 5.5 pounds) can persist into adulthood. In “Does Unconditional Cash during Pregnancy Affect Infant Health?” Krista Ruffini leveraged the large-scale stimulus programs during the COVID-19 pandemic to study whether unconditional cash received during pregnancy affects newborns’ birth weight. She is able to compare babies born in very similar circumstances: in the same county, in the same month, and to mothers of similar age, marital status, and ethnicity. The babies differed in their number of older siblings, which affected the size of the cash payment the household received. Her analysis suggests that an additional $1,000 reduced the prevalence of low birth weight by 1.7 percentage points on average.

Ruffini’s paper shows how government policy can impact people’s health. Francis Annan, Belinda Archibong, and Uche Ekhator-Mobayode show that international policy can matter, too. In “The Epidemic Effect: Epidemics, Institutions and Human Capital Development,” they study meningitis epidemics in Africa’s “meningitis belt.” Unsurprisingly, unusually high rates of meningitis are associated with poorer health outcomes in children. However, if the World Health Organization officially declared that an area was experiencing an epidemic, children born that year experienced better health outcomes than children born where the incidence of meningitis was high but there was no declaration. As in Ruffini’s study, it is the influx of resources—in this case, health aid—that leads to better health outcomes. In a world of finite resources, understanding who, how, and how much an additional dollar will affect is valuable information for policymakers who must decide how to allocate those resources.

Inflation, interest rates, and monetary policy

Inflation, interest rates, and monetary policy remained top of mind in 2023—for the public, for the media, and for policymakers. Three new papers contribute to this conversation, focusing specifically on how variation in average income, wealth, and unemployment among different groups of people interacts with features of the macroeconomic environment.

In “Monetary Policy with Racial Inequality,” Makoto Nakajima considers how monetary policy affects different racial groups, given that Black, Hispanic, and White workers experience different average income, wealth, unemployment rates, and rates of return on investments. Nakajima’s model indicates that all groups benefit when interest rates fall, causing unemployment to decline. However, Black and Hispanic workers gain more than White workers because they face a higher risk of being unemployed and are more likely to be living hand-to-mouth.

Mohammed Ait Lahcen, Garth Baughman, and Hugo van Buggenum focus specifically on the Black-White gap in the unemployment rate, which they model as resulting from two factors: White workers separate from jobs less often and find jobs more quickly than Black workers. In “Racial Unemployment Gaps and the Disparate Impact of the Inflation Tax,” the authors consider how that gap responds to different inflation scenarios. They find that the Black-White unemployment gap increases when the inflation rate goes up. Their model also suggests that when labor becomes more productive, Black workers are harmed more when unemployment is already high than when it is low. More generally, their model can help estimate how the Black unemployment rate will respond to any number of policy changes, such as new taxes or investment incentives.

How inflation affects the labor market is also the subject of “A Theory of Non-Coasean Labor Markets,” by Andrés Blanco, Andrés Drenik, Christian Moser, and Emilio Zaratiegui. The authors build a model of the labor market that incorporates many real-world frictions, including the fact that searching for jobs takes time and wages tend not to respond much even when economic conditions change. The authors’ model then predicts which jobs are saved, destroyed, and created when inflation goes up.