Gabriel Chodorow-Reich

The Cyclicality of the Opportunity Cost of Employment

The flow opportunity cost of moving from unemployment to employment consists of forgone public benefits and the forgone consumption value of nonworking time. We construct a time series of the opportunity cost of employment using detailed microdata and administrative or national accounts data to estimate benefits levels, eligibility, take-up, consumption by labor force status, hours, taxes, and preference parameters. The opportunity cost is procyclical and volatile over the business cycle. The estimated cyclicality implies far less unemployment volatility in leading models of the labor market than that observed in the data, irrespective of the level of the opportunity cost.

Effects of Unconventional Monetary Policy on Financial Institutions

Monetary policy affects the real economy in part through its effects on financial institutions. High-frequency event studies show that the introduction of unconventional monetary policy in the winter of 2008–09 had a strong, beneficial impact on banks and, especially, on life insurance companies. I interpret the positive effects on life insurers as evidence that expansionary policy helped to recapitalize the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers during the period 2010–13. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show that money market funds with higher costs did reach for higher returns in 2009–11, but not thereafter. Some private defined-benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that riskiness of the financial institutions studied fomented a trade-off between expansionary policy and financial stability at the end of 2013.