Garey Ramey

The Cyclicality of Separation and Job Finding Rates

This paper uses CPS gross flow data, adjusted for margin error and time aggregation error, to analyze the business cycle dynamics of separation and job finding rates and to quantify their contributions to overall unemployment variability. Cyclical changes in the separation rate lead those of unemployment, while the job finding rate and unemployment move contemporaneously. Fluctuations in the separation rate explain between 40 and 50 percent of fluctuations in unemployment, depending on how the data are detrended. The authors results suggest an important role for the separation rate in explaining the cyclical behavior of unemployment.

The Rug Rat Race

After three decades of decline, the amount of time spent by parents on childcare in the United States began to rise dramatically in the mid-1990s. This increase was particularly pronounced among college-educated parents. Less educated mothers increased their childcare time by over 4 hours per week, and college-educated mothers increased theirs by over 9 hours per week. Fathers showed the same patterns, but with smaller magnitudes. Why would highly educated parents increase the time they allocate to childcare at the same time that their returns from paid employment have skyrocketed? Finding no empirical support for standard explanations, such as selection or income effects, we argue instead that increased competition for college admissions may be an important factor. We provide empirical support for our explanation with a comparison of trends between the United States and Canada, across ethnic groups in the United States, and across U.S. states.

Advertising and Coordination

When market information such as price is difficult to communicate, consumers and firms may be unable to take advantage of mutually beneficial scale economies, so that coordination failures arise. Ostensibly uninformative advertising expenditures can be used to eliminate coordination failures, by allowing an efficient firm to communicate implicitly that it offers a low price. This provides a theoretical explanation for Benhams (1972) empirical association of the ability to advertise with lower prices and larger scale. Advertising becomes necessary for optimal coordination when the identity of the efficient firm is uncertain. An application to loss-leader pricing is developed.

Advertising and pricing to deter or accommodate entry when demand is unknown

Abstract We consider the advertising and pricing strategies of an incumbent firm who is concerned with deterring or accommodating entry and privately informed as to the level of market demand. Our fundamental result is that a demand-exaggerating distortion occurs: if the incumbent seeks to signal a low (high) demand, then he behaves as if there were complete information but demand were lower (higher) than it is. Pre-entry pricing and demand-enhancing advertising are therefore distorted downward (upward), as a consequence of signaling. Purely dissipative advertising is thus not employed as a signal. Refinements of sequential equilibrium are featured.

The Structure of Worker Compensation in Brazil, With a Comparison to France and the United States

We employ comprehensive linked employer-employee data for Brazil to analyze wage determinants and compare results to Abowd et al. (2001) for French and U.S. manufacturing. While returns to human capital in Brazilian manufacturing exceed those of the other countries, occupation and gender differentials are similar. The worker-characteristics component accounts for much of the greater wage inequality in Brazil, but the establishment-fixed component has scant explanatory power. Thus, firm- or industry-level factors offer little scope for explaining the differences in wage inequality. Brazils wage structure resembles that of France, a country with some similarity in labor market institutions.

Market structure, innovation and vertical product differentiation

Abstract We reassess Arrows (1962) [Economic Welfare and the Allocation of Resources for Invention, in NBER, The Rate and Direction of Innovative Activity (Princeton University Press, Princeton NJ)] results concerning the effect of market structure on the returns from process innovation. Here we consider product innovations that are vertically differentiated from older products, in the sense of Shaked and Sutton (1982) (Relaxing Price Competition through Product Differentiation, Review of Economic Studies 49, 3–13.), Shaked and Sutton (1983) (Natural Oligopolies, Econometrica 51, 1469–1484.). Competition and monopoly in the old product market provide identical returns to innovation when (i) the monopolist is protected from new product entry, and (ii) innovation is non-drastic, in the sense that the monopolist supplies positive quantities of both old and new products. If the monopolist can be threatened with entry, monopoly provides strictly greater incentives. Welfare may be greater under monopoly when innovation is valuable.

Recurrent Trade Agreements and the Value of External Enforcement

This paper presents a theory of dynamic trade agreements in which external institutions, such as the WTO, play a central role in supporting credible enforcement. In our model, countries engage in ongoing negotiations, and as a consequence cooperative agreements become unsustainable in the absence of external enforcement institutions. By using mechanisms such as delays in dispute resolution and direct penalties, enforcement institutions can restore incentives for cooperation, despite the lack of any coercive power. The occurrence of costly trade disputes, and the feasibility of mechanisms such as escape clauses, depend on the adaptability of enforcement institutions in their use of information.

Turbulence and Unemployment in a Job Matching Model

According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this paper we reassess the turbulence-unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers.

Exogenous vs. Endogenous Separation

This paper assesses how various approaches to modeling the separation margin affect the ability of the Mortensen-Pissarides job matching model to explain key facts about the aggregate labor market. Allowing for realistic time variation in the separation rate, whether exogenous or endogenous, greatly increases the unemployment variability generated by the model. Specifications with exogenous separation rates, whether constant or time-varying, fail to produce realistic volatility and productivity responsiveness of the separation rate and worker flows. Specifications with endogenous separation rates, on the other hand, succeed along these dimensions. In addition, the endogenous separation model with on-the-job search yields a realistic Beveridge curve correlation and performs well in accounting for the productivity responsiveness of market tightness. While adopting the Hagedorn-Manovskii calibration approach improves the behavior of the job finding rate, the volume of job-to-job transitions in the on-the-job search specification becomes essentially zero.

Job Destruction and the Experiences of Displaced Workers

This paper evaluates a class of endogenous job destruction models based on how well they explain the observed experiences of displaced workers. We show that pure reallocation models in which relationship-specific productivity drifts downward over time are difficult to reconcile with the evidence on postdisplacement wages and displacement rates. Pure reallocation models with upward drift can explain the evidence, but implausibly large and persistent negative productivity shocks are required to generate displacements. Combining upward drift with outside benefits or moral hazard as additional motives for displacement makes it possible to explain the evidence with much smaller shocks. Propagation of aggregate shocks, welfare implications of displacement, upgrade of relationships in lieu of displacement, and learning effects are also discussed.