Jay H. Hong

Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks

We investigate the welfare properties of the one-sector neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equilibrium literature, and we demonstrate constrained inefficiency for our model. We provide a characterization of constrained efficiency that uses the first-order condition of a constrained planners problem that points to the margins of relevance for whether capital is too high or too low : the income composition of the (consumption) poor. We calibrate our benchmark model parameters governing idiosyncratic risks to the U.S. earnings and wealth distribution, and for this distribution the income of the poor is mainly composed of labor earnings. We compute the constrained-efficient allocations -including transition dynamics- for our model economy, and we conclude that the long-run capital stock in a laissez faire world is not only too low, but much too low. We also show that one can find parameterizations with different qualitative features : in one case, the steady-state capital stock is too high, and in another case no steady state exists.

Do Technological Improvements in the Manufacturing Sector Raise or Lower Employment

We find that technologys effect on employment varies greatly across manufacturing industries. Some industries exhibit a temporary reduction in employment in response to a permanent increase in TFP, whereas far more industries exhibit an employment increase in response to a permanent TFP shock. This raises serious questions about existing work that finds that a labor productivity shock has a strong negative effect on employment. There are tantalizing and interesting differences between TFP and labor productivity. We argue that TFP is a more natural measure of technology because labor productivity reflects shifts in the input mix as well as in technology.

Labor-Market Uncertainty and Portfolio Choice Puzzles

The standard theory of household-portfolio choice is hard to reconcile with the following facts: (i) Households hold a small amount of equity despite the higher average rate of return. (ii) The share of risky assets increases with the age of the household. (iii) The share of risky assets is disproportionately larger for richer households. We develop a life-cycle model with age-dependent unemployment risk and gradual learning about the income profile that can address all three puzzles. Young workers, on average asset poor, face larger labor-market uncertainty because of high unemployment risk and imperfect knowledge about their earnings ability. This labor-market uncertainty prevents them from taking too much risk in the financial market. As the labor-market uncertainty is gradually resolved over time, workers can take more financial risks.

WAGE VOLATILITY AND CHANGING PATTERNS OF LABOR SUPPLY

Over the past few decades, the skilled–unskilled hours differential for U.S. men increased when the skill premium rose sharply, in contrast with dominant income effects. Based on PSID data, we show that over the 1967–2000 period, skilled men experienced a three times larger increase in wage volatility than unskilled men. With the rise in wage volatility, our general equilibrium incomplete markets model generates a 2.7 hours increase in the hours differential whereas it increased by 1.4 hours in the data. We find that hours adjustments are important for self‐insurance in the short run, whereas precautionary savings play a crucial role eventually.