Paul Beaudry

The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data

In this paper we address the question of whether wages are affected by labor market conditions in a manner more consistent with a contract approach than with a standard spot market model. From a simple implicit contract model, we derive implications about the links between wages and past labor market conditions. Using individual data from the Current Population Survey and the Panel Study of Income Dynamics, we find that an implicit contract model with costless mobility describes these links better than either a simple spot market model or an implicit contract model with costly mobility.

Do recessions permanently change output

Abstract This paper examines whether negative innovations to GNP are more or less persistent than positive innovations. We find that once we allow for the impulse response of GNP to be asymmetric, negative innovations to GNP are observed to be much less persistent than positive ones. In particular, the effect of a recession on the forecast of output is found to be negligible after only eight to twelve quarters, while the effect of a positive shock is estimated to be persistent and amplified over time. Our results may therefore help reconcile two antagonistic views about the nature of business cycle fluctuations.

Cohort patterns in Canadian earnings: assessing the role of skill premia in inequality trends

This paper documents the pattern of change in age-earnings profiles across cohorts and evaluates its implications. Using synthetic cohorts from the Survey of Consumer Finances over the period 1971 to 1993, we show that the age-earning profiles of Canadian men have been deteriorating for more recent cohorts in comparison to older cohorts. We find this pattern for both high school and university educated workers. In no case do we find evidence that the return to gaining experience has been increasing over time, nor do we find increased within-cohort dispersion of earnings. We view these findings as conflicting with the hypothesis that increased skill-premium largely explains the observed increase in dispersion of male weekly earnings in Canada. When looking at the pattern for women, we find only minor differences in the age-earning relationships across cohorts.

The Intertemporal Elasticity of Substitution: An Exploration using a US Panel of State Data

This paper uses state-level consumption data to estimate the intertemporal elasticity of substitution of consumption (IES). In contrast to the results of Hall (1988) and Campbell and Mankiw (1989), we provide evidence indicating that the IES is significantly different from zero and probably close to one. Since inference about the IES in the context of the standard Euler equation is problematic as a result of mis-specification bias, we cast most of our discussion in the context of the framework developed by Campbell and Mankiw. This modifies the Euler equation in that a fraction of agents simply consume their income. The use of panel data to examine the relationship between interest rates and consumption growth has two advantages. First, we achieve a significant increase in precision, which in particular allows us to rule out a zero IES. Second, we can use the panel aspect of the data to bypass asset return measurement problems. In particular, we identify a common time component in expected consumption growth that is associated with movements in interest rates when the IES is positive. Copyright 1996 by The London School of Economics and Political Science.

Wages and Employment in the United States and Germany: What Explains the Differences?

Over the last 20 years the wage-education relationships in the United States and Germany have evolved very differently, while the education compositions of employment have evolved in a parallel fashion. In this paper, we show how these patterns shed light on the nature of recent technological change and highlight the importance of taking into account movements in the ratio of human capital to physical capital when examining changes in the returns to skill. Our analysis indicates that the United States could have prevented the increase in wage inequality observed in the 1980s by a faster accumulation of physical capital.

Letting Different Views about Business Cycles Compete

There are several candidate explanations for macro-fluctuations. Two of the most common discussed sources are surprise changes in disembodied technology and monetary innovations. Another popular explanation is found under the heading of a preference or more generally a demand shock. More recently two other explanations have been advocated: surprise changes in investment specific technology and news about future technology growth. The aim of this paper is to provide a quantitative assessment of the relative merits of all these explanations by adopting a framework which allows them to compete. In particular, we propose a co-integrated SVAR approach that encompasses all 5 shocks and thereby offers a coherent evaluation of the dynamics they induce as well as their contribution to macro volatility. Our main finding is that surprise changes in technology, whether it be of the disembodied or embodied nature, account for very little of fluctuations. In contrast, expected changes in technology appear to be an important force, with preference/demand shocks and monetary shocks also playing non-negligible roles.

Changes in U.S. Wages 1976-2000: Ongoing Skill Bias or Major Technological Change?

This article examines the determinants of changes in the U.S. wage structure from 1976 to 2000. Our main empirical observation is that changes in both the level of wages and the returns to skill over this period were primarily driven by changes in the ratio of human capital to physical capital. We show that this pattern conforms extremely well to a simple model of technological adoption following a major change in technological opportunities. In contrast, we do not find much empirical support for the view that ongoing (factor‐augmenting) skill‐biased technological progress has been an important driving force over this period.

Should the Personal Computer Be Considered a Technological Revolution? Evidence from U.S. Metropolitan Areas

The introduction and diffusion of personal computers are widely viewed as a technological revolution. Using U.S. metropolitan area–level panel data, this paper asks whether links between PC adoption, educational attainment, and the return to skill conform to a model of technological revolutions in which the speed and extent of adoption are endogenous. The model implies that cities will adjust differently to the arrival of a more skill-intensive means of production, with the returns to skill increasing most where skill is abundant and its return is low. We show that the cross-city data fit many of the predictions of the model during the period 1980–2000, the PC diffusion era.

Endogenous Skill Bias in Technology Adoption: City-Level Evidence from the IT Revolution

This paper focuses on the bi-directional interaction between technology adoption and labor market conditions. We examine cross-city differences in PC adoption, relative wages, and changes in relative wages over the period 1980-2000 to evaluate whether the patterns conform to the predictions of a neoclassical model of endogenous technology adoption. Our approach melds the literature on the effect of the relative supply of skilled labor on technology adoption to the often distinct literature on how technological change influences the relative demand for skilled labor. Our results support the idea that differences in technology use across cities and its effects on wages reflect an equilibrium response to local factor supply conditions. The model and data suggest that cities initially endowed with relatively abundant and cheap skilled labor adopted PCs more aggressively than cities with relatively expensive skilled labor, causing returns to skill to increase most in cities that adopted PCs most intensively. Our findings indicate that neoclassical models of endogenous technology adoption can be very useful for understanding where technological change arises and how it affects markets.

What do interest rates reveal about the functioning of real business cycle models

Abstract This paper begins by documenting the extent to which the predictions of standard Real Business Cycle (RBC) models are incompatible with observed movements in real interest rates. The main finding of the paper is that extending the baseline model to include habit persistence in consumption and adjustment costs to capital significantly improves the models empirical performance. In our evaluation of the models performance, we take special care of estimating and testing predictions of the model using both moments drawn directly from the data and moments calculated after identifying shocks to the stochastic trend.