MEF-Seminar Summer 2025

Economists disagree about the factors driving the substantial increase in residual wage inequality in the US over the past few decades. To identify changes in the returns to unobserved skills, we make a novel assumption about the lifecycle dynamics of skills, which we validate using data on test score dynamics for older workers in the HRS. Using survey data from the PSID and administrative data from the IRS and SSA, we estimate that the returns to unobserved skills declined substantially in the late-1980s and 1990s despite an increase in residual inequality. Extending our framework to consider occupational differences in returns to skill and multiple unobserved skills, we further show that skill returns display similar patterns for workers employed in each of cognitive, routine, and social occupations. Finally, our results suggest that increasing skill dispersion, driven by rising skill volatility, explains most of the growth in residual wage inequality since the 1980s.

Search frictions in the product market have been widely studied as a foundation of monetary theory. More recently, they have also been advanced as a possible explanation for demand-side fluctuations. This paper develops a monetary model with product market search frictions to evaluate the quantitative relevance of these frictions to the short-term effects of monetary policy on output. In the model, due to matching uncertainty in the product market, firms operate with unutilized capacity and households carry unused liquidity, and changes to the nominal interest rate have effects on output. I discipline the degree of matching uncertainty by its implications on money velocity and capacity utilization. Absent matching uncertainty, a one percent reduction in the nominal interest rate increases consumption by 0.07%. Matching uncertainty can amplify this effect by a factor of four.

The timing of transfers is critical to their value for recipients. Thus, although the bulk of family transfers occurs in the form of inheritances, inter-vivos trans- fers may be far more valuable than their size suggests. To uncover the economic importance of inter-vivos transfers to recipients, we propose a tractable lifecy- cle model of the family capable of reproducing salient features of the data. We then use the model to address the consumption insurance puzzle based on Blun- dell et al. (2008). The model has the potential to narrow the gap between actual consumption insurance in the data and that predicted by standard incomplete- markets models. The model may also provide a novel rationale for the preferen- tial tax treatment of inter-vivos transfers relative to bequests.

Industrial policies, while often aimed at domestic industries, can spur technological progress abroad. We document this mechanism in the case of rare earth elements (REE) – critical inputs for manufacturing and the green transformation, with low elasticity of substitution, inelastic supply, and high production and processing concentration in China. Using REE-related patents classified by a large language model, sectoral TFP data, and matched trade data, we show that the introduction of REE export restrictions led to a global surge in innovation and exports in REE-intensive downstream sectors outside of China. To quantify the global impact of the adverse REE supply shock, we develop a quantitative general equilibrium model of trade and directed technological change. Under endogenous technologies, input-supply restrictions shift the direction of innovation in downstream sectors toward scarce inputs when inputs are gross complements, which can lead to the expansion of these sectors.

We study the interaction between monetary policy and labor supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong countercyclicality of hours worked in the left tail of the income distribution. While aggregate hours and labor earnings decline after a monetary tightening, individuals at the bottom of the income distribution increase their hours worked. We show that the empirical patterns are consistent with a standard one-asset HANK model. The model reveals that strong income effects at the bottom of the distribution can account for the observed countercyclical labor responses, highlighting how labor supply adjustments act as an additional margin through which households smooth consumption. Comparing this to a model with a homogeneous labor supply, we find that labor supply heterogeneity reduces the aggregate MPC and further shifts the transmission of monetary policy away from intertemporal substitution toward direct income effects.

How does an adverse economic shock affect families? We answer this question by exploiting a natural-experimental earthquake shock and unique panel data with comprehensive information on personal consumption and time use within households. We provide new evidence that the earthquake reduces the probability of divorce and induces intra-household reallocation from wives to husbands within the same household. We argue that the value of divorce decreases for wives due to the labor market shock, while the value of marriage remains high due to the family insurance provided by the husband to compensate for the wife's income loss, resulting in a decrease in the probability of divorce. We formally rationalize these results using a collective household model with limited commitment. Our empirical finding represents, to our knowledge, the first causal evidence to support the standard structural assumption of such responses and provides strong evidence against the assumption of income pooling.

We revisit the role of human capital in explaining the cross-country variation in GDP. We propose a general-equilibrium model in which workers of different human- capital groups (education and experience) sort across broad occupational categories. We map the model to a unique harmonized micro dataset that allows to measure average wages by human capital and occupation for 50 countries that span the entire development spectrum. The calibration reveals that rich countries have particularly high productivity in more complex, white-collar occupations. The composition and quality of human capital explain half of the cross-country non agricultural GDP per-worker gap relative to the US. For the poorest quintile of countries, a shift to US human capital would double non-agricultural GDP and the white-collar employment rate. We also find that occupational distortions are more pronounced in poor countries. They depress white-collar employment and contribute to a high white-collar wage premium.

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We show empirically that 11 percent of recent US high school graduates did not apply for federal financial aid due to finding applying too difficult or mistaken beliefs. Not applying due to such frictions negatively predicts bachelor’s degree enrollment, even after controlling for other attributes. We represent these frictions as heterogeneous filing costs in a structural model of college enrollment. We find that the aggregate costs of these frictions are modest because less than of half those affected would ultimately utilize aid. However, costs are large for the affected few with high skill from poor families.

This paper develops a dynamic spatial equilibrium model of a multi-region, multi-sector open economy where heterogeneous agents optimally choose their job, making forwardlooking decisions under aggregate uncertainty. We propose a solution of the system of individual dynamic optimal-control problems under rational expectations as a Mean Field Game, in discrete time and state space, preserving the full nonlinear structure of the problem. Using a calibration for France, we demonstrate that welfare outcomes and the spatial distribution of labor differ systematically from those under perfect foresight. Accounting for decisions made under aggregate uncertainty significantly reshapes the patterns of labor reallocation, both during transitions and in the long run.

This paper characterizes the transition dynamics of a continuous-time neoclassical production economy with capital accumulation in which households face idiosyncratic income risk and cannot commit to repay their debt. Therefore, even though a full set of contingent claims that pay out conditional on the realization of idiosyncratic shocks is available, the equilibrium features imperfect insurance and a non-degenerate cross-sectional consumption distribution.When household labor productivity takes two values, one of which is zero, and the utility function is logarithmic, we characterize the entire transition dynamics induced by unexpected technology shocks, including the evolution of the consumption distribution, in closed form. We then use these analytical transition results to study the speed of convergence in income per capita of a poor (low TFP) to a rich (high TFP) economy and the evolution of consumption inequality over time in response to an increase in idiosyncratic income risk.

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