Fatih Guvenen University of Minnesota Syllabus for ECON 8501 Fall 2012 This course covers topics at the nexus of macro and labor economics. The main goals of this course are to expose students to research questions at the current frontier, discuss a variety of open questions in this area that can lead to research papers (or possibly to a dissertation), and equip with the tools necessary to tackle these questions. Course Requirements To get credit for this course you will need to (i) make in-class presentations of papers that I will assign (typically one lecture in advance), (ii) write a referee report on one of the papers indicated with a (#) sign, and (iii) write an original research proposal. The deadline for choosing a paper for referee report is October 8th, class time. If you haven’t chosen a paper by then I will assign you one in class that day. The due date for the referee report is October 22nd, class time. The homework assignments will develop various empirical and computational skills and will allow you to familiarize with commonly used data sets and software packages. The research proposal should outline a clear research question and describe how you intend to answer the question posed (which data set you would use, a description of the model, the algorithm for solving it, etc). The proposal will be judged based on the originality of the idea (or the importance of the contribution), the feasibility of the exercise and how specific and detailed the proposal is. An ideal proposal would be one where somebody else could take it and follow the steps you describe to answer the question. Each student will present his/her proposal during the class time on October 22nd. The completed written proposal is due October 29th. Finally, students will be assigned to present some of the papers on the reading list below. Depending on total enrollment, each student could expect to make up to 3 presentations during the semester. Legend: **: I cover in class. *: A student presents. #: Papers for referee report. Course Schedule: • The class will meet on Mondays from 2:30pm to 5:30pm with a 10-minute break in the middle. Books and Useful Reading Materials • “The Race Between Education and Technology,” by Claudia Goldin and Lawrence Katz. • Why Does College Cost So Much? by Archibald and Feldman • “Macroeconomics with Heterogeneity: A User’s Guide,” Fatih Guvenen, Federal Reserve Bank of Richmond Economic Quarterly, 2011. • “Quantitative Macroeconomics with Heterogeneous Households,” Jonathan Heathcote, Kjetil Storesletten, and Gianluca Violante, Annual Review of Economics, 2009. • Browning, M., L. P. Hansen, and J. J. Heckman (1999): “Micro data and general equilibrium models,” in Handbook of Macroeconomics, ed. by J. B. Taylor, and M. Woodford. • Blundell Richard, and Tom MaCurdy (1999): “Labor Supply: A Review of Alternative Approaches,” in Handbook of Labor Economics, vol. 3, North Holland I. Evolution of Wages over the Lifecycle A. Economic Models of Wage formation: A major question of labor economics is the determination of wages: in particular why do wages grow over the lifecycle? And what determines the relative wages of different types of workers (young-vs-old, men-vs-women, married-vs-single households, etc.)? We will study several theoretical models of wage formation that highlight some interesting mechanisms. We will spend more time on variants of the human capital model, but will also discuss models with search and matching, learning-by-doing, learning about workers’ productivity, and learning with limited commitment on the part of worker. 1. Human capital: Y. Ben-Porath. (1967) “The Production of Human Capital and the Life Cycle of Earnings,” Journal of Political Economy, 75 (August), 352-65. G. Becker. (1993) Human Capital, 3rd ed. Chicago: University of Chicago Press, pp. 1-66. *J. Heckman. (1976) “A Life-Cycle Model of Earnings, Learning, and Consumption,” Journal of Political Economy, 84 (August), s11-s44. J. Mincer. (1997) The Production of Human Capital and the Life Cycle of Earnings: Variations on a Theme, Journal of Labor Economics, 15 (January), S26-S47. **Kuruscu, Burhanettin (2006): “Training and Lifetime Income, American Economic Review, Vol. 96, Issue 3, June 2006. *Rosen, Sherwin (1972): “Learning and Experience in the Labor Market,” Journal of Human Resources, Vol 7, No 3, pp. 326-342. *Huggett, Mark, Gustavo Ventura, and Amir Yaron (2007): “Sources of Lifetime Inequality,” Working Paper, Georgetown University. D. Acemoglu and J. Pischke. (1998) Why Do Firms Train? Theory and Evidence. Quarterly Journal of Economics, Vol. 113.1 (February), 79-119. D. Acemoglu and J.S. Pischke. (1999) Beyond Becker: Training in Imperfect Labor Markets, Economic Journal, 109.453 (February), 112-42. 2. Learning-by-Doing, Learning about Productivity (Spiced up with Search-Matching, Limited Commitment, etc): L. Rapping (1965): “Learning and World War II Production Functions, “The Review of Economics and Statistics, Vol. 47, No. 1, pp. 81-86. **P. Thompson: “How Much Did the Liberty Shipbuilders Learn? New Evidence for an Old Case Study.” Journal of Political Economy, 109(1):103-137. See also http://www.fiu.edu/~thompsop/liberty/photos/liberty_summary.html. *B. Jovanovic and Nyarko (1996): “Learning by Doing and the Choice of Technology,” Econometrica, No 6, 1299-1310. **B. Jovanovic (1979) “Job Matching and the Theory of Turnover,” Journal of Political Economy, 87.5 (October), 972-990. B. Jovanovic (1979) “Firm-Specific Capital and Turnover,” Journal of Political Economy, 87.6 (December), 1246-60. **M. Harris, and Bengt Holmstrom (1982): “A Theory of Wage Dynamics,” Review of Economic Studies, Vol. 49, pp. 315-333. H.S. Farber and R. Gibbons. (1996) “Learning and Wage Dynamics,” Quarterly Journal of Economics, 111.4 (November), 1007-47. **B. Guler, F. Guvenen, and G. Violante (2008): “Joint-Search Theory: New Opportunities and New Frictions,” Working Paper. 3. Education: Rothschild and White (1995): “The Analytics of the Pricing of Higher Education and Other Services in Which the Customer is Also the Input,” JPE. Hoxby (1997): “How the Changing Structure of Higher Education Explains College Tuition,” NBER Working paper. Goldin (1999): “A Brief History of Education” Archibald and Feldman (2010): “The Real Cost of Education,” Article in . And discuss the reasons behind the rise in costs of education. Restuccia and Vandenbraucke (2010): “The Evolution of Education: A Macroeconomic Analysis,” U Toronto Working Paper. Guvenen and Rendall (2012): “Emancipation Through Education,” UMN Working Paper. #Gallipoli, Meghir, Violante (2010): “Equilibrium Effects of Education Policies: A Quantitative Evaluation,” NYU Working paper. 4. Occupational Choice: A. Roy. (1951) “Some Thoughts on the Distribution of Earnings,” Oxford Economic Papers, 235-46. Kambourov and Manovskii (2009): “Occupational Mobility and Wage Inequality,” Review of Economic Studies. B. Statistical Models of Wages Over the Lifecycle *Guvenen, F. (2008): “An Empirical Investigation of Income Processes,” NBER Working Paper No 13394. **MaCurdy, Thomas (1982): “The Use of Time-Series Processes to Model the Error Structure of Earnings in a Longitudinal Data Analysis,” Journal of Econometrics, Vol. 18, pp. 83-114. *Storesletten, Kjetil, Chris Telmer and Amir Yaron (2004): “Cyclical Dynamics in Idiosyncratic Labor- Market Risk,” Journal of Political Economy, vol. 112 (3), pp. 695-717. **Guvenen, Fatih, Serdar Ozkan and Jae Song (2012): “The Nature of Countercyclical Income Risk,” NBER Working Paper No 18035. Guvenen, Fatih, Fatih Karahan, Serdar Ozkan and Jae Song (2012): “A User’s Guide for Labor Income Risk.” *Browning, Martin, Mette Ejrnaes, and Javier Alvarez: “Modelling Income Processes with Lots of Heterogeneity,” Review of Economic Studies, 2010. Abowd, John, and David Card (1989): “On the Covariance Structure of Earnings and Hours Changes,” Econometrica, Vol. 57, pp.411-445. Baker, Michael (1997): “Growth-rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings,” Journal of Labor Economics, Vol. 15, pp. 338-375 Baker, Michael and Gary Solon (2003): “Earnings Dynamics and Inequality Among Canadian Men, 1976-1992: Evidence from Longitudinal Tax Records,” Journal of Labor Economics, Vol 21, pp. 289- 321. Haider Steve J. (2001): “Earnings Instability and Earnings Inequality of Males in the United Stated: 1967- 1991, Journal of Labor Economics, Vol. 19, pp. 799-836. Lillard, Lee A. and Robert Willis (1978): “Dynamic Aspects of Earning Mobility,” Econometrica, Vol. 46, p. 985-1012. Lillard, Lee A., and Yoram A Weiss (1979): “Components of Variation in Panel Earnings Data: American Scientists, 1960-70,” Econometrica, Vol. 47, pp. 437-454. Meghir, Costas, and Luigi Pistaferri (2004): “Income Variance Dynamics and Heterogeneity,” Econometrica. Topel, Robert H. (1990): “Specific Capital, Mobility and Wages: Wages rise with Job Seniority,” NBER Working Paper No. 3294. II. Evolution of Wages (and inequality) Over Time The US wage distribution has experienced significant changes since the 1970’s. For example, total wage inequality has widened throughout the period whereas the college-high school premium fell monotonically in the 1970’s and then rose subsequently. A large part of the rise in wage inequality is not “explained” by observables (such as age and education) though—so it is called “residual inequality.” Finally, these developments coincided with a substantial slowdown in labor productivity growth (as well as median wage growth). We first document these facts and then study models that highlight mechanisms for these changes. A. Empirical Facts * Lawrence Katz and David Autor (1999) “Changes in the Wage Structure and Earnings Inequality,” in O. Ashenfelter and D. Card, eds., Handbook of Labor Economics, vol. 3A, pp. 1463-1555. **Acemoglu, Daron (2002) “Technical Change, Inequality and the Labor Market.” Journal of Economic Literature. David Autor, Lawrence Katz, and Melissa Kearney (2007). Trends in U.S. Wage Inequality: Revising the Revisionists, mimeo, Harvard University *L. Katz and K.M. Murphy (1992) “Changes in Relative Wages, 1963-87: Supply and Demand Factors,” Quarterly Journal of Economics, February, 35-78. *C. Juhn, K.M. Murphy, and B.