The Long and Short of Labor Supply Changes

Author(s): Nusbaum IV, Edwin Charles | Advisor(s): Rupert, Peter | Abstract: The study of the dynamics, causes, and consequences of changes in labor supply is central to understanding modern economies and identifying candidate policies to improve welfare. Each chapter of my dissertation contributes to one or more components of this broad theme by combining applied econometrics techniques with insights from quantitative theoretical models. Using these tools, I aim to address three questions: How do aggregate hours worked change over the business cycle? Can the rise in female labor force participation account for household migration trends? What role do individual labor supply choices play in driving aggregate growth as populations age?In Chapter 1 of my dissertation, I study the finite sample properties of a novel approach to identifying macroeconomic shocks with long-run restrictions. In contrast to past studies, this approach constructs and constrains the long-run impact of shocks directly using local projections rather than inferring them from vector autoregressions. Through a series of Monte Carlo simulations, I show that the local projections approach can yield substantial reductions in both bias and mean squared error, while also boasting decreased sensitivity to the choice of included lag length and assumed order of integration of the endogenous variables. I then use data from the Bureau of Labor Statistics to revisit a long standing debate on the response of aggregate hours worked to positive productivity shocks. I find that labor hours rise in response to positive productivity shocks and follow a hump-shaped profile thereafter. This result is robust to a number of specification choices and provides new evidence in support of the standard real business cycle model.My joint work with Christine Braun and Peter Rupert constitutes Chapter 2 of my dissertation, and studies the relationship between the historical rise in female labor force participation and contemporaneous decline in household migration rates. Between 1964 and 2000, the inter- county migration rate of married couples declined by 15%. Concurrently, female labor force participation among married women and the relative wages of women increased by 39 and 14 percentage points, respectively. Using a two location household level search model of the labor market, we show that both the increase in dual earner households and the rise in women’s wages contributed significantly to the decline in the migration rate of married households, with each explaining 53% and 20% of the decline, respectively. We further show that this co-location problem has important implications for structural models designed to estimate lifetime earnings inequality.Finally, I conclude my dissertation in Chapter 3 with joint work with Thomas Cooley and Espen Henriksen wherein we study the growth effects of aging populations in Europe’s four largest economies – France, Germany, Italy, and the United Kingdom. Since the early 1990’s, GDP per-capita growth in these economies has slowed while at the same time a combination of longer individual life expectancy and declining fertility have led to gradually ageing populations. Using a general equilibrium overlapping generations model, we show that demographic change such as this affects economic growth directly through aggregate savings and labor supply decisions. These decisions are further affected indirectly through additional distortions caused by rising tax rates needed to fund pension systems. We find that the net effect of these forces can account for a significant fraction of the historical growth slowdown and that evolving demographics will continue to drag down growth over the next 20 years. We highlight that the degree to which gains to life expectancy change labor supply decisions is the most important margin through which demographic change affects growth by studying several reforms aimed at increasing late-life labor supply.