Hutchins Roundup: Labor market slack, undocumented households and Medicaid, and more

Vivien Lee and
Vivien Lee Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Louise Sheiner
Sheiner Headshot Square
Louise Sheiner The Robert S. Kerr Senior Fellow - Economic Studies, Policy Director - The Hutchins Center on Fiscal and Monetary Policy

March 15, 2018

Studies in this week’s Hutchins Roundup find that headline unemployment rates are not as indicative of labor market slack as they used to be, households with mixed-immigration status had similar health coverage gains as non-mixed households in Medicaid expansion states, and more.

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Headline unemployment rates are not as indicative of labor market slack as they used to be

Using panel data from 29 advanced economies between 2000 and 2016, Gee Hee Hong of the International Monetary Fund and colleagues find that labor market slack and productivity growth can account for most of the post-crisis slowdown in nominal wage growth. In countries with unemployment rates above their pre-crisis average, conventional measures of slack can explain about half of the slowdown in nominal wage growth since 2007, with involuntary part-time employment acting as a further significant drag. In countries with unemployment rates below their pre-crisis average, sluggish productivity growth can explain about two-thirds of the slowdown. Even in these countries, however, involuntary part-time employment weakened wage growth. Several advanced economies have experienced higher post-crisis rates of involuntary part-time employment and temporary employment, they say, suggesting that the headline unemployment rate is not as good a measure of slack as it used to be.

Mixed-immigration status households had similar health coverage gains as non-mixed households in Medicaid expansion states

Concerns about deportation may prevent people who are in the United States legally but live in households with undocumented immigrants from applying for Medicaid and other public programs. Using data from the American Community survey to identify likely households with mixed immigration status, Michael Cohen and William Schpero of Yale find that, in states that expanded Medicaid, mixed and non-mixed households had similar gains in health insurance coverage, but in non-expansion states, mixed households had lower coverage gains. The authors’ explanation: in non-expansion states, the Affordable Care Act enhanced knowledge about Medicaid availability and increased Medicaid enrollment among those previously-eligible but unenrolled, but immigration status dampened this effect. The authors postulate that immigration status may not have had this effect in expansion states because these states tend to have more immigrant-friendly environments and are usually more effective at ensuring insurance take-up for everyone.

The relationship between consumption, income, and wealth has broken down

Using consumption and income data from 1960 to 2017, Aditya Aladangady and Laura Feiveson of the Federal Reserve Board show that aggregate household consumption has not kept up with disposable income, government transfers, and household wealth since 2012. One potential explanation is that the 2008 crisis may have lowered expected growth and raised uncertainty, they say. Although overall sentiment about the economy has rebounded to pre-recession levels, consumers’ expectations of median income growth have not. Further, the perceived probability of experiencing job loss in the next five years is still above its prerecession level. Another potential explanation is that people are extracting much less equity from their homes than pre-crisis, so their propensity to consume due to housing wealth may be lower. Housing equity has become more concentrated among older, higher-income individuals, the authors say, who have a lower propensity to consume. The authors note that slower moving trends may also be at play, but don’t consider increased income and wealth inequality or population aging to be large factors.

Chart of the week: College enrollment has increased among low-income students

chart 03.14.2018

Quote of the week

“[I]t is all too likely that policymakers will face more difficult monetary policy challenges when the next downturn occurs. So, with the economy close to maximum employment and price stability, now is a good time to take a hard look at whether—and how—the Fed’s monetary policy framework might be retooled to better deal with less favorable circumstances that inevitably will arise…even if nothing much comes of these discussions and no dramatic changes are made to our monetary policy framework, there are opportunities to improve our existing strategy. Namely, I think additional communications enhancements are needed to bolster the credibility that the FOMC will deliver on its policy mandates,” says Charles Evans, president of the Chicago Fed.

“We should concentrate more explicitly and more publicly on outcome-based policy settings aimed at delivering maximum employment and 2 percent inflation on average through the cycle. It is of great importance to strengthen the public’s understanding of potential policy actions to better deliver symmetric 2 percent inflation expectations. We need to reduce the percentage of the public that believes the FOMC’s 2 percent objective is a ceiling. Better communicating such an outcome-based approach is a more useful enhancement for bolstering credibility than strict adherence to instrument-based policy rules—a prescription that theoretical analysis often relies on to deliver monetary credibility. Of course, such an outcome-based emphasis would also be beneficial for executing any of the alternative policies under consideration.”