Hutchins Roundup: Location and life expectancy, a stronger Phillips Curve, and more

Michael Ng,
Michael Ng Former Research Analyst - Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution
Vivien Lee, and
Vivien Lee Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Louise Sheiner

June 27, 2019

Studies in this week’s Hutchins Roundup find that the current place of residence matters for life expectancy, alternative measures of inflation show a stronger Phillips Curve, and more.

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Geographic location affects life expectancy

Life expectancy varies substantially across the United States, but it’s unclear whether that’s attributable to environmental factors or to differences in population attributes, like genetics or health behaviors. Using data on Medicare beneficiaries who moved between 1999 and 2014, Amy Finkelstein and Heidi Williams of the Massachusetts Institute of Technology and Matthew Gentzkow of Stanford University find that the current place of residence matters for life expectancy. Moving from the least healthy area to the most healthy area increases life expectancy at age 65 by 1.1 years, they estimate, which is 5% of the average remaining life expectancy at that age. Equalizing location effects across places would reduce the geographic variation in life expectancy by 15%. Places with favorable life expectancy effects tend to have higher quality and quantity of health care, less extreme climates, lower crime rates, and higher socioeconomic status, they say.

Alternative measures of inflation show a stronger Phillips Curve

In recent years, the sensitivity of inflation to labor market slack—the so-called Phillips Curve relationship—has weakened. To better measure the Phillips Curve, James Stock of Harvard University and Mark Watson of Princeton University decompose inflation into 17 components and compare it to measures of real economic activity. They find that components of inflation that are well measured and are non-tradeable such as housing and food services tend to be very correlated with real activity, implying a strong Phillips Curve relationship. Other components that are poorly measured, influenced by global markets, or obtained through negotiated prices such as financial services, gasoline, and health care are not sensitive to real activity.  They construct a new inflation index designed to weight more heavily the components of inflation that are sensitive to changes in the economy and show that the relationship between this measure of inflation and real activity has been stable over time, implying that the Phillips Curve relationship still holds. The authors note that their measure of inflation has differed from traditional measures of core inflation since the 1990s and is more similar to the Cleveland Federal Reserve’s Median Consumer Price Index and the Dallas Federal Reserve’s Trimmed Mean Personal Consumption Expenditures measures of inflation.

New workers coming off the sidelines can help explain the rise in labor force participation

The labor force participation rate for prime-age workers (those between ages 25-54) has been rising since October 2015. Increases in labor force participation can be driven either by lower labor force exit (more people staying in their jobs) or higher labor force entry (more people coming off the sidelines to join the labor force). Ernie Tedeschi from Evercore ISI argues that labor force entry accounts for between one-third and one-half of the increase in prime age labor force participation from its low during the post-crisis recovery. This estimate is higher than that found by previous work, and reflects a series of statistical adjustments to Current Population Survey data that Tedeschi argues are necessary to correct for errors and month-to-month volatility. Given the trend, prime-age labor force participation could rise further in the future, he concludes.

Chart of the week: Rising delinquencies on consumer loans suggest rising risk of economic slowdown

consumer loan delinquencies

Quote of the week:

“Earlier this week, a cooperative of technology companies proposed a new payments infrastructure based on an international stablecoin – Libra. Libra would be backed by reserve assets in a basket of currencies including sterling. It could be exchanged between users on messaging platforms and with participating retailers. As designed, Libra may substantially improve financial inclusion and dramatically lower the costs of domestic and cross border payments. The Bank of England approaches Libra with an open mind but not an open door,” says governor of the Bank of England, Mark Carney.

“Unlike social media for which standards and regulations are being debated well after they have been adopted by billions of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch Libra, if it achieves its ambitions, would be systemically important. As such it would have to meet the highest standards of prudential regulation and consumer protection. It must address issues ranging from anti-money laundering to data protection to operational resilience. Libra must also be a pro-competitive, open platform that new users can join on equal terms. In addition, authorities will need to consider carefully the implications of Libra for monetary and financial stability. Our citizens deserve no less…Whatever the fate of Libra, its creation underscores the imperative of transforming payments. The Bank’s strategy to open access to a wide range of payment solutions combined with appropriate regulatory oversight of them maximizes the likelihood that the payments revolution will meet the demands of the new economy and the needs of all our citizens.”